Economic Update | Indiana and Kentucky’s Labor Force Challenges

submitted by
Uric Dufrene, Ph.D., Interim Executive Vice Chancellor for Academic Affairs, Sanders Chair in Business, Indiana University Southeast

The latest statewide employment data show that Kentucky has one of the hottest economies nationwide.  August BLS data puts Kentucky payroll growth at about 2.6% from the same time last year. Over the year, the Bluegrass state has added about 52,000 jobs.  The Lexington and Bowling Green metropolitan areas saw the highest percentage change in jobs, at 3.4% each. The largest metropolitan area, Louisville, added about 7,000 jobs over the year, for a growth of about 1.0%. 

In contrast, Indiana added 59,000 jobs, a change of 1.7% from the previous year. The two metro areas of Indianapolis and Ft. Wayne show the highest percentage growth in jobs at 2.5% and 2.2% respectively. Three metro areas, Muncie, Elkhart-Goshen and Lafayette-West Lafayette, saw a negative change in payrolls from the year before.   Elkhart-Goshen, home to the RV manufacturing industry, saw the largest decline of 5,000 payrolls year-over-year. 

While the short-term progress in payroll growth is impressive, especially for Kentucky, the longer-term growth in the labor force for both states is troubling. Labor force growth is critical because of the impact on gross domestic product.  Limited labor force growth will ultimately show up in a state’s GDP-generating capacity unless this is counterbalanced by capital investments that result in higher productivity. 

We can compare the labor force growth of both states to neighbors as well as other states that have notched economic wins.  Since states vary by size, we need to make statistical adjustments to place states on a level playing field, or to compare apples to apples. We can do this by indexing the labor force of each comparison state to 100.  The magnitude of growth in the labor force will then show up as the difference from the starting point of 100.  

Over the past 20 years, the labor force of Indiana grew to an index of 107.85.  Kentucky is slightly under this at 103.94. You can interpret this as a 7.85% change in the labor force for Indiana since 2003, and a 3.94% change for Kentucky.  How does this compare to neighboring states?   Well, both Indiana and Kentucky fare better than Ohio (99.75%) and Illinois (102.02).  For Ohio, the state’s labor force is smaller today than 20 years ago. 

The comparisons are quite stark when you compare to states that are seeing strong economic gains, driven by labor force growth and capital investments. Kentucky’s neighbor to the South, Tennessee, has an index value of 116.7, which means its labor force has grown by almost 17%.   Georgia’s index value is 120.35, or a 20% growth in labor force.  Much has been written and documented about the population growth of states like Florida and Texas.  Both states are seeing labor force growth of 36% and 38% respectively.   Other notable observations for comparative purposes:  Idaho (139.69), Nevada (137.7), South Carolina (122.25), California (112.36), Wyoming (109.39), and the U.S. (114.46).   Indiana and Kentucky’s labor force growth has been below the U.S. for the past 20 years.

In the last state employment report, there were five states that produced job growth higher than Kentucky:  Florida (2.8%), Idaho (2.7%), Nevada (3.9%), Texas (3%), and Wyoming (2.7%).   All saw labor force growth that exceeded both Indiana and Kentucky in the past 20 years.    

For both Indiana and Kentucky, growth in the labor force is critical to their respective economic futures.  We must continue to make the quality of place investments that help boost the attractiveness of both states and help retain and attract workers.  The decline in the college-going rates of both states is alarming, and if not reversed, will make talent in-migration even more critical.  Investments in education and technology must help drive productivity gains, all being crucial for long term economic growth.    

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