THE PERFORMANCE OF THE MASSACHUSETTS ECONOMY
Scottish Enterprise
May 2007
Table of Contents
1. INTRODUCTION 3
2. RECENT ECONOMIC PERFORMANCE 4
3. DRIVERS OF ECONOMIC GROWTH 7
4. THE STRUCTURE OF THE MASSACHUSETTS ECONOMY TODAY 10
5. WHAT HAS BEEN DRIVING PRODUCTIVITY AND EMPLOYMENT GROWTH? 12
6. INNOVATION, RESEARCH AND DEVELOPMENT 12
7. EDUCATION AND SKILLS 16
8. ENTERPRISE AND ENTREPRENEURIAL ACTIVITY 18
9. BOSTON’S UNIVERSITIES AND ECONOMIC DEVELOPMENT 18
10. CONCLUSIONS 20
THE PERFORMANCE OF THE MASSACHUSETTS ECONOMY
OVERVIEW
· Massachusetts’ economic performance (measured by GDP per head) outperforms all other OECD countries
· High levels of productivity and a high employment rate have both contributed to high GDP per head
· Massachusetts’ employment is concentrated in knowledge intensive, high value sectors
· Research and development has been a main driver of productivity growth - Massachusetts outperforms other OECD countries on a range of R&D measures
· Massachusetts has a highly skilled workforce, again outperforming other OECD economies
· The state’s higher education sector plays an important role in the economy by providing skills and attracting government R&D funds and business R&D activities.
· Massachusetts is not an overly entrepreneurial economy, although does perform well for high growth businesses
· The interaction between the higher education sector, R&D activity, skilled workforce and knowledge intensive industries, which all depend on and influence each other, explain Massachusetts’ economic performance
1. INTRODUCTION
The Massachusetts and Boston city region economies rank highly in a number of benchmark indices and are often cited as examples of successful knowledge economies. The 2005 World Knowledge Competitiveness Index[1], which benchmarks the world’s top ‘knowledge regions’, ranks Boston second out of 125, behind only San Jose (interestingly 18 out of the top 20 regions are in the US). Boston’s position is boosted by high productivity and GDP per head, driven in particular according to the report by high levels of R&D expenditure and equity finance (figure 1). Scotland is ranked 83rd.
Figure 1: World Knowledge Competitive Index, 2005
Overall ranking (out of 125)Rank / Region
1 / San Jose, US
2 / Boston, US
3 / San Francisco, US
4 / Hartford, US
5 / Seattle, US
8 / Stockholm, Sweden
20 / Uusimaa, Finland
51 / Denmark
55 / South East, UK
56 / London, UK
83 / Scotland
Selected sub-factor rankings (out of 125)
Boston / Scot
Private equity investment per capita / 4 / 32
Govt R&D per capita / 5 / 82
Business R&D per capita / 5 / 102
GDP per capita / 6 / 104
Investment in primary/secondary education / 8 / 79
Patent registrations per capita / 11 / 106
Labour productivity / 12 / 88
Employment - managers per capita / 25 / 16
Massachusetts is ranked first out of fifty US states in the ‘2007 State New Economy Index’[2], which benchmarks US states across a range of knowledge economy indicators (Massachusetts was also first in the 1999 and 2002 indices). The state scores particularly well for the proportion of workers in high value jobs, workforce education and skills, the number of scientists and engineers, high growth businesses and venture capital (figure 2). In OECD rankings[3], Boston ranks third out of the top global metro-regions in terms of GDP per head (behind San Francisco and Washington).
Figure 2: The State New Economy Index, 2007
Selected sub-factor ranking (out of 50)Rank
Managerial/prof/tech jobs / 1
High-tech jobs / 1
Workforce education / 1
Venture capital / 1
Manufacturing value-added / 2
Fast growing firms / 2
Scientists and engineers / 3
IT jobs / 4
Exports / 4
FDI / 5
IPOs / 5
Overall rankings (out of 50)
Rank
1 / Massachusetts
2 / New Jersey
3 / Maryland
4 / Washington
5 / California
6 / Connecticut
7 / Delaware
8 / Virginia
9 / Colorado
10 / New York State
2. RECENT ECONOMIC PERFORMANCE
Between 1997 and 2005 annual average real GDP growth was 3.7% in Massachusetts, above the US level (3.1%) and Scotland’s (2%). This would place Massachusetts at the bottom of the second quartile of OECD countries (Scotland is in the fourth quartile – figure 3). Compared to other US states, Massachusetts ranks 15th (figure 4).
Figure 3
Figure 4
Over the 1997-2005 period, the Massachusetts’ economy grew by 31%, slightly above the US level (+28%) and significantly above Scotland’s (+17%) (figure 5).
Figure 5
GDP per head is a better measure of wealth and prosperity than overall GDP as it takes into account population growth. In 2005, Massachusetts’ GDP per head was the 5th highest of all US states (excluding the District of Columbia) and was 22% above the US average and 61% above Scotland’s (figure 6). If compared to OECD countries, Massachusetts would be ranked 2nd behind Luxembourg[4] (figure 7).
Figure 6
Figure 7
GDP per head in Massachusetts grew by 27% between 1997 and 2005, higher than for the US as a whole (+18%) and Scotland (+17%). Annual average growth over the period was 3%, ahead of both the US and Scotland (2% each), placing Massachusetts in the 2nd quartile of OECD economies (figure 8).
Figure 8
GDP growth in Massachusetts is average by OECD and US standards. GDP per head, however, is high by both US and OECD standards.
3. DRIVERS OF ECONOMIC GROWTH
Productivity
Productivity is a key determinant of long term, sustainable economic growth and measures the output that can be produced with a given set of inputs. Labour productivity is a common indicator with GDP per hour the preferred measure (as it takes into account differences in average working hours across economies). However, GDP per hour data is not available for Massachusetts so GDP per worker data has been used.
GDP per worker in Massachusetts in 2005 was 11% higher than the US average, and 43% above the Scottish level. Massachusetts has the second highest productivity levels when compared to OECD countries (figure 9).
Figure 9
Between 1997 and 2005, annual average productivity growth was 3.4% in Massachusetts, higher than the US (+2.4%) and Scotland (+1.3%). Compared to other OECD countries, Massachusetts had one of the best productivity performances, ahead of all other advanced economies (figure 10).
Figure 10
Employment
Boosting the proportion of the working age population with a job (the employment rate) is the other key determinant of GDP per head growth. Massachusetts’ employment rate in 2005 was 73%, marginally below Scotland’s (73.3%) but above the US average (71.5%). Massachusetts is ranked 17th out of the 50 US states for employment rates and would just be in the top quartile of OECD countries (figure 11).
Figure 11
Employment in Massachusetts declined in the early 1990s before showing consistent growth up to 2000, when the dot-com bust and resulting downturn in the US economy (and globally) hit Massachusetts harder than average due to the relatively high proportion of IT related jobs. Since 2003, employment has started to rise again. Overall, between 1992 and 2006 job growth in Massachusetts (+16%) has been below in the US average (+25%) but above Scotland’s (+11%) (figure 12).
Figure 12
Population
The population of Massachusetts has grown by 12% over the last 25 years, lower than the rate for US as a whole (+30). Scotland’s population declined slightly (-1.6%) over the same period (figure 13). Since 2000, population growth in Massachusetts has slowed, rising by just 0.5% compared to a 1% rise in Scotland and a 6% rise for the US.
Figure 13
There has been recent evidence of a decline in younger age groups in Massachusetts with graduates leaving the State for better job opportunities and a lower cost of living elsewhere. Since 2001 Massachusetts has experienced net out-migration (-84,000 between 2001-05) and the number of 22-34 year olds declined by 2% between 2003 and 2005. Over the same period Scotland has started to experience net in-migration.
Overall GDP growth in Massachusetts has been driven by increases in employment and population accompanied by high (and increasing) productivity.
High GDP per head in Massachusetts is driven by high levels of productivity and a high employment rate.
Scotland’s performance lags Massachusetts due to weaker productivity, employment and population growth.
4. THE STRUCTURE OF THE MASSACHUSETTS ECONOMY TODAY
The Massachusetts economy has transformed itself over the last 25 years from one based on textiles, metalworking and other heavy manufacturing to one based on higher value activities. Today the economy is dominated by the service sector which accounts for 84% of the State’s GDP, higher than the US average (79%) and Scotland’s (74%). Looking at industrial structure in more detail, main points to note (figure 14):
· Manufacturing is more important in Scotland than Massachusetts and the US
· Real estate and business/professional services are particularly important for Massachusetts
· Financial services are also more important than in the US/Scotland
MassBenchmarks[5] has identified a number of important clusters for the Massachusetts economy:
· Information Technology - computer and communications equipment
· Health Care/lifesciences - health services, medical equipment and devices, biotechnology and pharmaceuticals
· Financial Services – including banking and insurance
· Knowledge Creation - a broad cluster that supports the creation of knowledge based assets and includes higher education, printing and publishing, legal/accounting activities, engineering, management, R&D services and software
· Traditional Manufacturing - paper, rubber and plastics, fabricated metals, apparel and textiles, industrial machinery, instruments and all other manufacturing industries
· Arts, tourism and leisure
Figure 14
Knowledge creation accounts for almost a quarter of Massachusetts jobs, with a further 14% in healthcare/lifesciences (figure 15). Overall, what can be termed as ‘knowledge economy sectors’ account for 46% of all Massachusetts’ jobs.
Figure 15
The importance of knowledge based, high value businesses to Massachusetts is highlighted by the large number of education, healthcare and financial services businesses among the largest 25 private sector employers in the State (figure 16).
Figure 16: Twenty-five Largest Private Sector Employers in Massachusetts in June, 2006 (listed alphabetically)
Bank of America / Home Depot USABaystate Medical Centre / Massachusetts Institute of Technology
Beth Israel Deaconess Medical Centre / Raytheon Company
Big Y Foods / S & S Credit Company
Boston Medical Centre Corporation / Shaw’s Supermarkets
Boston University / Southcoast Hospitals Group
Brigham & Women’s Hospital / State Street Bank & Trust Company
Demoulas Super Markets / The Children’s Hospital Corporation
E.M.C. Corporation / UMass Memorial Medical Centre
Federated Retail Holdings / United Parcel Service
Friendly Ice Cream Corporation / Verizon New England
General Hospital Corporation / Wal-Mart Associates
Harvard University
Massachusetts also scores highest in the 2007 State New Economy Index for its ‘knowledge employment index’, defined as a combination of:
· the share of the workforce employed in managerial, professional, and technical occupations (ranked 1st out of 50 states)
· the education level of the workforce (ranked 1st)
· employment in high value-added manufacturing sectors (ranked 2nd)
· employment in IT occupations in non-IT sectors (ranked 4th)
· employment in high-wage traded services (ranked 7th)
· the average educational attainment of recent immigrants (ranked 15th)
The Massachusetts economy is strongly dependent on knowledge intensive, high value sectors and businesses such as education, IT, professional and financial services. This helps explain why Massachusetts has higher productivity levels compared to the US and Scotland.
5. WHAT HAS BEEN DRIVING PRODUCTIVITY AND EMPLOYMENT GROWTH?
Four main factors lie behind the strong performance of the Massachusetts economy over recent years:
· growth of high value, knowledge intensive sectors (as highlighted above)
· strong R&D and innovation performance
· its ability to draw on a skilled workforce
· world-class universities and research institutes that support the skilled workforce base and R&D performance.
6. INNOVATION, RESEARCH AND DEVELOPMENT
Innovation, which can be defined as the successful exploitation of new ideas, is one of the main engines of long-term economic growth and structural change. Innovation can occur through investment in R&D, through adopting new technologies from other firms or countries, or through trying different ways of working. Investments in innovation can result in new technologies, products and processes, as well as novel services and means of delivery. One measure of innovation that is readily available and broadly comparable across economies is research and development expenditure.
Massachusetts’ R&D performance has been identified by a number of commentators as one of the main factors behind its recent strong economic performance and its position as one of the world’s leading knowledge economies. In 2003 gross expenditure on R&D (GERD)[6] in Massachusetts was $15.6 billion, the equivalent to 5.3% of state GDP, the second highest of all US states and double the US figure (2.5%). Scotland’s figure was 1.5%. Massachusetts had a higher level of GERD as a % of GDP than any other OECD country in 2003 (figure 17).
Figure 17
R&D performers
Business enterprise R&D (BERD) in Massachusetts in 2003 was the equivalent to 3.7% of GDP, higher than the US average (1.9%) and any other OECD country. Scotland’s figure was 0.6% (figure 18).
Figure 18
Higher education R&D (HERD) expressed as a % GDP was 0.61% in 2003, above the US rate (0.37%). This though was slightly below Scotland’s level (0.64%) (figure 19).
Figure 19