UPGRADE RHODE ISLAND'S HUMAN CAPITAL NOW

The Providence Journal Editorial Page, June, 1997

Now that Manufacturing Renaissance Week has ended, we must not lose sight of the importance of manufacturing to our state's economy. As everyone should know by now, it is not sufficient for Rhode Island to merely preserve what it now has. Instead, we must be creative and seek ways to enhance our manufacturing climate. But to do this, we will need to both assess our current position and address the prerequisites for success differently than we have in the past.

First and foremost, we must stop defining the cost of doing business in the traditional way, based exclusively on Unemployment Insurance, Workers Compensation, energy and manufacturing wages. Other costs matter. The best example of this pertains to the measurement of labor cost. In today's economy, the average manufacturing wage no longer accurately reflects how expensive labor is since manufacturing firms require workers with far greater skills than were adequate in the past, persons whose skills can be continually upgraded as the technology of production improves. Thus, the costs of hiring, training, and re-training are now critically important components of labor cost. Admittedly, these are difficult to measure. But they should never be ignored.

Once we accept this broadened categorization for labor cost, part of the anomaly concerning why our low (nationally) manufacturing wages have not generated more manufacturing activity here becomes apparent: Rhode Island is a high-cost state. Not just the eight-percent above the national average indicated by the "traditional" measures. More than a decade of neglecting the skills and expertise of our workforce, our "human capital infrastructure," ironically beginning just as we entered the information age, has made Rhode Island among the most expensive places to do business in the northeast.

In the information age, neglecting a state's human capital infrastructure is never benign. It is exacting a high toll on us today as we find ourselves in the long run for all of these bad decisions concerning our human capital infrastructure. How many persons must a manufacturing firm interview before finding one acceptable candidate? Forty? Fifty? Is this a coincidence? Why did Rhode Island continue to have near-recession levels of long-term unemployment even as it approached full employment last year? Why has Rhode Island's rate of job creation throughout this entire recovery been so incredibly slow? Another coincidence? Does anyone really believe that $5,000 per-employee training subsidies over three years will be sufficient to eradicate the major problems Rhode Island has with its educational quality K-12 and our more than decade-long neglect of public higher education?

One recurring topic in any discussion of the future of manufacturing here is the success of manufacturing in the southern states. Why is it that these states have done so well over the last decade? The factor cited as being most critical in study after study is their quality of education. They are keenly aware of the fact that the most important prerequisite for success in the information age is educational quality - at all levels. Years ago, the southern states had the foresight to improve the quality of their educational systems, thus enhancing their human capital infrastructures.

The time has come for Rhode Island to view the prerequisites for future manufacturing "success" within this broader context. As always, we must provide incentives for firms to modernize production. Supply-side incentives that allow us to increase our physical capital infrastructure still matter. The Economic Policy Council has done an excellent job detailing the need for this type of incentive and it has provided us with several excellent proposals. But, while this type of incentive by itself might have been sufficient years ago, it is no longer adequate in today's manufacturing climate. Unless accompanied by measures that guarantee commensurate gains in the skills of our workforce (our human capital infrastructure), the resulting increases in productivity and profitability will often be less than what was anticipated.

Permit me, the "optimist" about Rhode Island's economy, to outline two possible scenarios related to this. At the present time, Rhode Island finds itself highly dependent on Massachusetts for its economic well being. And, most of our current economic momentum is being derived from strong growth in retail sales and existing home sales. As should be apparent, the greatest risks to our current rate of growth are rising interest rates and a slowing of national economic activity, exactly what Alan Greenspan has vowed to bring about. For lack of a better term, we are "cyclically vulnerable." I don't foresee a recession, but our rate of economic growth will slow somewhat as we move toward the end of this year and into next year. If I am wrong, and growth remains strong, then implementing traditional supply-side incentives such as those proposed by the Economic Policy Council, absent commitment to improving our human capital infrastructure, will result in possibly severe labor shortages, since we will be unable to provide sufficient numbers of persons who possess the requisite specialized skills that will be needed. If I am correct, and the economy slows, the effectiveness of the supply-side incentives the Policy Council has proposed dealing with physical capital will tend to be diminished, since this type of expenditure is postponable during periods of slowing economic activity and demand.

The scenario based on moderating economic activity is the one more likely to occur. While Connecticut has performed as badly as Rhode Island throughout much of the 1990s, relying too much on the success of gambling for their momentum, they have recently made a major long-term commitment to education and the skills of their workforce. We, too, must act to enhance our existing workforce skills and to provide a mechanism that guarantees their adequacy in the future. Connecticut might have relied too heavily on gambling for its recent economic success. But if Rhode Island fails to dramatically improve its human capital infrastructure now, it will be taking the larger gamble.

by Leonard Lardaro