Sunday, May 6th, 2012

The OECD Reviews Chicago

Update 5/20/12: This post has been edited to reflect a correction. Please see here for details.

“Although still high in absolute terms, GDP and labor productivity growth rates are sluggish – both by US and international standards. The Chicago Tri-State metro-region’s contribution to national growth has slowed over the past decade and the region does not stand out as a top knowledge hub. Despite a dynamic and numerically large labor force, the region has experienced virtually no growth in the size of its prime working-age population and displays limited ability to attract and retain talent when compared to its US peers. More worrisome are the persistence of unemployment and the lack of sufficient job creation.” – OECD Territorial Review, The Chicago Tri-State Metropolitan Area

The Organization for Economic Cooperation and Development (OECD) is an international organization that has its roots in the administration of Marshall Plan aid to rebuild Europe after World War II. The OECD was invited by the Chicagoland Chamber of Commerce* to perform a “territorial review” of Chicago’s regional economy. I believe this is the first such review the OECD has ever undertaken in the United States. The results were released a couple months ago. The Chicagoland Chamber graciously sent me a copy. (The report is available online here – thx Jim Russell for the link). I did a read through of this inch-thick, 332-page report and wanted to share a few observations about it. As the quote at the top might indicate, this report, like Rahm Emanuel’s economic strategy, was fairly gloomy. My points will be topical and not an integrated narrative as I did not get to undertake as thorough a review as I might like.

Interesting Statistics

The OECD review amassed quite a bit of interesting statistical data on Chicago and puts them in the context of other major cities in the 34 countries that comprise in the OECD. I think that by itself made the review worth doing. I might suggest other cities take a look at this to determine if such a study would be relevant to them, particularly as international comparisons can be difficult to pull off.

This report is a goldmine of stats and there’s way too much to list here, but a few things that jumped out at me:

  • The OECD report benchmarked labor productivity, which is less commonly looked at in economic studies. Chicago’s is above average but growing more slowly than average.
  • Chicago has trailed the nation in job growth. Had Chicago simply matched the national average in job growth since 1990, the region would have 600,000 more jobs than it does today.
  • There was quite a bit of sectoral analysis of Chicago’s economy. In fact, they actually normalize the sectoral composition of Chicago’s economy when looking at job growth to see if its under performance in job growth was due to concentration in slow growing sectors – but it was not.
  • Chicago is known for having America’s second largest business district, but it ranks only fifth out of the top ten regions in America for the percentage of its jobs in the core city. Between 1960 and 1990, over 96% of new regional jobs were created outside downtown.
  • There were many other interesting statistics around labor force participation, mobility of educated labor, elderly dependency ratios, educational attainment, poverty, patents, the structure of governments, taxation, etc.

Excess High End Talent

According to the OECD, Chicago suffers from a skills mismatch in its workforce. This is not just true at the bottom end of the economy as might be expected, but also at the top end, where there is a surplus of highly skilled labor:

At the high end, there is a large pool of high-skilled, highly educated workers, in principle more than sufficient to fill the jobs available at that level … at the high-skill end, data for the tri-state region points to an apparent oversupply.

To some extent this shouldn’t be a surprise. Chicago is a desirable city for people to live in, particularly for educated workers inside its heartland catchment area. As with other big city talent magnets, the economy doesn’t always supply the right employment for all the people who want to live there. The many articles about unemployment in Portland, for example, illustrates this, and Chicago is similar. In that regard, you might see the skills surplus as a sign of local strength.

However, the skill concentration in Chicago isn’t producing the type of high end innovation economy seen elsewhere. As the OECD notes, “Indicators suggest that the Chicago Tri-State metro-region does not rank as highly among the US knowledge hubs as one might expect, given the size of its economy and population and its concentration of world-class research universities.”

Also, Chicago may not be as attractive a talent hub as its aggregate numbers indicate. Again per the OECD:

To be sure, the Chicago Tri-State metro-region remains an attractive place for many migrants, but it is less attractive than many of its US metro-region peers. Moreover, if the analysis is confined to highly educated people of prime working age (25+, with at least a bachelor’s degree), then the picture is even more problematic. During 2005-09, more such people moved into the area than left it, but the net gain was relatively small compared with other large US metro-regions. Los Angeles, for example, benefited from a net gain of nearly 80,000 highly educated people in 2009, compared with 3,500 for the Chicago Tri-State metro-region.

When you under-perform as a talent magnet and still can’t put high skilled labor to good use, that’s a definite sign of trouble. This was one thing that was eye opening for me in the study as I’d previously assumed the high end of the market was in pretty good shape and that skill mismatch problems were the result of a large under-educated population vs. open jobs requiring mid-tier skills.

Policy Prescriptions

The OECD’s recommendations were not nearly as strong as its assessment of the region’s conditions. This shouldn’t be surprising as it is easy to look at data and see what may be wrong, but it is not always obvious what to do about it. The recommendations fall into five broad categories:

  • Better Skills Matching
  • Improving Innovation and Entrepreneurship
  • Investments in Transportation and Logistics
  • More Green Industry Growth
  • More Effective Institutional Arrangements

First off, including “green growth” as one of only five major chapter headings is a joke. The aggregate number of jobs identified as specifically green is small. And as I’ve noted many times, there’s no such thing as green industry. Pretty soon there will just be industry again – it will all be green. So if Chicago and the US aren’t doing well at today’s industries, why would we think they would do any better at tomorrow’s? “Green” isn’t some sort of fairy dust you can sprinkle on and work wonders with. If anything, the acceleration of transition to more green practices will only drive more manufacturing offshore, exactly as it did with light bulbs. The track record of trying to create “green jobs” almost everywhere has been poor and has failed to live up to the hype, so I can’t believe the OECD is doubling down on this snake oil.

For the other areas, the OECD doesn’t break much new ground, though does highlight some interesting international case studies of regions getting it right. The sections more or less regurgitate the laundry list of organizations and initiatives already in place, then tag on “do more and coordinate better.” Examples include, “create region-wide capacity to match skills supply with demand” and “broaden the innovation focus [to include] non-science-and-technology-based innovation.”

By contrast, there was little focus on what counterproductive initiatives might be trimmed. While, for example, the report notes that many of the excessive numbers of local governmental units probably should be eliminated or merged, it doesn’t really look at how many of the alphabet soup of various non-governmental civic development groups might likewise be better off euthanized. Given the unified civic leadership nexus of Chicago, this should in theory be much easier than killing off governments, which are famously resistant to elimination. It’s hard for civic sector leadership to scold state legislatures about the need to consolidate when they can’t even do it themselves. This shows that the OECD had to deal with local political reality, so it probably pulled a lot punches in the recommendations. Statements of raw flattery such as “All key public and private stakeholders are keenly aware of what needs to be done to address these issues effectively” show the extent to which the OECD wanted to avoid ruffling feathers and challenging the Chicagoland status quo, which is disappointing.

I might also take issue with the way the problems were attributed to these structural factors without addressing at any great length many of the clear drivers of Chicago’s under-performance. For example, Chicago is the regional capital of a greater Midwest that has been struggling as a whole. It’s tough to swim upstream against that. (I’ll have more to say on other underlying factors in a subsequent analysis of my own).

In short, this report got it half right in giving us a very good look at the current conditions, strengths, challenges, and international comparisons. Where it lagged was in fully articulating the structural landscape driving the under-performance and developing compelling strategies for turning the ship around. Still, if I were a region out there looking for a good snapshot of where I stood in the marketplace, the OECD would be on my list of people to call.

* Disclosure: I won a competition sponsored by the Chicagoland Chamber in 2009.

61 Comments
Topics: Demographic Analysis, Economic Development, Globalization, Public Policy, Regionalism, Strategic Planning, Talent Attraction, Urban Culture
Cities: Chicago

61 Responses to “The OECD Reviews Chicago”

  1. the urban politician says:

    Somewhere amidst all this bad news, is a sign of promising things still brewing under the surface for Chicago:

    CNN’s list of the to 100 fastest growing inner city companies in the US has 12 companies from Chicago, easily beating out every other city. Link: http://money.cnn.com/smallbusiness/fastest-growing-businesses-inner-city-100/2012/full-list/

    Compared to other metros, (by my fly-by count):

    Metro NY (including Connecticut, Woodhaven, NY): 6
    Los Angeles: 5
    Washington, DC: I counted 4 or 5

    Chicago really blows away the competition in this one. A sign that entrepreneurism is still alive and new ideas are still blooming from the great beast on the prairie.

  2. uffy says:

    Thanks for the link. I’m not really sure how anyone can see how quickly downtown is growing and extrapolate that Chicago is failing. If anything there’s a mad rush into the city’s nicer neighborhoods, especially around the loop.

  3. the urban politician says:

    Uffy,

    I think you should give more credit to the commentators here. Nobody is questioning the growth and desirability of Chicago’s core. They are bringing up legitimate concerns about metro Chicago’s performance on several key indicators compared to other US Metros.

    I just thought that the link I provided above was a nice indicator of new trends which may be brewing under the surface. Chicago has a lot of industries that have left town or collapsed, and that has wreaked havoc upon its economy, but from the ashes we see plenty of signs of new life, and that is crucial.

    Aaron mentioned a talent/employment gap occurring in Chicago, but perhaps in part that is contributing to so much entrepreneurship in the city. People are creating their own companies, doing their own thing. I know people who have left or lost their jobs who are simply buying up real estate and making that their way of life. People are out there doing things on their own, and that seems to be reflected in part in the above numbers.

    What is nice about Chicago is that when you look at that list of 12 companies, you see a diversity of industries:

    manufacturing
    logistics
    digital media
    telecommunications
    financial services
    web design
    marketing

    Chicago’s tremendous economic diversity serves it well here.

    Interestingly, America’s “dream city” Houston only has 2 companies on the list. Also interesting is Nashville’s performance, with 6 companies on the list. This is impressive considering Nashville’s size compared to all of the big boys.

  4. the urban politician says:

    Here is the same list for last year:

    http://money.cnn.com/smallbusiness/fortune/fastest_growing_businesses_inner_city_100/2011/full_list/index.html

    Interestingly, Chicago wins in this list as well, but this time its lead is less over its rivals, with 7 companies. In this list, San Francisco has about 5, but if you include Oakland then the Bay Area either ties or wins at 7 or 8.

    So Chicago pulled even further ahead of the field this last year, and it also appears that Nashville has recently stepped it up a notch, while the Bay Area took a bit of a hit.

    These lists also point to some good indicators for Detroit as well, which seems to have a good handful of companies on the list for each year. Keep in mind that this list is for “inner city” companies only, so the “inner city” of Detroit, which has long been struggling, does show signs of life. Great to see.

  5. the urban politician says:

    Royce,

    Here is another example of Rahm Emanuel being such a bad mayor for Chicago:

    http://www.ccc.edu/news/Pages/Chicago-Sun-Times-City-to-give-2-million-to-companies-that-hire-City-Colleges-grads.aspx

    What a terrible mayor! Clearly he only cares about his wealthy buddies

  6. Chris Barnett says:

    That linked list is to companies in low-income, high-poverty, high-unemployment census tracts. The same sort of list is used by the US government to determine eligibility for several economic-development tax-credit and grant programs.

    I am not sure it reveals anything other than opportunism by start-ups seeking low-cost locations and low-cost capital or debt. In measuring macro trends, I’d rather see the whole picture of start-ups in a metro, not just the ones in the most challenged census tracts.

    (Please do not take this as an indictment of Federal programs for inner cities. I work in a field mostly dependent on the same. But I understand that they often influence decisions at the margins: companies that choose to locate in a challenged neighborhood of one metro probably had already chosen that metro. Thus, such neighborhoods compete mostly with other parts of their metro, not other cities’ challenged neighborhoods. So I doubt that this particularly limited ranking really tells us much about Chicago vs. Anywhere.)

  7. the urban politician says:

    Chris,

    In most American metros (especially older ones), the central city usually can be characterized as a “low-income, high poverty, high unemployment” census tract relative to its suburbs.

    Many of the companies listed in Chicago, however, are anything but that–you have companies listed from the west loop and Ravenswood, for example, that are in more gentrified areas.

    Your comments above reflect that you spent little time exploring where these companies are based and that your perhaps have a lack of knowledge about Chicago neighborhoods; Hillard Heintze is one of the top performers and it is headquartered in the heart of Chicago’s financial district downtown; Coyote Logistics (#1 on the list) was started in a wealthy Chicago suburb and has now moved into an industrial space in a gentrified north side neighborhood of Chicago (which is hardly struggling with crime or poverty). I highly doubt that it or most of the other companies got any meaningful Federal grants, and if you really feel that is the case then show me the evidence of this. Finally, if companies wanted low cost locales for startups they would almost all be starting off in Houston or Nashville–the fact that high tax Chicago is creating so many of these companies speaks to the contrary of your argument.

    For the most part, Chicago’s performance on this list for the last 2 years speaks volumes. It shows that when the economy collapsed, a lot of talented people stuck around and created their own companies. This shows that the city still has great appeal for entrepreneurs who want to be here and will create new opportunities when none are readily available. Great to see and this bodes well for the city.

  8. Chris Barnett says:

    TUP, I studied the disclaimer on the Top 100 website to find how they populated their list. Their description of how they determined “inner city” reads very much like the guidelines for determining the list of census tracts eligible for New Markets Tax Credits.

    Until recently the list of NMTC-eligible census tracts was updated with the “longform” decennial census data. So a tract could have been considerably gentrified before it went off the list. The fact that an area is gentrified today is irrelevant when the tract’s qualification was based on old data.

    In addition, Chicago has several hundred TIF districts to provide other incentives locally. The aid is seldom direct; it may be done through infrastructure improvements or site acquisition and redevelopment.

    NMTC are not granted to a relocating company, but to a community development financial institution as an incentive to lend to major employment-generating redevelopment projects in troubled areas.

    A company would be crazy NOT to look at NMTC and TIF tools for growth financing. Unless you know the exact details of Coyote Logistics’ relocation, you do not know if they used TIF incentives or New Markets Tax Credits-based financing to do the deal. Such arcana are not generally publicized beyond “a package of incentives” when a project is announced.

    I’m saying that when any fast-growing company with significant physical operations moves into a NMTC-qualified census tract, it is highly suggestive that NMTC financing plays a role.

    And I think you have inadvertently proved my point: “inner city” Chicago is competing with Chicago suburbs, not with Indianapolis or Nashville or Houston for Chicago start-ups. Displaced employees are more likely to try and grow where they’re planted than to pull up stakes and go somewhere that they have NO network.

    I think business start-ups per 1000 population, or the number of a metro’s entries on the Inc 500, would be a better competitive measure among metros than the list you’ve cited.

  9. the urban politician says:

    Chris,

    What is your point?

    If your argument is that “this company is based here or moved here due to financial incentives x,y, or z and therefore that does not count”, then we might as well discount the gains made by southern cities for the past 3 decades. Much of the entire economic strategy of places like Houston or Dallas has been to poach companies from elsewhere due to thier lower taxes and lower regulation (which is essentially the same as a financial incentive). Does this mean, then, that we should discount the gains these cities have made?

    Besides, what city, in some shape or form, isn’t using financial incentives these days? I know that Coyote Logistics received financial incentives, but that does not necessarily mean the same for the other 11 companies listed. In addition, there have been companies that have moved to downtown Chicago lately without receiving any city incentives. Grubhub, a well known internet company, is one example, but there are others.

    What is more evident is that Chicago is doing an exceptional job at growing (and in some cases attracting) fast growing startup companies into its inner core, better than any other city in the US. You can go on and on about the reasons, but that CNN list doesn’t lie.

    You can argue the means, but you can’t argue the ends.

    My opinion is that Chicago is a talent magnet that unfortunately has faced tougher economic times than similar sized cities, and thus a lot of motivated people have had to go out on their own and grow new companies. The fact that so many of them are in Chicago speaks wonders.

  10. the urban politician says:

    Chris,

    Take a look:

    http://www.chicagorealestatedaily.com/article/20120516/CRED03/120519850/pls-moves-headquarters-to-1-south-wacker

    No incentives. Chicago has its share of serious problems, but the core city’s ability to grow, attract, and retain fast growing new companies in the past few years is one of the bright spots.

    That part about the Chicago story is real. And just yesterday, a group of large financial institutions announced financing for a speculative office highrise (no tenants signed!) in Chicago’s Loop. How many speculative office towers are going up right now in the United States? Perhaps none?

    I call that a major vote of confidence in the city’s future.

  11. Osito says:

    Unfortunately, Chicago is losing ground to former competitor cities. The fact is that Chicago is still in the Rust Belt, and is still afflicted by many of the regional ills (declining population, reliance on manufacturing, etc.).

    Is Chicago an underpeforming, smaller NYC, or an outperforming, larger Detroit? I would say, on the whole, the latter is more accurate. Look at the homicide numbers, the Census results, the devastation on the South and West Sides.

    I think Houston will eventually overtake Chicago, but probably not until 2025 or so. It will happen, though. Dallas probably overtakes Chicago too.

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