The Kansas Productivity Puzzle

The Kansas Productivity Puzzle

Lance Kinzer
Kansas State Representative, Dist. 14
http://www.lancekinzer.com

Among the many interesting things that occurred during the first week of the legislative session perhaps the most compelling involved a presentation to the House Tax Committee by Professor Arthur Hall of the Center for Applied Economics at The University of Kansas. Dr. Hall’s presentation was focused on something he calls The Kansas Productivity Puzzle. Simply put, Kansas lags behind both the national average and other states in our region in the crucial economic category of productivity growth.

In economic terms productivity is the value of goods and services per worker. Kansas falls short with respect to productivity growth in every sector of our economy except durable goods manufacture. This is true not merely when the comparison is made against the nation as a whole, but also when the comparison is made against other agricultural states in our region. To understand why this matters it is important to recognize that productivity growth is a key factor in determining wages. It is also a crucial determinant in overall economic growth. If Kansas had enjoyed merely average productivity growth over the past 25 years our state economy would be some $18 billion dollars larger than it is at the current time. Furthermore, wages in Kansas lag some $5,000.00 per worker behind the national average for similarly educated workers.

The impact of sub-par productivity growth also has a negative impact on unit labor costs for Kansas businesses. This is merely a fancy way to say that businesses in Kansas get less bang for their buck than elsewhere in the country. Indeed, Dr. Hall reports that Kansas has the 3rd worst unit labor cost growth rate in the country. The data suggests that this ‘productivity puzzle” is both long term and systemic. Understanding all of the various factors that contribute to our productivity lag is a complicated question. That having been said, Dr. Hall’s current hypothesis is that there is an important relationship between the size of government in Kansas and our low productivity growth.

In particular, Dr. Hall points out that Kansas has the 4th highest number of local government employees per capita in the nation. Furthermore, the number of local government employees in Kansas is growing at the 4th highest per capita rate in the country. Part of this problem may result form the relatively large number of local government units that exist in Kansas. For a state of our size we have a large number of counties and school districts, and employment in these sectors of government is growing at a rapid rate.

Taking school districts as an example, during the 30 year period between 1972 and 2002 the total K-12 student population in Kansas decreased by 1%, yet the number of teachers and administrators employed by our schools have roughly doubled. Indeed, if the school district employee to student ratio in Kansas were the same today as it was when I was in high school about 15 years ago the cost savings would be approximately $400 million dollars per year. Looking at non-K-12 local government employees in the same way the cost savings would be more than $315 million dollars per year if local government worker per citizen numbers returned to their 1987 level.

The issues of slow productivity growth and fast government sector growth brought to light by Dr. Hall have serious implications that all Kansas citizens and policy makers should consider. While seemingly abstract economic categories like productivity growth may appear detached from everyday life, they have important real world implications. In sorting through how best to address the Kansas Productivity Puzzle it is important to remember that the only way to increase overall productivity is by helping individual Kansas businesses to improve their productivity. This involves enacting polices that provide grater access to the capital, both financial and intellectual, that leads to innovation and in turn growth. It is also crucial that we keep in mind the negative impact an ever growing government sector can have on productivity growth.

The solution to this complex problem may not then be so obscure after all. Policies that limit the size and growth of government and a tax and regulator structure that encourage business growth appear the best available solutions to addressing the Kansas Productivity Puzzle.