MUNCIE – The past decade has seen a blossoming of research on the geography of employment and the effect of automation on the demand for workers and skills. These studies benefitted from significantly richer data sets on people and skills that enabled substantially more sophisticated labor market analysis. I especially admire work done by David Autor and Enrico Moretti, whose work is rich and easily accessible to non-economists. Their research was promoted by real world happenings that could ultimately inform public policy. But, I have become frustrated at how few insights from the past quarter century are understood and applied to education and tax policies.

In many states, and certainly here in Indiana, public policy towards education, tax incentives and the role of workforce training seem very focused on applying lessons from the 1960s and 1970s, while ignoring nearly everything important from the 1980s through the present. This column is part of my effort to draw out two or three critical lessons from the last two or three decades and tie them to state policies.

The first lesson learned is the primacy of human capital in the success of regions. Nearly the only thing that differs among cities, counties or metro areas is the educational attainment of workers. Capital investment, which for much of the 19th and early 20th century helped determine economic differences between regions, matters very little today. Sadly, Indiana seems wedded to a 1960s model of capital investment. Adjusting for inflation, since 2010, Indiana increased tax incentives for capital by $5.025 million.
 
Over the same time, our cumulative increase in education funding to universities and K-12 education was only $17 million. Indiana’s leaders pay a lot of lip service to educating and attracting talented workers, but pay a whole lot of money to attract capital.

The second lesson of this new research is the growing polarization of labor markets. This means there has been growth at both the high and low ends of the pay scale. This has come at the expense of middle-skilled jobs that pay mid-level wages. The proximal cause of this is technological change. The skills most susceptible to automation and digitization have been those clustered within the middle class. Foreign trade also influenced these jobs, but mostly because trade pressure simply hastened the speed with which American firms adopted new technologies and automation.

State-level policies appear oblivious to the polarization of jobs. It is hard to overstate how unmindful Indiana’s policies are to three decades of evidence. As labor markets polarized, wages rose sharply at the top and stagnated at the bottom. One very likely reason is that displaced workers flooded low-skilled labor markets, while the supply of highly skilled workers remained low. In response to polarized labor markets and low levels of college attendance, Indiana cut funding to colleges and universities. This quickly reduced the share of Hoosier children heading to college at a time when the college wage premiums continues to rise. This is puzzling in light of abundant evidence that more cognitive skills are in greater demand.

The third great lesson of labor market research is uncertainty about the composition of future jobs and labor market skills. We know with much certainty that automation will replace many skills now prized by labor markets. History tells us there will be plenty of new jobs, but they will require different, typically more cognitive skills, and will appear in different places. This uncertainty combined with labor market turbulence makes clear a need for greater focus on durable, transferable, highly cognitive skills. In short, we need more of the skills taught almost exclusively in elementary, middle and high schools, than in colleges and universities.

In response to labor market turbulence and a greater demand for durable cognitive skills, Indiana has moved in precisely the wrong direction. The state weakened high school graduation requirements and now obliges children to substitute academic learning for career familiarization as early as middle school. 

We have shifted funding from schools to workforce training, substituting learning in durable cognitive skills with inherently transient, job-focused training. Good schools are probably working around these obstacles, but taxpayers should ask tough questions of state leaders who send this message to send to students and families.

These critiques of Indiana’s human capital policies are not new. The evidence of labor market polarization and the importance of human capital in local prosperity is not new. Concern over Indiana’s poor levels of educational attainment are not new. Perhaps the only novelty here is that since 2010, Indiana has cut spending on K-12 from 2.59% to 2.29% of our state’s GDP. We have made even deeper cuts to the share of GDP supporting higher education.

I admire fiscal restraint, but that is not what we are observing. State and local incentives to businesses have grown by more than $5 billion since 2010. The shift of tax dollars from investment in human capital to subsidies for business equipment is most assuredly not a conservative principle. More to the point, we hear a great deal of political talk about the need for talent, but it is difficult to reconcile that rhetoric with spending priorities. If today we spent the same share of GDP on education as we did in 2010, we would have more than $1.56 billion extra this year alone.

I am not advocating for a large tax increase, but it is essential that we be honest with ourselves. We are spending far less of our income on human capital, and more on physical capital, than we did a decade ago. I suspect there are good political reasons for this shift, but it is deeply misguided economic policy. It is now time for taxpayers and voters to help align successful politics with smarter economic policy. 

Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.