Academic journal article Economic Perspectives

Reversal of Fortune: Understanding the Midwest Recovery

Academic journal article Economic Perspectives

Reversal of Fortune: Understanding the Midwest Recovery

Article excerpt

The Midwest economy has received considerable attention in recent years as it has shed its image as the Rust Belt and reemerged as a strong regional competitor both on the national and international stage. This reversal of fortune has surprised some analysts, and explanations of the region's resurgent strength have often been more anecdotal than empirical. In this article, we take a more systematic approach to analyzing the elements that have contributed to the region's recovery since the mid-1980s.(1) Specifically, we describe the contribution of external and internal factors to the economic revival of the Midwest and identify the challenges and opportunities the region now faces,

Charting the turnaround

A region's economy can be represented by many diverse measures. Unemployment rates are perhaps the most widely recognized indicators of both economic progress and participation of the region's population in the economy. Looking at the aggregate unemployment rate for the Midwest versus the nation from the 1980s to date, two remarkable features can be seen.(2) First, from an average annual rate that exceeded the nation's by 3 percentage points in 1983, the Midwest's unemployment rate had fallen to a full percentage point below the nation's by 1996 (see figure 1). The same year marked the fifth consecutive year that the rate remained below the nation's. A second feature of the labor market reflected by the unemployment rate is the behavior of the Midwest economy during the most recent (1990-91) recession. In prior recessions, the highly cyclical nature of the Midwest economy, combined with the region's eroding share of national production, resulted in a more rapid rise in Midwest unemployment relative to the nation. In contrast, during 1990-91, the underlying secular strength of the region's economy allowed its labor market to continue to gain on its national counterpart and, ultimately, to experience a more fully employed work force.

[Figure 1 ILLUSTRATION OMITTED]

Despite the Midwest's tight labor markets, its growth of employment and population are not, in general, exceeding the nation's. The Midwest turnaround has been characterized by a convergence in the pace of employment growth with that of the nation. Job growth in the early 1990s was especially strong relative to the nation, but has now probably eased to a pace that is on par with the nation. Because the region's work force is approximately at full capacity, any further supranational employment growth cannot reasonably be expected unless population growth increases sharply. Although recent employment gains in the Midwest have been accompanied by population growth, reflecting a turnaround from a net outflow in the 1980s to a net inflow in the 1990s, the Midwest continues to lag other regions (especially most of the Sun Belt) in terms of population growth.

This combination of strong employment growth and lagging population accounts for the marked improvement in the Midwest's labor force participation relative to the rest of the nation. From a deficit position during the 1980s, the region's ratio of employed, aged 16 and above, to population (at 0.65) has surpassed the U.S. average (0.63).

Heightened work force participation appears to be reviving the incomes of Midwest residents. Per capita income relative to the nation had dipped sharply from a superior position in the late 1970s to an inferior position by the early 1980s. However, the region's relative position began to improve in 1991 and slightly exceeded the national average in 1994 and 1995, the latest year available (see figure 2). Median household income, measured in constant purchasing power, largely parallels this pattern. After dipping to parity with the nation from 1980 to 1983, Midwest income continued on par with the nation through 1994, and is now showing preliminary signs of strength relative to the nation.

[Figure 2 ILLUSTRATION OMITTED]

Midwest income continues to flow from the region's traditional industries. …

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