February 13, 2012
Iowa’s Innovation Index
High pay and productivity are the key “first derivative” factors of economic development, predicting the pace of growth. Innovation is the key “second derivative” factor, affecting the growth of growth, or the long-term trajectory of an economy.
Much has been written about the cycles of innovation and our new “Creative Economy” era. Regions exhibit long-term, accelerating growth when its economy and labor markets exhibit the characteristics of innovation. A simple metric that macroeconomists follow to measure whether innovation is taking hold in the business sector is The Labor Income Share. It could simply be called “The Innovation Index” because of its long-term correlation with the evolution of an economy to less labor-intensive, more efficient markets. How is Iowa doing, relative to the US? Not well, but Iowa’s cities can be ranked in an Innovation Index to see how various cities are doing.
The United States, as a whole, is experiencing a shift from labor intensive to “brain intensive” industries.
That transition is lauded and mourned, depending on one’s position in the transition. For every Google millionaire (much more productivity than labor) there is a factory or call-center worker (more labor intensive) who has seen a job outsourced to low-cost labor countries. Globalization punishes “high labor cost” industries, with the exception of higher education, which remains a critical input to localized innovation. The Cleveland Fed’s economist Dr. Occhino says it this way, “Technological change connected with improvements in information and communication technologies [raises] marginal productivity and return to capital relative to labor.”
As with any second derivative metric, the connection to “real world” may appear to disconnect, but the implication is real in the long-term. It matters for those concerned with which Iowa economies are poised to grow. Iowa’s Innovation Index looks like this:
Note that every Iowa metro is lagging the United States average. Bottom-line, most of our economy is still stuck in the old industrial age, where the Labor Share Index was at about 65% for the 20th century as we bridged from an Agricultural Economy to the Information Economy. It is worth excluding Ames and Iowa City, given the severe difficulties in measuring “labor income share” in a college town. (The economic impact of innovation in the classroom takes a long time to spill over into business metrics, and things like “capital return on university buildings” are nearly impossible to measure. So statisticians don’t even try.)
Cedar Rapids tops the state in this metric. The population hub of the Creative Corridor has taken aggressive steps to shift its civic structure toward a more efficient and productive structure. New jobs in the last decades centered in highly productive fields like engineering (Rockwell Collins), financial services (Transamerica) and telecom / IT (GoDaddy.com, even the McLeod jobs still exist in myriad small firms like I’mOn). With high productivity, innovation-leaning metrics and one of the highest paid labor forces in the state, it is poised to grow. But before it rests on its laurels, it needs to understand that it is still lagging the country’s average and has a long way to go to be a national center of the innovative economy.
Council Bluffs is a bright spot for sure. Google has arrived. They have new electric plants. Omaha is spilling over the border, with its nexus of internet, financial services and modern logistics. It now rivals Cedar Rapids, the population hub of the Creative Corridor and tops in the state in transforming itself to a 21st century economy.
