Why education cuts, low spending hurt Arizona twice

It may seem like the proverbial free lunch, but there are ways to boost government revenues without raising tax rates or fees.

Investing more in public education, particularly by increasing the share of university graduates in the workforce, could result in a gain in revenue greater than the additional cost, Tom Rex and I found in writing our paper, "The Economic Impact of Raising the Educational Attainment of Arizona's Workforce."

Drawing on the work of Enrico Moretti of the University of California, we estimated the economic impact of pursing such a strategy. The positive impacts accrue to all workers. Indeed Moretti's work and the ASU application illustrates that most of the benefits are captured by workers without degrees.

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How does this happen? Businesses in search of skilled productive workers expand in regions that have high levels of educational attainment. These businesses operate at high margins, retain productive workforces and pay excellent wages and salaries.

Both their degreed and non-degreed workers reap higher wages due to these productivity enhancements. Other businesses in the area compete for talent at all levels and overall wages rise as does the standard of living in the region. So a rising tide does lift all boats.

Raising the labor force share of college graduates won't be easy and it won't happen overnight. Arizona has to produce more graduates and, our economic development strategy must be focused on attracting and retaining those businesses looking to employ top talent and pay top wages. But the payoff is large.

How big are the impacts? Based on a static analysis using recent data, had the labor force share of workers with at least a bachelor's degree been 1 percentage point higher, aggregate earnings in the state would have been $1.33 billion higher. State government general fund revenues would have been approximately $64 million higher.

In addition, we simulated the economic impact of a gradual increase in the percentage of university graduates in the Arizona workforce. In the baseline dynamic simulation, we assume it takes six years to raise the labor force share of college graduates by 1 percentage point over current trends. In this scenario, it would take 31 years for Arizona's workforce share of university graduates to reach the national average.

Increases in earnings and government revenues would rise over time. In 31 years, annual earnings in Arizona would be $22.6 billion higher, in today's dollars, than if the policy initiative had not been pursued. State government general fund revenues would be nearly $1.1 billion higher.

If the general fund cost of implementing the initiative was less than this, the state would realize a net gain in revenue and standards of living would rise accordingly. There are a variety of other societal benefits from increasing educational attainment, such as greater civic participation and an increase in charitable giving.

Insufficient funding and continuing budget cuts to education are doubly damaging.

First, they impede the goal of producing more educated workers. Second, they send signals to businesses that Arizona does not sufficiently invest in its workforce.

In the competitive arena of economic development, other states use this against us very effectively, making it harder for us to attract employers seeking educated, productive, high paid workers.

Why should those without degrees care about a plan to raise the number of college-educated workers? Experiment on your own at economist.asu.edu/simulation-tool and see the widespread monetary benefits, including when and where they accrue. Increase degreed labor force shares at a faster rate and reap rewards at an earlier date.

Dennis Hoffman is professor of economics and director of the Seidman Research Institute and Office of the University Economist at Arizona State University.