Daniel Aaronson

Daniel Sullivan

English

Research Papers in Economics

Chicago Fed Letter
Regional growth in worker quality
by Daniel Aaronson, economic advisor, and Daniel Sullivan, vice president
An analysis of regional labor quality growth places the Midwest near the center of the
U.S. labor quality distribution. To maintain its relative position going forward, the Midwest
will have to increase its share of workers with post-secondary education. This will require
policies that not only promote the education of its residents, but also efforts to make
the region more attractive to the highly mobile population of college graduates.
ESSAYS ON ISSUES THE FEDERAL RESERVE BANK MAY 2003
OF CHICAGO NUMBER 189
1. Proportion of workers with at least high school
proportion
1964 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 ’00
0.36
0.46
0.56
0.66
0.76
0.86
0.96
SOURCE: Authors’ calculations based on data from the US. Census Bureau
and Bureau of Labor Statistics, 1964–2002, Current Population Survey,
March supplements.
The rate of improvement in work force
quality is among the key determinants
of an economy’s potential rate of growth.
Indeed, in previous work, we have
shown that increases in a simple labor
quality measure that quantifies the
effects of such factors as educational
attainment and labor
market experience ac-
count for roughly 10%
of U.S. labor productiv-
ity growth since 1964.1
Moreover, this contribu-
tion of worker quality
improvement to eco-
nomic growth has var-
ied substantially over
time, reflecting varia-
tion in the rate of in-
crease in educational
attainment and the
aging of the work force.
However, over this peri-
od, not all regions of the
U.S. developed human
capital at the same rate.
In this Chicago Fed Letter,
we provide estimates of
the rate of improvement in the quality
of regional work forces, with particular
emphasis on the Midwest.
Although we show that broad patterns
of human capital accumulation are
similar across regions, there are some
notable contrasts as well. In particular,
regions, chiefly in the South, that his-
torically have had relatively low levels
of human capital have been slowly con-
verging to the levels of regions, partic-
ularly the West, that historically have
had relatively high levels of human cap-
ital. This convergence has been driven
primarily by a reduction in disparities
in educational attainment, particularly
high school graduation. By our measure,
average worker quality in the Midwest is
strikingly similar to the overall U.S. av-
erage. In fact, this similarity has existed,
without interruption, since the 1960s.
Though the Midwest is close to the na-
tional average in overall human capital,
it arrives at that average in a particu-
larly midwestern manner, with a strong
showing at the lower end of the educa-
tional distribution and a less impressive
performance at the high end. As a re-
sult, in the Midwest, educational attain-
ment is concentrated more in the middle
ranges, with both fewer high school
dropouts and fewer college graduates
than in the nation. This, perhaps, pos-
es a challenge for the region. Because
a high school education is already near-
ly universal in the Midwest, further re-
ductions in the fraction of dropouts may
be more difficult to achieve. To keep
up with the nation in the development
in overall human capital, the Midwest
U.S.
Low region
Midwest
High regionmay need to improve its relative per-
formance in training, attracting, and
retaining college graduates.
What is worker quality?
Our measure of worker quality is derived
from economic models of human cap-
ital accumulation. Workers are assumed
to invest in productivity-increasing skills
through formal education and on-the-
job training, while firms are assumed
to hire additional labor until workers’
marginal productivity coincides with
their wage rate. The latter assumption
allows us to infer the effects of worker
characteristics on productivity, which
are not directly observable, from their
effects on predicted wages, which can
be estimated from cross-sectional data
on workers’ wage rates and indicators of
their human capital. In particular, we
use data on individual workers from
the Current Population Survey (CPS)
to estimate statistical models of wage
determination that value workers’ ed-
ucation, experience, and other charac-
teristics. We then apply these value
estimates to the changing distributions
of worker characteristics to obtain esti-
mates of the growth in overall worker
quality.
To be sure, the available data on worker
characteristics only begin to scratch the
surface in explaining the determinants
of wages and productivity. For instance,
the productivity increase associated
with obtaining a college
degree likely depends
on the program of
study, the quality of the
institution, and a myri-
ad of other factors. But
available data sources
merely record whether
a worker has a college
degree. Similarly, the
productivity increase
associated with a year
of work experience will
vary with the nature of
the work, how much
time is devoted to train-
ing, and other factors.
But data sources do not
include such informa-
tion. Indeed, our mea-
sure of worker quality growth is based
on proxies for years of work experience
derived from the difference between a
worker’s age and their years of formal
education. Unobserved differences in
time out of the labor force due, for ex-
ample, to raising children, will lead such
proxies to differ from actual experi-
ence. Though imperfect, our measure
of labor quality does, however, sum-
marize the impact of observable labor
force characteristics on productivity.
Trends in human capital
accumulation
We begin by documenting some of the
broad trends in educational attain-
ment that underlie our
estimates of worker
quality growth and show
how these trends differ
across regions. We focus
on educational levels
because, while factors
such as the aging of the
work force and the in-
crease in female labor
force participation have
significant impacts on
the growth of labor
quality over time, they
have less impact in dif-
ferentiating labor quali-
ty across regions.
U.S. levels of formal ed-
ucation have expanded
greatly over the last
century. During this period, high school
graduation went from a rarity to the
norm. College attendance and gradua-
tion rates also rose rapidly during the
twentieth century, especially after WWII
with the introduction of the GI Bill and
increased federal funding of higher ed-
ucation. Increasing graduation rates
have led to a corresponding increase
in the percentage of workers with high
school and college education. Over the
last several decades, the increase in ed-
ucational attainment has generally been
greater in regions that started at lower
levels, leading to some convergence in
regional educational attainment.
Figure 1 shows the share of workers
with a high school diploma in the U.S.
and the East North Central Census re-
gion, which we will refer to as the Mid-
west. In addition, the figure shows the
levels of high school attainment in the
Census regions with the highest and
lowest fraction of high-school-educated
workers.2 In 1964, 57.7% of U.S. work-
ers had completed high school, with
the rate varying from 44.0% in the East
South Central region to 68.0% in the
West region. By 2001, the last year for
which data are available, the overall
rate had increased to 89.4%, varying
from 85.2% in the West South Central
region to 92.5% in the West North
Central region. In general, the progress
was more rapid in the regions that
started at low levels of high school
2. Proportion of workers with at least some college
proportion
1964 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 ’00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
SOURCE: Authors’ calculations based on data from the US. Census Bureau
and Bureau of Labor Statistics, 1964–2002, Current Population Survey,
March supplements.
U.S.
Low region
Midwest
High region
3. Proportion of workers with college degree
proportion
1964 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 ’00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
SOURCE: Authors’ calculations based on data from the US. Census Bureau
and Bureau of Labor Statistics, 1964–2002, Current Population Survey,
March supplements.
U.S.
Low region
Midwest
High regionMichael H. Moskow, President; William C. Hunter,
Senior Vice President and Director of Research;  Douglas
Evanoff, Vice President, financial studies; David
Marshall, team leader, macroeconomic policy research;
Daniel Sullivan, Vice President, microeconomic policy
research;  William Testa, Vice President, regional
programs and Economics Editor; Helen O’D. Koshy,
Editor; Kathryn Moran, Associate Editor.
Chicago Fed Letter is published monthly by the
Research Department of the Federal Reserve
Bank of Chicago. The views expressed are the
authors’ and are not necessarily those of the
Federal Reserve Bank of Chicago or the Federal
Reserve System. Articles may be reprinted if the
source is credited and the Research Department
is provided with copies of the reprints.
Chicago Fed Letter is available without charge from
the Public Information Center, Federal Reserve
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Chicago Fed Letter and other Bank publications
are available on the World Wide Web at http://
www.chicagofed.org.
ISSN 0895-0164
attainment, leading to the convergence
evident in the figure.
Since the mid-1960s, Midwest rates of
high school attainment have nearly al-
ways exceeded those in the rest of the
nation. From the late 1960s through the
early 1980s, the gap was typically quite
small. Since the mid-1980s, however,
the Midwest has seen noticeably more
progress in high school attainment than
the nation as a whole. Indeed in 1998
and 1999, the Midwest recorded the
highest regional rates of high school
attainment, and its 2001 level of 91.8%
was less than a percentage point below
the leading region. Given the very low
relative wages earned by workers with-
out a high school diploma, the Midwest’s
relatively strong showing in high school
attainment has been a significant factor
in boosting average labor quality in the
region. However, rates of increase have
slowed, as high school attainment has
become nearly universal, limiting the
boost to labor quality that can come
from this avenue in the future.
Figure 2 displays the growth in the frac-
tion of workers with at least some post-
secondary education.3 For the nation as
a whole, the fraction of such workers in-
creased from 22.6% in 1964 to 58.0%
in 2001. Regional rates of post-secondary
educational attainment also converged,
though somewhat less dramatically than
in the case of high school attainment.
In 1964, rates of post-
secondary attainment
ranged from 16.9% in
the East South Central
region to 31.3% in the
West region, a range of
15.4 percentage points.
In 2001, the same two
regions were at the top
and bottom, but their
rates had risen to 53.2%
and 61.9%, respectively,
a gap of only 8.7 percent-
age points.
In contrast to its rela-
tively high levels of high
school attainment, until
very recently the Mid-
west had lagged behind
the nation in its rate of
post-secondary educational attainment.
From the mid-1960s through the late
1980s, workers in the Midwest were of-
ten two percentage points or more less
likely to have had some college educa-
tion than the typical U.S. worker. How-
ever, that gap has narrowed since the
early 1990s, and the Midwest rate was
only a tenth of a percentage point be-
low the national average in 2001. Given
that increases in rates of post-second-
ary educational attainment show no
sign of slowing, continued progress in
raising such rates is likely to become
increasingly important to maintaining
the Midwest’s relative position in over-
all labor quality.
Figure 3 shows that, for the country as a
whole, the fraction of college graduates
increased from 11.8% in 1964 to 28.4%
in 2001. Unlike the convergence we have
seen in regional rates of high school and
post-secondary educational attainment,
regional rates of college completion have
actually diverged. In 1964, college grad-
uation rates ranged from 9.2% in the
East South Central region to 15.1% in
the West region, a spread of 5.9 percent-
age points, while in 2001 the range was
from 23.1% in the East South Central
region to 32.8 % in the New England
region, a spread of 8.9 percentage points.
Figure 3 also shows that the Midwest has
long lagged behind the rest of the na-
tion in the fraction of workers with a
college degree. Indeed, the figure sug-
gests that the gap relative to the rest of
the nation may have increased slightly
after about 1980. The Midwest rate of
27.1% in 2001 was 1.3 percentage points
below the national average. Because
workers with college degrees tend to be
more mobile than other workers, fac-
tors other than the generosity of sup-
port for higher education influence the
share of a region’s work force with de-
grees. The Midwest may be at a disad-
vantage in attracting and retaining
college-educated workers. Still, given
its current position, increasing the rate
of college graduates in its work force
represents an opportunity for the Mid-
west to improve its labor quality.
The Worker Quality Index
Our composite estimates of labor quality
summarize the impact on productivity
of the above trends in educational at-
tainment, along with other changes in
the work force. To derive these estimates,
we use the 1980 CPS data for the nation
as a whole to estimate a statistical model
that relates wage rates to workers’ edu-
cation, potential experience, sex, and
other characteristics. We then use that
model to predict what workers in other
years would have earned in 1980. The
average of these predictions is worker
quality. By focusing on the growth of
such predicted wages, we isolate the por-
tion of wage growth that is due to the
changing composition of the work force
4. Labor quality
1980$
1964 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 ’00
4.25
4.50
4.75
5.00
5.25
5.50
SOURCE: Authors’ calculations based on data from the US. Census Bureau
and Bureau of Labor Statistics, 1964–2002, Current Population Survey,
March supplements.
High region
Low region
U.S.
Midwestrather than accumulation of physical
capital or technical progress. These
latter factors raise the value of an hour
supplied by a worker with a constant
level of human capital.
Figure 4 displays our estimates for 1964
through 2001 for the U.S., the Midwest,
and the regions with the lowest and high-
est labor quality. The typical worker of
1964 would have earned about $4.62 per
hour in the labor market of 1980, while
the typical worker of 2001 would have
earned about $5.16 in 1980. This rep-
resents an 11.7% increase in labor
quality or about three-tenths of a per-
centage point increase per year. Though
changes in the distribution of potential
experience and the fraction of women
in the labor force had important effects
on the rate of labor quality growth over
certain periods of time, most of the over-
all increase since the mid-1960s is due
to the increases in educational attain-
ment documented above.
It is also clear from figure 4 that labor
quality in the various regions of the
country has converged to a significant
extent since the mid-1960s. For instance,
in 1964, labor quality in the West (the
region with highest labor quality) was
more than 10% higher than in the
southern regions. By 2001, however,
the gap had shrunk to about 5%. This
was largely due to the faster increase in
1 See Daniel Aaronson and Daniel Sullivan,
2001, “Growth in worker quality,” Econom-
ic Perspectives, Vol. 25, No. 4, pp. 53–74.
This paper also contains a detailed dis-
cussion of our methodology.
2 Data come from the annual March supple-
ments to the CPS. The East North Cen-
tral region is composed of Ohio, Michi-
gan, Indiana, Illinois, and Wisconsin.
There are eight other Census regions.
3 A portion of the relatively large increase
in the fraction of workers with some college
education that occurred in 1992 is due to
a change in the CPS educational attain-
ment question. Aaronson and Sullivan
(2001) discuss how we mitigate the effects
of this change on our measure of labor
quality.
4 In the standard growth accounting frame-
work, the contribution of labor quality to
labor productivity is the product of the
growth in labor quality and the share of la-
bor in total costs, which is about two-thirds.
the fraction of workers with high school
or some college education that occurred
in the states that started with lower labor
quality. Throughout the period of our
data, overall Midwest labor quality has
been extremely close to the national av-
erage. Indeed, though not shown in the
figure, each of the five states in the Mid-
west region are tightly bunched around
this norm, with Michigan just slightly
above and Indiana and Wisconsin just
slightly below the national average. As
shown above, this reflects the offsetting
effects of having both fewer high school
dropouts and fewer college graduates.
Conclusion
Labor quality has risen significantly since
the mid-1960s. The 11.7% increase in
our index of labor quality accounts for
about 10% of the growth in U.S. labor
productivity over the period.4 Labor
quality has, moreover, converged across
the various regions of the country, with
the gap between the highest and low-
est regions now about half as large in
percentage terms as it was in the mid-
1960s. The Midwest has been, and con-
tinues to be, very near the national
average of labor quality.
The fact that the Midwest has gotten to
its current position near the center of
the labor quality distribution by having
a higher than average share of workers
with a high school education perhaps
poses a problem going forward. With
the share of workers with high school
degrees already quite high, it will be dif-
ficult to increase it significantly further.
To keep up with the rest of the nation,
the Midwest will have to increase its
share of workers with post-secondary
education. This will require policies
that not only promote the education
of its residents, but also those that make
the region attractive to the highly mo-
bile population of college graduates.

Regional growth in worker quality

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Regional growth in worker quality

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