Kentucky and the New Economy

From Challenges for the New Century
p. 3-40, published 2000

In its third annual report on its namesake phenomenon, Digital Economy 2000, the U.S. Department of Commerce proclaimed in June 2000 that what it had previously described as an "emerging" phenomenon had most assuredly arrived. "Americans have definitively crossed into a new era of economic and social experience bound up in digitally-based technological changes that are producing new ways of working, new means and manners of communicating, new goods and services, and new forms of community," observed Robert J. Shapiro, Under Secretary of Commerce for Economic Affairs.(7) Indeed, much of the economic growth enjoyed by the United States during the latter half of the 1990s can be attributed to the broad economic impact of information technology, which helped produce, if only on paper, enormous wealth, ratchet up productivity gains, dampen inflation, create high-wage jobs, raise employer expectations, and forever change the way we work and live.

The "new" or "digital economy" that is the topic of so much discussion is clearly a global system of commerce and industry in which the keys to wealth and job creation are knowledge, innovation, ideas, and technology. More precisely, Yale economist William D. Nordhaus suggests that it involves "the acquisition, processing and transformation, and distribution of information."(8) Its components are the computer hardware that processes information, the communications systems that distribute it, and the software that enables humans to manage the process. The synergy between these components, Nordhaus observes, is what differentiates it from earlier manifestations of the separate technologies.(9)

Though information technology industries provide only 8 percent of the nation’s economic output, as much as one third of U.S. economic growth over the past five years can be attributed to its powerful influence, according to the Commerce Department. These analysts point to plummeting computer prices, which have fallen at a rate of 26 percent a year over the past five years, as the impetus for $510 billion in business investment in hardware and software, and as an important drag on inflation, pulling it down by half a percentage point each year over the last half of the decade.

Moreover, the Commerce Department notes, jobs in information technology posted salaries 85 percent higher than those enjoyed by the private sector as a whole.(10) A separate, February 2000 report, "Nothing But Net: American Workers and the Information Economy," from Rutgers University and the University of Connecticut also found a wage differential for workers who use computers on the job. As with several preceding studies, this study found that workers who earn lower incomes are less likely to use computers and the Internet than those in higher income brackets. Specifically, they found that 57 percent of workers earning less than $40,000 a year use computers during their workday compared with 77 percent of workers who earn more than $40,000 a year.(11) Though computers are now part of most workplaces, the routine use of them on the job is strongly associated with higher wages.

Since 1995, the Federal Reserve’s Oliner and Sichel conclude, information technology also has been key to productivity gains, the indicator that is most strongly linked with the capacity for economic growth. The use of information technology throughout the economy and the production of computers and embedded semiconductors, they find, account for as much as two thirds of the 1 percentage point boost in productivity between the first and second halves of the decade.(12) During this period, productivity rose at 2.5 percent a year, almost double the average pace over the prior 25 years.(13)

And the potential of what Nordhaus terms the "brand new economy,"(14) Internet-based commerce, has yet to be realized. Though the economic output of these web-based businesses is insignificant to date, many prognosticators envision an incalculable, perhaps limitless role for the electronic arena, one in which retail sales and business-to-business (B2B) commerce explode, just as Internet communications have. Web advertiser spending alone grew 140.6 percent in 1999, to $4.6 billion, according to Veronis Suhler, a firm that tracks and forecasts communications industry spending. The firm predicts that advertiser spending will quadruple by 2004 and exceed spending on consumer magazine advertising.(15) The target audience is already global. Worldwide, according to the U.S. Department of Commerce, the number of people with Internet access soared 78 percent in the last year alone to 304 million, a 100-fold increase since 1994.(16) Regardless of whether the millions who are logging on to the Internet are viewed as potential customers or participants in a new era of global enlightenment, our world is changing at warp speed. The challenge is not to be left behind.

Job prospects for college graduates appear very bright. An annual survey of employers by the Collegiate Employment Research Institute of Michigan State University found that employment opportunities will likely increase by between 6 percent and 10 percent during 2000-2001 and by as much as 25 percent in some sectors.(42) Over the long term, the Bureau of Labor Statistics estimates that 1.3 million jobs will open annually for college graduates between 1998 and 2008, an increase of 158,000 jobs a year over the prior decade, largely attributable to a 58 percent rise in anticipated needs for replacement workers. Many college graduates will fill jobs left by retiring Baby Boomers. Replacement jobs are expected to comprise 36 percent of all the jobs available to college graduates over the 1998-2008 decade, up from 25 percent over the prior decade. And unlike circumstances during the previous decade, the number of available jobs is expected to more closely match the number of available workers. Still, about 90,000 college graduates, compared to 183,000 over the previous decade, are expected to enter jobs every year that do not require a college degree,(43) a circumstance that underscores the need for career planning and the cultivation of skills the marketplace demands.

In today’s tight labor market, some employers are going to great lengths to woo and keep highly skilled workers. While their counterparts faced uncertain job demands just a few short years ago, college graduates are enjoying the fruits of a sellers’ market—higher starting salaries, sign-on bonuses, and previously unthinkable "perks" from employers eager to please.(44) Enticements for highly skilled workers range from stock options to cold cash, from wardrobe allowances to loans to help with that first-home purchase.(45) Even at the lowest end of the wage ladder, many workers are being offered sign-up bonuses and unaccustomed benefits, and, given the glut of retail and service sector jobs, most can virtually move at will.

Not surprisingly, "employee churn" is also a facet of the New Economy.(46) The much-heralded dot.coms, only some of which have found a responsive niche in the consumer consciousness, are the most memorable of recent examples of firms and jobs that have come to life—and quickly died—in today’s volatile economy. In a February 2000 survey, the Bureau of Labor Statistics (BLS) found that nearly three fourths of workers who had lost jobs during the preceding three years had found other employment.(47) So most workers who lose a job find a new one, but average tenure has declined. In a separate report, BLS finds that, while employee tenure increases with age, about one fourth of all workers in today’s economy have been with their employer for 12 months or less. For all workers, median tenure on the job declined between 1996 and 2000, from 3.8 years to 3.5 years, after rising slowly since 1987. While no further declines were found between 1998 and 2000, median years of tenure for men declined between 1996 and 1998, after years of relative stability. Women, on the other hand, experienced a decline in median tenure between 1996 and 2000, from 3.5 years to 3.3 years. Among men, the proportion of workers who had been with the same employer for 10 or more years fell in nearly every age group while the proportion of women with 10 or more years of tenure increased.(48)

In an analysis of the South’s economy, MDC estimates that the region gained 17.7 million jobs between 1978 and 1997, nearly 4 million more than it would have if its industrial structure and economic growth rate had matched the nation’s. While jobs grew nationally at 42.6 percent, job growth in the South reached 54.2 percent. However, had the region’s business sector mix paralleled the nation’s, MDC estimates it would have created another 1.2 million jobs. The South has gained substantially fewer jobs in services than the nation as a whole, which enjoyed dramatic growth in services during the 1980s and 1990s. Since the 1970s, Kentucky has logged a job growth rate of 33 percent, gaining more than 10 jobs per 100 people over the two-decade period examined. While the overall regional and national job growth rate was significantly higher, Kentucky’s gain in the number of jobs per 100 people was larger than the South’s and the nation’s over the period examined (see Table 1).(49)

Table 1:  Employment in the South, 1978-1997

Going, Going, Gone Global

• A knowledge revolution that has transformed our capacity and our potential;
• Information technology that has irrevocably changed the marketplace, from the products it offers to the way business is conducted, altering the competitive positions of states and nations in the process;
• Technology that enables manufacturers to produce more goods with fewer workers; and
• Receding barriers to the flow of goods, services, and people, and, correspondingly, expanding markets.(50)

As a consequence of this collision of forces, we have become far more dependent upon export markets and, to a lesser extent, the direct investment of foreign capital in enterprises here in the United States for economic growth. Both have become an important source of jobs and income. According to the Office of the U.S. Trade Representative, the United States has experienced an eight-year export increase of more than 75 percent or nearly $500 billion in exports of goods and services. For the first time ever, exports will top $1 trillion in 2000.(51) On average, the Office of the U.S. Trade Representative estimates that for every billion dollars of goods and services exported, thousands of jobs are created. Between 1994 and 1998, 1.3 million new jobs supported by the exports of goods and services were created in the United States. Moreover, jobs supported by goods exports pay an estimated 13 percent to 16 percent more than the average U.S. wage.(52)

While globalization has also exacted losses, Kentucky has benefited from a rising export market and the investment of significant foreign capital. During the same time period, exports increased at a real annual rate of 10.6 percent a year, a faster pace than found in all but 10 other states.(53) Not surprisingly, Kentucky has continued to gradually ascend in the rankings of states by the value of their exports. Rising exports have helped Kentucky-based firms stay competitive and increase profitability and market strength. In turn, the economic position of communities and families that rely upon them has been strengthened.

According to the Cabinet for Economic Development, the value of Kentucky’s exports has more than doubled during the 1990s, rising from $4.1 billion in 1992 to $8.8 billion in 1998.(54) Manufactured goods accounted for more than $8.3 billion, or 94 percent of the state’s 1998 exports (see Figure 3).

Figure 3:  Value of Kentucky Exports

Transportation equipment ranked first in export shipment value, with over $2.8 billion in export sales. Kentucky ranked 11th in the nation in total transportation equipment export sales. Following transportation equipment were industrial machinery and chemicals and allied products, all high value-added products. These three industries accounted for almost 60 percent of the state’s total 1998 exports. Important agricultural exports include livestock, soybeans and tobacco. At $97 million in export sales, mining also contributed substantially.

In 1998, Kentucky’s exports were 1.3 percent of total U.S. exports, compared with 1.0 percent in 1990. Kentucky ranked 22nd in the nation in 1998 in terms of the increase in its share of total U.S. exports relative to other states.(55) The state’s improved ranking from 1996, when it ranked 23rd, indicates an increase in its share of total U.S. exports relative to other states. Canada continued to be Kentucky’s largest foreign market, receiving almost $2.6 billion in goods or nearly 30 percent of the state’s total exports. Following Canada, Kentucky’s major export markets were western Europe and the Pacific Rim.(56)

MDC’s analysis of the progress of globalization in the South finds that the region continues to lag behind the national average in terms of exports as a percent of gross state product. Exports in Kentucky, however, comprised the region’s highest percentage of gross state product (6.9 percent), with the exception of Texas (9.4 percent). Still, the Commonwealth lagged behind the national average of 8.5 percent in 1997.(57)

Foreign-direct investment or the location of foreign affiliates also has created thousands of jobs across the South and the nation. Between 1988 and 1997, real foreign direct investment increased in Kentucky by an annual average of 10.6 percent, a growth rate higher than in all but seven other states. Between 1987 and 1997, a time frame for which data are available from the Bureau of Economic Analysis but one that excludes some of the most extraordinary growth of the past five years, the Commonwealth benefited from more than 50,000 jobs created by foreign affiliates. During the 1987-1997 time period, however, Kentucky enjoyed the South’s largest percentage increase (133 percent) in jobs created by foreign affiliates, followed by Florida (94 percent) and Alabama (84 percent) (see Figure 4). By 1997, the portion of manufacturing employment in foreign affiliates in Kentucky had reached 19.6 percent, again the region’s highest share. By contrast, manufacturing jobs in foreign-owned affiliates in the South stood at 12.6 percent, while the U.S. average was 10.7 percent. While many of these new firms are branch plants that make their most significant economic contributions to cities and regions that host their U.S. headquarters and are subject to move again in the event of a changed local environment or larger economic position, their presence has helped improve the economic circumstances of many families in the Commonwealth.

Figure 4: Percent Growth in Employment in Foreign Affiliates, Kentucky and Selected States, 1977-1997

Yet another measure indicates that a significant portion of Kentucky’s firms are fully prepared to participate in the global economy and thus remain sufficiently competitive, profitable, and, ideally, a long-term presence in the state. Firms that achieve ISO 9000 status do so by demonstrating that they have adopted rigorous quality standards to meet international customer and supplier demands. The number of Kentucky firms that have met this test of preparedness for the international marketplace has increased sevenfold since 1994. Moreover, relative to our neighboring states, the majority of which have far more urban economies than our own, Kentucky is well positioned in regard to the number of registered ISO 9000 businesses per 1,000 firms. Only the larger, more urban states of Ohio, Illinois, and Indiana have higher rates (see Figure 5).(58)

Figure 5:  ISO 9000 Registered Businesses per 1,000 Firms

Because manufacturers dominate the much-sought-after rolls of ISO 9000 registrants, Kentucky may be better positioned than some data suggest. Among surrounding states, Kentucky has the third highest percentage of establishments that are manufacturers (9.4 percent), behind only Tennessee (11.0 percent) and North Carolina (10.7 percent). Nationally, the average portion of establishments that are manufacturers is 5.3 percent, according to County Business Patterns. Though the state is home to several large manufacturing establishments, many of its manufacturers are small firms. Four surrounding states have a higher percentage of employees in manufacturing than Kentucky (Indiana, 25.0 percent; North Carolina, 23.9 percent; Ohio, 20.7 percent; and Tennessee, 21.0 percent), indicating more employees per firm and thus potentially greater vulnerability to dislocations. An estimated 20.1 percent of employees work in the manufacturing sector in Kentucky, compared with 9.4 percent nationally.(59)

Globalization is also gradually transforming the face of our population, and thus, our labor force, which is fast becoming more ethnically diverse and international. The U.S. Hispanic and Asian populations are predicted to grow at an unprecedented 2 percent per year growth rate. Hispanics are expected to become the nation’s largest minority group as early as 2010 and possibly a quarter of the population by 2050.(60) By the middle of this new century, whites, who were still a significant majority in the 1990s at 73.6 percent of the population, may barely achieve majority status (52 percent).(61) In 1999, the number of foreign workers in the United States reached its highest level in seven decades, 15.7 million, according to the Bureau of Labor Statistics.(62)

As we have become more and more reliant on a large immigrant population to meet labor force demands, the anti-immigrant backlash of the mid-1990s has receded, and tolerance for diversity appears to be rising. But fully integrating these new citizens presents new problems for the nation as well as for our state. Among Hispanic immigrants to the South, MDC finds, 39.2 percent do not have a high school diploma, and another 27.2 percent have only a high school diploma.(63) The undereducation of young Hispanic immigrants, many of whom demographers predict will become long-term residents of Kentucky, makes it vitally important that we encourage and enable their participation in training and education opportunities. Otherwise, we could lose important momentum in raising the education and skill levels of our workforce.

Though globalization has created jobs and contributed to spreading prosperity here, it has not been without negative consequences. Perhaps the most painful product of globalization, one that often obfuscates its benefits, is job displacement. Dissolving barriers to trade have permitted industries to shop in a global marketplace for locations that will permit them to reduce production costs and become more competitive. U.S. labor costs are frequently the first-strike target of cost reduction. While it does not factor in productivity, the rate of which has risen sharply in the United States and remains key to production costs, 1999 hourly compensation for production workers in manufacturing in U.S. dollars ranged from $2.12 in Mexico, to $5.44 in Hong Kong, to $5.62 in Taiwan, and $16.60 in Ireland, to $19.20 in the United States.(64) And these comparative wages are by no means the world’s lowest. While 1999 data were unavailable, in Sri Lanka, a target relocation site for segments of the apparel industry, the average 1998 wage was 47 cents an hour.(65)

While industrial relocations offshore clearly afford industries economic advantages, the consequences are devastating for local communities like Columbia, Kentucky, where the workforce depended heavily on regional apparel industry jobs that have been among the first to go in the global marketplace. Though the pace of job losses in the apparel industry is expected to slow somewhat in the coming years, it remains among the most likely targets for relocation. As these and other low-skill production jobs move to developing countries, affected rural communities and families are finding it difficult to regain their economic footing. Though nondurable goods-producing industries like apparel manufacturing remain an important component of Kentucky’s and the entire South’s economy, job losses in this sector will almost certainly continue to displace workers and jolt local economies. As shown in Figure 6, apparel industry firms such as Union Underwear and Fruit of the Loom that were once the state’s dominant manufacturing employers have shed nearly 12,000 jobs in Kentucky over the past decade.

Figure 6:  Apparel Industry Employment, Kentucky, 1990-2000

One organization, the Corporation for Enterprise Development (CFED), a nonprofit based in Washington, D.C., that advocates and facilitates sustainable and equitable development strategies, sees little evidence that Kentucky’s advances in the global economy have produced a higher quality of life for its citizens. CFED’s 2000 Development Report Card for the States gives Kentucky an overall grade of a "D" and a "D" on its Performance Index, one of three larger indices that measure how well a state’s economy is "providing a widely shared and sustainable standard of living." CFED also gave the state a "D" on its "Development Capacity Index," the state of its physical and human infrastructure, and a "C" on its "Business Vitality Index."(66) Many of the weaknesses that CFED and others point to have roots in the undereducation of Kentuckians, an enduring problem that has resulted in increasingly costly consequences in this era of change.

The Rising Returns to Education

The gradual and, some have argued, destructive devaluation of physical or low-skill labor represents one of the most significant changes witnessed in recent U.S. history. It has reduced many workers to poverty-level wages, alienated and emasculated men who once took great pride in their ability to care for themselves and their families, and contributed substantially to what has been, in recent years, the largest income gap in the industrialized world. As prominent social theorist Peter F. Drucker has observed, no class in history has fallen faster than that of blue collar workers.(67) At the opposite end of the spectrum, highly skilled and highly educated workers, coined "knowledge workers" by Drucker, have high wages and ascending status.

Though the political dynasties represented in the presidential election would suggest otherwise, today’s economy is extending unprecedented economic rewards as well as power and influence to its brightest workers, just as Drucker predicted it would.(68) More recently, in his "comic sociology" book, Bobos in Paradise: the New Upper Class and How They Got There, reporter David Brooks of The Weekly Standard asserts straightforwardly that so-called "bourgeois bohemians," the Bobos of his title, have already become the elite. Their status, he asserts, is the product of brainpower rather than the affluence of their parents—a direct consequence of the Information Age.(69)

Over recent decades, the returns to education have increased steadily, largely because the real incomes of undereducated, low-skill workers have lost substantial ground. Since 1963, the U.S. median income for men with a college education has grown by a relatively modest 22 percent, or less than 1 percent a year, from $38,496 to $47,126 in 1997. Over the same time period, however, incomes at all lower education levels actually declined in real dollars.(70) From 1963 to 1997, a male high school graduate’s median income fell from $28,917 to $25,453 while those men with 9 to 12 years of schooling without a diploma saw their incomes plummet, from a median of $24,837 to $16,818.(71) Women’s incomes have increased at every education level, but college graduates have realized the largest gains at 53 percent.(72)

Some of today’s fastest growing occupations require at least a bachelor’s degree. Indeed, the fastest growing jobs in the nation are concentrated heavily in the professional specialty occupational group, which includes computer engineers, computer support specialists, computer systems analysts, database administrators, and desktop publishing specialists. This occupational group alone, which is principally comprised of high-skill jobs that require training and experience beyond a bachelor’s degree, is predicted to grow by 27 percent between 1998 and 2008.(73) In Kentucky, jobs for "system analysts" are predicted to grow at the fastest rate for occupations requiring at least a bachelor’s degree between 1996 and 2006 (90.4 percent), but only about 254 of these prized jobs will be created in the state.(74) Other fast-growing jobs include physical therapists (84.8 percent) and occupational therapists (82.4 percent),(75) who will be in strong demand as our population ages. By far, however, the most job openings (1,860 between 1996 and 2006) will be for "general managers and top executives," again occupations requiring extensive experience beyond a bachelor’s degree.(76) Jobs for registered nurses (1,093), elementary (883) and secondary (620) teachers round out the list.(77)

The common denominator among the higher-paying jobs that are expected to be much in demand is education. As never before, it is paying returns to workers, making the prospects of a future without some postsecondary education relatively grim. Though some will succeed in our economy in spite of their educational shortcomings, they are likely to be rare exceptions to the rule. For the most part, without some education or training beyond high school, most workers can expect little more than subsistence wages. They can expect to work yet stay poor. In short, education really does pay.

Figure 7 illustrates just how much it paid in 1998 alone. As shown, 1998 median incomes for the average U.S. and Kentucky full-time worker, age 25 years and older, increased steadily with educational attainment. Interestingly, these Current Population Survey data from the U.S. Census Bureau show a minimal disparity between earnings here and at the national level at every educational attainment level in 1998. The largest difference between earnings at the national level and in Kentucky occurs at the highest degree level—a bachelor’s degree or better. However, this minor discrepancy does not contradict the underlying point that higher degreed workers enjoy an earnings premium in both the United States and Kentucky.

Figure 7:  Median Income by Educational Attainment, Full-Time, Year-Round Workers, Age 25 and Older, US and KY, 1998

While trends in educational attainment show substantial improvement in the Commonwealth, most other states are also enjoying similar trends. More and more individuals are pursuing postsecondary education in the face of declining economic fortunes for those without training or education beyond high school. While the proportion of Kentuckians who hold a college degree has risen steadily over the past 20 years, the national average has risen at a similar pace. Thus, as shown in Figure 8,(78) the percentage of persons in Kentucky with a bachelor’s degree or higher relative to the national average has not improved. By contrast, as Figure 9 shows, the gap between the percentage of Kentuckians and the percentage of U.S. persons with at least a high school diploma has narrowed considerably over the past 20 years. In 1978, nearly 10 percentage points separated the portion of Kentuckians with a high school diploma from the U.S. average; by 1998, fewer than 5 percentage points separated the two.

Figure 8:  Percent of Persons with a Bachelor's Degree or Higher, KY and US, 1978-1998

Figure 9:  Percent of Persons with a High School Degree or Higher, KY and US, 1978-1998

A 1998 analysis of the returns to education in Kentucky by UK economist Mark Berger found the difference between the weekly earnings of college graduates and high school graduates in the state had risen from 40 percent in the late 1960s to 60 percent in the mid-1990s.(79) Graduate and professional degrees in the state have yielded an even higher return relative to a high school graduate, up from 60 percent to 100 percent during the same time period.(80) Men and women with graduate degrees in Kentucky are, respectively, earning twice and three times as much as high school graduates.(81) Berger also found that the difference in the wages of those with some college compared to those with just a high school diploma also has been drifting upward over time, while the difference between the wages of those without a high school diploma and high school graduates has been narrowing.(82)

As the threshold for returns to education has gradually extended beyond a high school diploma, the economic health and prosperity of a state such as ours has come to depend in large part on its ability to train and educate its citizenry for high-skill, high-wage jobs and to develop or attract employment opportunities to match these emerging skills.

In recognition of the growing importance of intellectual capital, the Kentucky General Assembly laid an important foundation for Kentucky’s participation in the New Economy with the enactment of the Endowment Match or "Bucks for Brains" Program during the 1998 regular session. Additional funding was provided in the 2000 session. By increasing the number of top-caliber research professors at Kentucky’s public universities, this matching program provides an intellectual infrastructure for basic and applied research capacity. This intellectual infrastructure is essential if Kentucky is to establish and nurture research and development facilities that are fundamental to the incubation of high-tech businesses and industries. Combined with the required private match, over the four-year period, the program will infuse Kentucky’s intellectual infrastructure with $460 million. As with efforts to improve the state’s educational foundation, however, ours will continue to be a struggle for parity with states that have already made similar and, in some cases, more significant investments and realized substantial returns as a result.

Anchored to the Past?

For Kentucky, alignment with the New Economy will not be easy. First, Kentucky must prepare a large population of poor, undereducated Kentuckians for a new century of rising expectations, a particularly difficult challenge given the state’s inability to meet lesser economic challenges over the past century. A historic underappreciation of the value of education in the state is further complicated by the unyielding affinity among many men for physical labor. As MDC observed in its 1998 report, The State of the South, "Too many Southern men see their careers based on their ability to do specific things: make things, drive things, dig things, lift things, or pick things. The economy, meanwhile, is rewarding those—regardless of race, gender, and ethnicity—who have the ability to think things."(83) As a result, Ron Crouch, Director of the State Data Center at the University of Louisville, often observes, "Bubba is in trouble."

In addition to educational limitations and cultural obstacles, much of the state’s economy remains anchored to the past. And some research has shown a parallel between the trajectory of per capita income and industrial composition; that is, the closer the alignment of a region’s or a state’s industrial composition with the national industrial makeup, the more likely that per capita income will also converge with the national average.

A recent analysis of changes in the industrial composition of states between 1958 and 1998, for example, finds that Kentucky continues to receive a larger share of earnings from farms, mining, manufacturing, transportation and public utilities, and retail trade than the United States as a whole. At the same time, Kentucky receives a much smaller share of earnings from finance, insurance and real estate, and services than the nation, a circumstance that this study suggests may inhibit income growth. Although Kentucky has reduced its dependence on earnings from farming and mining, earnings from manufacturing remained virtually unchanged over the 40-year period examined, compared to a national decline of 11.3 percent. Overall, this analysis ranks Kentucky 33rd in terms of its alignment with or similarity to U.S. industrial composition in 1998, compared to 38th in 1958. By 1998, per capita income in Kentucky had reached 81 percent of the national average, compared to 73 percent in 1958, but the state ranked 42nd nationally. In 1958, it ranked 43rd.(84) As shown in Figure 10, per capita income has risen steadily over the past two decades, but it has made only slow gains toward the national average.

Figure 10:  Kentucky Per Capita Income, 1980-1998

Kentucky’s per capita income, however, may be closer to the national average than these data suggest. Some argue that cost of living differences between states could leave incomes unequal. In addition, there may be differences in quality of life, as measured by environmental quality, civic health, crime and other such factors that would also inhibit complete convergence of incomes across states. A recent study by Berger and Blomquist found that after making cost-of-living and quality-of-life adjustments to Kentucky’s 1998 per capita income, its convergence to the national average increased from 81 percent to 88 percent.(85)

Increasingly, service sector employment is dominating national and state economies. Nationally, robust job growth is expected to continue in the service-producing sector at an estimated rate of 2.8 percent a year.(86) The largest gains are predicted for business services (4.6 million jobs); health services (2.8 million jobs); engineering, management, and other services (1.1 million jobs); and social services (1 million jobs),(87) all of which include high-paying information-driven jobs. An aging population is expected to create a strong demand for health care, as well as health products, and a rising demand for highly skilled residential care is creating the lion’s share of new jobs in social services.(88)

Following national trends, Kentucky’s economy is beginning to break with the past and move toward greater reliance on service industry employment. In April 2000, an estimated 477,900 Kentuckians were employed in the service-producing sector compared to 320,500 in the manufacturing or goods-producing sector. Kentucky’s service industry jobs are concentrated heavily in health services (152,600) and business services (100,500).(89) The largest annual rates of growth in the service sector at the national level are expected to be in computer and data processing (8.1 percent), health services (5.3 percent), residential care (4.6 percent), management and public relations (3.8 percent), and personnel supply services (3.7 percent). The Kentucky Department of Employment Services predicts strong growth rates for numerous health care occupations here at all education levels except those requiring minimal education.(90)

Generally lower-paying jobs in the retail trade component of the U.S. service sector are also expected to continue growing steadily over the coming decade, increasing at a predicted pace of 1.3 percent a year between 1998 and 2008.(91) In Kentucky, retail salespersons head the list of occupations that will create the most annual job openings (2,255) between 1996 and 2006 for those with a high school diploma and some postsecondary training, growing 15.5 percent over the decade.(92) And, as previously noted, cashiers head the list of jobs (3,853) expected to be created in Kentucky that prefer but often do not require a high school diploma.(93) Jobs for cashiers are predicted to grow 22.9 percent.(94)

Manufacturing could be the state’s future weak spot if globalization compels more low-skill industries to seek cheaper wages offshore or in other U.S. locales and if automation continues, as expected, to eliminate rather than create jobs in this sector. Between 1997 and 1999, manufacturing accounted for one in three displaced jobs in the nation, a lower rate than that of the 1980s but a proportion that is twice manufacturing’s share of employment.(95) However, higher productivity rates and real output growth have moderated predictions of national job losses in the manufacturing sector,(96) suggesting that the returns to information technology and organizational change are creating manufacturing as well as service industry jobs. BLS predicts that between 1998 and 2008, manufacturing will, as expected, retain its share of output while experiencing a net loss of only an estimated 89,000 jobs, principally in nondurable goods.(97) The apparel industry, a Kentucky stalwart that employed 18,900 people here in April 2000, ranks second nationally in terms of its annual job loss rate, at -4.4 percent a year, but the pace of apparel job losses is expected to be slower than over the 1988-1998 decade.(98) On the other hand, the miscellaneous plastic products sector, where 15,400 Kentuckians were employed in April 2000, is expected to grow at a rate of 1.6 percent per year.(99)

While manufacturers of nondurable goods are predicted to lose 196,100 jobs over the decade, durable goods manufacturers will gain an estimated 107,400 jobs nationally.(100) Electronic components and accessories and miscellaneous transportation equipment are expected to enjoy the highest rates of employment growth in the durable goods sector, which would appear to be good news for Kentucky’s manufacturing base. But motor vehicles and equipment manufacturers are predicted to experience a slight national loss of 50,000 jobs over the decade due to moderate output growth, increased productivity, and continued automation.(101) Thus, the future of Kentucky’s manufacturing base appears uncertain but far more promising than just a few short years ago.

Nationally, traditional manufacturers have been slow to gain their footing in the New Economy. Though many analysts believed that the gap between traditional and high-tech manufacturers would narrow due to the rapid growth of the economy as a whole, Business Week reports that through much of the current expansion, high-tech industries have grown far faster than the rest of the manufacturing sector. By July 2000 the split between the two sectors had actually widened. Real production of high-tech firms rose nearly 50 percent in the first quarter while the remainder of the manufacturing sector, nearly 90 percent, rose by only 1.6 percent. Indeed, traditional manufacturing, where Kentucky has placed many of its hopes for a more prosperous future, hardly grew at all during the early months of the year 2000.(102)

Additionally, some evidence suggests that traditional manufacturers have been slow to use electronic commerce, a circumstance that, over the short and the long term, could adversely affect profitability and competitiveness. In February 2000, the National Association of Manufacturers reported survey results that showed 68 percent of manufacturers were not yet conducting business transactions electronically. While 80 percent of manufacturers reported having a web site, they had not yet begun to use the Internet for business processes.(103) If these data are indeed reflective of the pace of adaptation to the New Economy, the manufacturing sector could continue to experience anemic rates of growth, a consequence that will have a dramatic impact on the Commonwealth’s future prosperity.

Like other economic sectors, Kentucky’s farm economy is also undergoing demanding and difficult changes. Because tobacco has historically been the state’s leading cash crop, recent dramatic drops in the burley tobacco quota have created tremendous instability. At least in part, the global economy, namely cheaper sources of burley tobacco, has played a prominent role in the decline of this long-dominant Kentucky crop. This year, tobacco farmers grew about one third of the tobacco they were growing just three years earlier. As a consequence, "for sale" signs have gone up at many small farms while others have begun to explore alternative crops and farm products. We estimate that a number of counties in the state could be hard hit by the plummeting burley tobacco quota because of their high level of dependence on tobacco as a source of income and their relatively high poverty rates.(104)

Unless research yields new uses for tobacco, the fate of farmers who are unwilling to adopt alternative crops will continue to rise and fall with the fortunes of cigarette manufacturers, who have become the target of widespread public enmity in the United States. Additionally, the tobacco products industry ranks eighth nationally in the rate of job losses it is expected to incur over the 1998-2008 decade, at a rate of 3.1 percent a year.(105) Further, recent data shows that global markets that were once expected to counter waning U.S. demand for cigarettes are changing as well. As nations recognize the long-term costs of the health consequences associated with smoking, the world is beginning to turn away from cigarettes. In 1999, the number of cigarettes smoked per person fell by 2 percent worldwide and by 8 percent in the United States.(106)

A decline in farm employment could have a significant adverse effect on some rural areas, particularly if we experience an economic downturn. In 1997, Kentucky ranked fourth nationally in the number of farms, as it did in 1992, and ranked second, behind only North Carolina, in its share of the U.S. tobacco harvest (30.4 percent).(107) Conducted before recent sharp declines in the burley tobacco quota, the 1997 Census of Agriculture found about 8,000 fewer farms in Kentucky than in 1992,(108) a count that some experts believe under-represents the actual number of farms in the state. The number of full-time farms declined by 16 percent, or 6,334 farms,(109) a figure which could drop precipitously by the time the next farm count is taken in 2002. The agriculture census also found that the state had lost more than 330,000 acres of farmland over the five-year period between these national counts, a decline of 2 percent.(110)

The decline in farmland is not simply a reflection of a declining farm economy, but rather a reflection of change. Crop yields increased, and the average size of farms in the state increased by 7 percent,(111) a reflection of the shift toward larger agribusiness operations. At the same time, the market value of Kentucky’s agricultural products increased 15 percent between 1992 and 1997, with crop sales accounting for the majority (52 percent). Beef cattle remained an important component of the Kentucky farm economy; the state registered the eighth highest inventory of beef cows in the nation.(112) Thus, the outlook for farming appears mixed: small farms are being lost, large farms are becoming still larger, and the overall value of farm products is increasing.

Clearly, the changing nature of farming and the farm economy will compel occupational change. The U.S. Department of Agriculture’s Economic Research Service estimates that Kentucky has the ninth highest number of farm workers in the nation,(113) a point of vulnerability as tobacco declines and automation eliminates the need for many farm jobs. By 2006, the Workforce Development Cabinet predicts, jobs for farm workers in the state will decline by 14.3 percent, from 12,409 in 1996 to 10,633 in 2006.(114) The number of farmers is expected to decline even more sharply, from 21,089 in 1996 to 16,800 by 2006, a decline of 20.3 percent.(115)

Farmers are not the only endangered species in Kentucky. The high-wage jobs that once enabled coalfield families to enjoy comfortable, middle-class lives are also fast disappearing. Nationally, coal mining ranks third among industries that are expected to experience the largest percentage decline in their workforce over the 1998-2008 decade.(116) Coal industry employment has declined dramatically in Kentucky since the boom years when employment peaked at more than 49,000 jobs in 1979. By April 2000, the number of jobs for miners in the coalfields had dwindled by 73 percent to just 17,000 jobs.(117) While coal production remained strong well into the 1990s, the limited and largely inaccessible reserves that remain are expected to shorten the current cycle of high productivity. Though an estimated 89 billion tons of coal remains, the extent to which it proves mineable and marketable will determine the life of the industry’s future.(118)

While the cornerstones of Kentucky’s old economy are crumbling and its ability to leap into the New Economy is far from fully realized, the state’s broad-based commitment to education and workforce modernization appear to be its best hope for making economic change work for the people of Kentucky.

Inching Toward the New Economy

Clearly, the rise of global communications and trade continues to produce winners and losers, sometimes overnight. While we are beginning to see signs of adaptation to the changed marketplace in Kentucky, most agree that too little of the literal and figurative electricity of the digital economy is present here. We have too few e-businesses and, by most assessments, too little of the entrepreneurial energy or "critical mass" needed to foster more high-tech development.

For example, a recent analysis of how well the states are positioned in their adaptation to the New Economy ranked Kentucky 39th. While the Commonwealth ranked fairly high on various indices of globalization and of dynamism and competition, its overall performance was undermined by the presence of too few knowledge jobs, too many sectors that have not successfully made the digital transformation, and a weak infrastructure to foster innovation. The state received its lowest rankings on the indices of workforce education (49th), the number of scientists and engineers in the population (47th), the percentage of adults who are online (46th at 23 percent), and the number of firms with commercial Internet domains (42nd with 0.13 percent).(119) Though these data are already "old," particularly given the speed of Net time, and they no longer accurately capture such indices as the state’s online population, the snapshot of the Commonwealth’s position relative to other states helps to illuminate those areas in which public policy needs to focus.

These deficiencies are being met with policy responses at the state and the local level. The Commonwealth’s leadership has taken numerous steps to elevate the quality of the state’s educational infrastructure at every level, instituting a long-term quest for excellence and successfully placing educational achievement in the state on an upward trajectory. Further, the Kentucky Innovation Act of 2000, based on the research and recommendations of the Kentucky Science and Technology Council, seeks to address some of the gaps in the state’s entrepreneurial infrastructure. The Act will fund efforts to build and promote networks of high-tech, research-oriented industries, help manufacturers adapt to the New Economy, train workforces, place new emphasis on the recruitment of high-tech firms and jobs, and focus new attention on research and development.

Moreover, Kentucky’s local and university leaders also are taking steps to better position their communities in the New Economy. Their ventures into the New Economy range from Glasgow’s early and visionary move to provide public Internet access via its cable television network to fast-growing Lexington’s efforts to showcase e-businesses, and from the efforts of the Berea-based Mountain Association for Community Economic Development (MACED) to enable rural Owsley County residents to become familiar with the Internet at kiosks in such public venues as local groceries to the University of Louisville’s creation of a high-tech incubator.(120)

If the New Economy is to show returns in Kentucky, however, Kentucky businesses must use the technologies now driving our economy to their fullest advantage. Some data suggest that Kentucky businesses are embracing these technologies. For example, a survey of Kentucky businesses conducted in 1998 with 364 responding businesses found that 100 percent used computers and that about 80 percent were connected to the Internet.(121) On the other hand, the Center for Business and Economic Research surveyed Kentucky businesses in 1999 to understand their use of and experience with online commerce.(122) They found that about 14 percent of the responding firms (57 of 392) indicated that they sold their products or services online.(123) This is less than half of the 34 percent of U.S. enterprise businesses online in 1999 (see Table 2).

Table 2:  More US Businesses Move Online

Detailed state-level data about the extent of online business-to-business or business-to-consumer exchanges are not available, but we can look at the number of web sites or registered domain names in Kentucky as an indicator of the extensiveness of online exchanges. An examination of the number of registered domain names in Kentucky and surrounding states shows that Kentucky consistently lags behind the U.S. average and most surrounding states (see Figure 11).(124)

Figure 11:  Estimated Number of Registered Domain Names, KY and Surrounding States

In its analysis of the position of southern states in the New Economy, MDC reports that Kentucky consistently trails the national average as well as most southern states in several employment measures. As shown in Table 3, the most recently available data show that the number of information sector and professional, scientific and technical services jobs per 1,000 jobs in Kentucky lags well behind the national average. Additionally, few southern states are as poorly positioned on most measures. Only four states (Louisiana, 11.9; Mississippi, 10.0; North Carolina, 13.0; and South Carolina, 11.7) have fewer information sector jobs, and only Arkansas (16.1), Mississippi (15.2), and West Virginia (18.2) have fewer professional, scientific, and technical services sector jobs. In turn, the projected increase in core information technology jobs predicted to be created between 1996 and 2006 is expected to be smaller in Arkansas (55 percent), Mississippi (54 percent), Oklahoma (55 percent), and South Carolina (56 percent). Finally, several states were found to have fewer high-tech workers per 1,000 private sector workers, including Arkansas (21), Louisiana (15), Mississippi (18), South Carolina (22), Tennessee (20), and West Virginia (19).

Table 3:  New Economy Jobs, KY and U.S.

The future success and prosperity of Kentucky businesses will depend in large measure on their ability to incorporate and master the lightening quick changes wrought by the technology of today’s digital economy. From Main Street retailers to small and large manufacturers, the Internet provides businesses of all types a vital competitive edge. Nationally, retailers, the most vulnerable of enterprises, are realizing significant returns from their entrance into e-tailing. In a summer 2000 survey of more than 1,500 businesses in 16 downtown commercial districts, the National Trust for Historic Preservation found that 14.3 percent of total sales issued from Web sites,(125) a figure that has likely increased in the intervening months. "Five or six years ago, Main Street businesses had virtually no Web presence," observed Kennedy Smith, Director of the National Trust’s Main Street Center. "Now they are discovering the means to expand retail sales on the Web. This presence is an important step for Main Street, where even a 5 percent increase in annual sales can be key to success or failure."(126)

If Kentucky businesses continue to lag behind in embracing these technologies, it will become increasingly difficult to gain ground relative to other states as we move from the "old economy" to the "new economy." Thus, our approach to development must be informed by a fuller understanding of the increasingly important role that information technology is playing in the formation of new businesses and the growth of established ones. Moreover, our approaches to development and recruitment at the local and the state level must become better informed about the needs of the e-businesses we hope to attract.

Employment and Wage Trends

Most analysts conclude that the very forces that have enabled today’s explosion of jobs in the United States, namely information technology and globalization, also figured prominently in depressing wages over two and a half decades. Only during the 1996-1998 period did wages begin to outpace inflation, culminating in a 2 percent increase in 1998.(127) Over the previous 25 years, technology is believed to have eliminated millions of redundant jobs and gradually raised the rate of return for high skills. At the same time, globalization led to increasingly fierce competition and an international bidding war for labor that has resulted in the migration of low-skill industries to lower-cost shores.

Many of these industries once provided low-skill jobs at good wages in places like Adair and Franklin counties, where garment manufacturers have shuttered factories that employed hundreds of Kentuckians. Sewing machine operators, closely followed by farmers, lead the Workforce Development Cabinet’s list of the 25 occupations that are expected to lose the largest number of jobs in the state between 1996 and 2006.(128)

In general, the employment options for low-skill workers in today’s economy are limited to lower-paying service sector and retail sales jobs. In the category of occupations that prefer but do not always require a high school diploma, by far the most jobs between 1996 and 2006 will be for cashiers (3,853), a job that was disproportionately held by women in 1990. In Kentucky, the percentage of cashiers who were female was higher than at the national level, 85 percent compared to 78 percent.(129) Jobs for fast food preparation and service workers (2,169), helpers and laborers (1,580), food preparation workers (1,129), and janitors and cleaners (1,002) round out the top of the list.(130)

In addition to the larger forces of globalization and advancing communications technology, other influences have slowed wage growth. The decline of unions in the United States and the attendant erosion of worker bargaining power is believed by some to have slowed wage growth. Still other analysts point to the entry of millions of women and immigrants into the labor force, principally at lower-wage jobs, which has skewed supply, as a factor in holding wages in check. Millions of immigrants, many of whom possess minimal skills, have been drawn to the dynamic U.S. labor market. Without these workers, however, today’s heated economy would have exhausted its labor supply long ago and ground to a halt. Certainly, without Hispanic workers, Kentucky’s farm economy would likely have suffered a far more devastating blow than the drought of 1999. To a lesser but growing extent, other industries in the state are also increasing their reliance on immigrant workers.

A New York Times report concludes that increased corporate mobility within the United States also may have figured in the slow response of wages to the tight labor market. Free to locate anywhere with access to the Internet, many firms are opting for locations that enable them to shave labor costs or capture a pool of available workers in high unemployment areas. According to Site Selection magazine, internal corporate migration has doubled since 1996 to more than 11,400 annual moves.(131) Similarly, in response to an American Management Association survey, 42 percent of CEOs reported that their firms had recently moved or were actively considering a move.(132) Clearly, Kentucky’s lower wage scale has attracted many firms to our state in recent years, but, just as offshore locations have beckoned garment manufacturers, the new arrivals offer no guarantee that they will stay. And corporate mobility, be it national or global, has another effect. As Harvard economist Lawrence Katz observes, "The threat of it helps to hold down wages."(133)

Though family income has grown, albeit very slowly, the growth has largely been a byproduct of more wage earners and more hours worked, according to the U.S. Department of Labor.(134) Between 1989 and 1998, total family work hours for a middle-income American family increased 246 hours, or about six full-time weeks of work a year, according to the Economic Policy Institute’s The State of Working America.(135) A middle-income African-American family worked almost 500 hours more per year than white families.(136)

The noticeable trend toward more year-round work can be attributed largely to the expanding role that women are now playing in the labor force.(137) Between 1967 and 1998, the percentage of U.S. women participating in the labor force increased dramatically, from 41 percent to 60 percent, and the percentage of women who work year round also rose sharply, from 52 percent to 70 percent. At the same time, overall male labor force participation has actually declined by 5 percentage points, and the percentage who work year round has increased only slightly, from 74 percent to 77 percent.(138) In recent years, the labor force participation of women in Kentucky has increased at a faster pace than at the national level, a trend that may contribute to the lack of growth in the lower-wage range. Berger and Chandra find that the labor force participation rate of women in Kentucky has been increasing faster than the national average while male labor force participation has been declining at a faster rate than nationally.(139)

While the growing presence of women in the labor force has enabled many families to stay financially afloat, single-parent households, usually headed by women, remain the poorest of the working poor. And a recent RAND Corporation study finds not only that women are disadvantaged by lower earnings, but also that motherhood appears to be associated with reduced earnings. RAND found that having two children, for example, lowered a woman’s earnings by 19 percent while one child lowered her earnings by 13 percent.(140) Based on longitudinal studies, economist Jane Waldfogel finds that while women without children earn about 90 percent of what their male counterparts earn, mothers earn only about 73 percent.(141)

In myriad ways, the buoyant economy of the late 1990s has given us a glimpse of the possibilities that broad prosperity could hold for our state and our nation and, indeed, for the world to which we are now so closely linked. In the coming years, we will be challenged to build on that promise, to capture greater economic opportunity, to extend the reach of prosperity, and to address the inequities that continue to block our path to progress.

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