8/31/98

KUFM KGPR

T. M. Power

The Change in Montana’s Industrial Structure: What Has It Meant?

The change in the Montana economy that has most concerned economic commentators and many Montana residents has been the shift in employment from goods-production such as mining, smelting, logging, and milling, towards services. "Services" to economists mean things like business, medical, legal, and repair services although in common parlance it has come to also include jobs in retail trade, finance, and government.

This shift in industrial structure is usually directly blamed for the deterioration in real earnings per job in Montana. Services-producing jobs are looked upon as the inferior jobs that Montanans were forced to take as we lost the better, goods-producing jobs. As common as this belief is, there appears to be little evidence to support this linking of changed industrial structure and deterioration in economic well-being.

First, the changes in Montana’s economic structure almost exactly match the changes that have taken place in the national economy. Nothing very unusual has taken place in Montana. For instance, the share of jobs located in business, medical, repair and other narrowly-defined services was 20 percent in both Montana and the US in 1976 and 30 percent in both in 1996. The increase is larger, 50 percent, but Montana was simply tracking the national economy, not going its own way on some deteriorating path. Actually the decline in manufacturing and other non-farm goods-production employment was significantly greater, actually almost twice as great, in the national economy than in the Montana economy. Yet the nation as a whole did not see a the type of decline in real earnings per job that Montana experienced.

If one focuses on one part of the Montana economy where the change in industrial structure appears to have been the greatest, the timber-producing counties in northwestern Montana, from Lincoln and Flathead to Ravalli and Granite counties, the story is the same. Despite the declines in the timber industry and the explosive growth in services, retail trade, and finance that have accompanied the rapid population growth, the shift of jobs towards services in our "timber basket) counties was almost identical to the growth in services in the national economy as a whole. Again, what has been going on in the Montana economy does not appear to be unusual.

The comparison can also be carried to the other Western states. If we pull the large cities of Salt Lake, Phoenix, Albuquerque, Denver, etc. out and focus on the non-metropolitan parts of the Western states, we have a more appropriate comparison since Montana is the least metropolitanized state in the Union. Across the non-metro West from New Mexico to Utah to the west-slope of Colorado to Wyoming, one finds that real earnings per job have declined in a manner very similar to Montana’s experience. Yet these areas, of course, are not timber-dependent and have not been affected by the decline in that industry. The changes in their economic structures also primarily mimic the nation rather than involving some different regional pattern.

The fact is that Montana and the West are going through changes that are primarily national in character. Our economies are becoming more and more like the national economy. In general this is a good thing, we are losing our historic mining and lumber town pasts as our economies become more and more diversified and less tied to one or two industries.

One can take a more rigorous approach to the question of what the link is between changes in industrial structure, the level of real wages and economic inequality by statistically analyzing the data in ways that attempts to hold constant the many other variables that influence wages. Such a statistical analysis can try to tease out the roles played by things such as the shifting economic rewards for education and experience, national economic trends, as well as change in regional economic structure.

When this is down for the Pacific Northwest states, including Montana, one finds that changes in economic structure, including the decline in wood products and the shift towards services, can explain very little of the change in workers’ economic fortunes. Only 5 to 20 percent of the decline in earnings per job can be explained by the change in economic structure. It is the nationwide decline in the rewards to relatively inexperienced and less educated workers and the decline in the wage premia paid by some industries that has driven the loss in real earnings.

The point, of course, is not that every thing is fine with the Montana economy. The decline in earnings per job is real. The rise in the cost of housing in the more densely settled counties compounds this problem. Children living in poverty and rising economic inequality should concern us all. Focusing on the wrong source of the problems, especially a feature driven largely by the national economy such as the shift towards services, distracts us and prevents us from developing effective public policy responses.