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					The Face of Texas
                                         Jobs
                                         People
                                         Business
                                         Change




FEDERAL RESERVE BANK OF DALLAS • OCTOBER 2005
The Face of Texas                                                                  Table of Contents
                                                                                    1 Introduction
Jobs, People, Business, Change                                                        Mine Yücel

                                                                                    3 Texas in the Most Recent
                                                                                      Recession and Recovery
                                                                                      Mine Yücel
         The only constant is change itself. A Greek philosopher wrote those
words more than two millennia ago, at a time when events probably didn’t            6 Why Did Texas Have a
move as rapidly as they do today. Accepting the inevitability of change still         Jobless Recovery?
leaves us the task of understanding the often bewildering world around us.            Pia M. Orrenius, Jason L. Saving
                                                                                      and Priscilla Caputo
Most of us need help in deciphering the meaning of the changes we can see
and identifying the changes we can’t see. That is the purpose of this collection   12 Industry Clusters in Texas
of essays — to give our readers solid, useful perspectives that will assist in        Laila Assanie and Mine Yücel
understanding the changing Texas economy.
                                                                                   17 Economic Progress in
         The new century finds Texas in transition — no longer booming on
                                                                                      the Texas Economy
high oil prices, finally rebounding from the late 1990s technology bust and           Robert W. Gilmer
still looking for the next economic driver. Our times are complex. Texas’
economy is being reshaped not only by what’s happening in the state and            24 Texas Border Benefits from
                                                                                      Retail Sales to Mexican Nationals
nation but also by a globalizing world, an important part of which lies just
                                                                                      Keith R. Phillips and
over the Rio Grande.                                                                  Roberto Coronado
         These essays explain the recent past, give a textured picture of the
current landscape and offer a glimpse of what changes may be over the              27 Texas Border Employment
                                                                                      and Maquiladora Growth
horizon. Our goal is straightforward: We want to promote a fuller
                                                                                      Jesus Cañas, Roberto Coronado
understanding of Texas’ evolving economy, so the state’s citizens will be better      and Robert W. Gilmer
equipped to take advantage of opportunities that lie ahead.
                                                                                   33 Do Higher Oil Prices Still
                                                                                      Benefit Texas?
                                                                                               .
                                                                                      Stephen P A. Brown and
                                                                                      Mine Yücel

                                                                                   37 The Changing Face of Texas:
                                                                                      Population Projections
Harvey Rosenblum
                                                                                      and Implications
Executive Vice President and Director of Research                                     D’Ann Petersen and Laila Assanie
Federal Reserve Bank of Dallas
                                                                                               this recession was a major factor in the


Introduction
Mine Yücel
                                                                                               state’s prolonged downturn.
                                                                                                    Pia Orrenius, Jason Saving and
                                                                                               Priscilla Caputo survey the weak jobless
                                                                                               recovery after the most recent recession
                                                                                               and suggest that it may be caused by
                                                                                               structural change in the Texas labor mar-
                                                                                               ket. They note that structural change is
                                                                                               not new to Texas. The state went through
                                                                                               structural change in the 1980s after the oil
                                                                                               bust and may be going through another
                                                                                               one now. They show that the high-tech
                                                                                               and apparel industries are undergoing
                                                                                               structural losses, while the health care,
                                                                                               education and government sectors are
                                                                                               undergoing structural gains. But, just as
                                                                                               the oil industry decline paved the way for
                                                                                               the diversification and growth of the Texas
                                                                                               economy a decade later, the structural
                                                                                               change going on today will pave the way
                                                                                               for a more dynamic and prosperous Texas.

                                                                                               Oil’s Impact
                                                                                                    The oil industry has been undergoing
                                                                                               change for the past 20 years, shrinking
                                                                                               while other sectors of the Texas economy
                                                                                               have grown. The Texas economy’s diversi-
                                                                                               fication away from energy and the energy
                                                                                               sector’s declining importance prompt
                                                                                               Stephen Brown and Mine Yücel to ask
                                                                                               whether high oil prices are still a benefit to
                                                                                               the Texas economy. They show that higher




T
     The economic landscape of Texas is            While the drivers of the economy may        energy prices still benefit the state —even
changing. The state lost more than             change, one constant is the close relation-     though it is by less than in the boom years
200,000 jobs during the tech bust and          ship the state has with the Mexican econ-       of the 1970s and early ’80s. They also find
recent recession. A majority of these jobs     omy. The interconnection is crucial to the      evidence that the Texas economy has
were in the high-tech sector, which was        border economies and is a big factor in         become less sensitive to fluctuations in oil
the main driver of the Texas economy in        the changing demographics of Texas.             prices than it was in the ’70s and ’80s.
the 1990s. With the decimation of the tech                                                     First, oilfield activity has become less sen-
sector, which industry will be the driver of   Structural Change                               sitive to fluctuations in energy prices. Sec-
the Texas economy in the future? This               The articles in this publication dis-      ond, the energy industry makes up a
monograph doesn’t attempt to answer            cuss some of the changes in the economic        smaller share of the Texas economy than it
that question, but we explore some of the      landscape of our state. Mine Yücel looks at     used to. Together these factors mean that
ways the Texas economy has been chang-         the Texas economy’s performance during          Texas output is about 15 percent as sensi-
ing and some of the current issues facing      the most recent recession and explains          tive to oil price fluctuations as it was from
it.                                            why it was different from previous reces-       1970 to 1988. Texas employment no
     The state has gone through boom and       sions. She argues that unlike previous          longer seems to be positively affected by
bust cycles before, but each downturn has      recessions, the most recent recession was       oil price fluctuations.
been followed by a stronger and more           primarily due to a high-tech bust rather
diverse economy. The oil bust was partic-      than an oil price shock. Although oil           Business Mix
ular to Texas and hurt the state’s economy,    prices were relatively high during the               Laila Assanie and Mine Yücel outline
while low oil prices helped the rest of the    recession, they did not benefit Texas as        the importance of industry agglomeration
nation. The tech bust, on the other hand,      much as in the past because the state has       to an economic growth. They highlight the
was experienced similarly in Texas and         diversified away from oil. In addition, she     key clusters in Texas and its six major met-
the nation. Texas bore a larger brunt          shows that the high-tech sector grew very       ropolitan areas through economic base
because it had a higher share of high-tech     fast in Texas in the 1990s, to a share higher   analysis. They find that oil and gas extrac-
manufacturing and service industries           than the national average. Texas’ higher        tion and its support activities, pipelines,
than the nation.                               share of industries that were hit hard in       natural gas distribution, refining and oil-

                                                                               OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS               1
                                      field-machinery manufacturing are still        because retail sales strength varied closely
                                      agglomerated in Texas. However, high-          with peso strength, especially in Laredo
                                      tech and transportation industries have        and McAllen.
                                      been added to this mix. Computers,                   Another perspective on border cities
                                      telecommunication services, semicon-           is presented by Jesus Cañas, Roberto
                                      ductors and air transportation firms now       Coronado and Bill Gilmer. They show how
                                      have a larger presence in Texas than in the    expansions and contractions of the ma-
                                      nation as a whole.                             quiladora industry have affected Texas
                                           Bill Gilmer analyzes per capita in-       border cities. NAFTA’s passage and the
                                      come growth in various regions of the          peso devaluation in the early ’90s led to
                                      Texas economy. He shows that the state         maquiladora growth and the relocation of
                                      economy has been growing rapidly since         component parts and material suppliers
                                      1969, either matching or exceeding the         to Texas cities along the border. Texas bor-
    Texas’ population is              nation’s growth. But the Texas Triangle        der cities developed rapidly in the ’90s as
    faster growing,                   cities of Houston, Dallas/Fort Worth,          part of this supply chain. Cañas, Coron-
                                      Austin and San Antonio grew faster than        ado and Gilmer observe that proximity to
    younger and more                  average. Outside the Texas Triangle,           the U.S. market becomes a crucial advan-
                                      income growth was much slower,                 tage for the maquiladoras when there is a
    ethnically diverse                although population growth was not.            short inventory cycle, when the weight-
                                      Especially after 1989, the Texas Triangle      to-value ratio of goods is high, when there
    than the nation’s.                cities contributed three-fourths of the        is frequent retooling, when quality is more
    The Hispanic                      state’s income growth. Gilmer notes that       important than price and when intellec-
                                      the Mexican border area represents a           tual property rights are critical. However,
    population will                   challenge to state economic development        they note that the state is unlikely to
                                      because the border cities’ average per         repeat the banner performance of the ’90s
    be the dominant                   capita income is only 50 to 60 percent of      as foreign competition slows the growth
                                      the national average. The border saw           of Texas border-city suppliers to the
    force in Texas                    explosive gains in the ’90s following the      maquiladora industry. Hence, Texas may
    by 2020.                          passage of NAFTA and the growth of the         see less stimulus in the future from
                                      maquiladora industry, but high popula-         maquiladora expansion.
                                      tion growth and high in-migration rates
                                      kept income per capita low in this area.       Population Shift
                                      The article also explains that the growth in        Finally, D’Ann Petersen and Laila
                                      wages and salaries after 1989 came             Assanie discuss Texas’ changing demo-
                                      through a change in industry mix as the        graphic makeup and how it will shape the
                                      economy shed low-wage jobs and                 economy. Texas’ population is faster
                                      replaced them with better-paying ones.         growing, younger and more ethnically
                                                                                     diverse than the nation’s. The Hispanic
                                      Border Influence                               population will be the dominant force in
                                           Texas border cities are a unique blend    Texas by 2020. The authors demonstrate
                                      of U.S. and Mexican cultures, languages        that there are large disparities between
                                      and customs and follow the ups and             ethnic groups in income and education.
                                      downs of the Mexican and U.S.                  Such disparities may imply a decline in
                                      economies. Keith Phillips and Roberto          real income and a lower-skilled and less-
                                      Coronado look at how border cities on the      educated labor force in Texas compared
                                      Texas side benefit from cross-border traf-     with the nation. On the other hand, the
                                      fic by consumers from their sister cities on   young and fast-growing population also
                                      the Mexican side. They estimate retail         means Texas’ housing market may con-
                                      sales in four metro areas along the            tinue to be vibrant even as the baby
                                      Texas – Mexico border. They find that in       boomers age. Texas’ challenge is to reduce
                                      2001, retail sales to Mexican nationals        the disparities and make our differences
                                      accounted for nearly 20 percent of retail      work for us.
                                      sales in border metros. Laredo had the
                                      highest share, with 41 percent of its retail   Yücel is a senior economist and vice presi-
                                      sales going to consumers from across the       dent in the Research Department of the
                                      border. Phillips and Coronado also show        Federal Reserve Bank of Dallas.
                                      that unexpected changes in the peso’s real
                                      value affected these border metros

2       FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
                   Texas in the Most Recent
                   Recession and Recovery
                   Mine Yücel




                   A
                        After decades of faring better than the                             picked up in Texas in 2004. But while the
                   rest of the country, Texas’ economic                                     1.7 percent increase put Texas on par with
                   growth has lagged both the nation’s and                                  the nation, it still left the state below its
                   its own past performance for almost three                                historical pace. What are the reasons for
What are the       years.                                                                   Texas’ prolonged downturn? Why did the
reasons for             The most recent U.S. recession was                                  state lose its edge?
                   short-lived, beginning in March 2001 and
Texas’ prolonged   ending that November, according to the                                   Past Performance
                   National Bureau of Economic Research. It                                     Texas employment growth, on aver-
downturn? Why      took Texas another 20 months — until July                                age, exceeded the nation’s from 1970
                   2003 — to bottom out, based on the Texas                                 through 2004, with a 2.8 percent rate to
did the state      Coincident Index.1 Employment growth                                     the country’s 1.8 percent (Chart 1). The
lose its edge?
                   Chart 1
                   Texas Bests U.S. Employment Growth for More Than 30 Years
                   Percent
                    8
                    7
                    6
                    5                                                                                                          Texas
                    4
                                                                                                                                               Texas average
                    3
                    2                                                                                                                          U.S. average

                    1
                    0
                   –1                                                                                         United States

                   –2
                             ’71   ’73     ’75    ’77     ’79     ’81    ’83     ’85     ’87    ’89     ’91     ’93    ’95     ’97     ’99   ’01   ’03   ’05

                   NOTES: Data are year-over-year, seasonally adjusted, annualized rates. Shaded bars signify national recessions.
                   SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas; National Bureau of Economic Research.


                                                                    OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                                         3
Chart 2
Texas Economy Follows Oil Prices
Detrended Texas employment                                                                                    2005 U.S. dollars per barrel
 8                                                                                                                                        90
                                                                                                                                          80
 6
                                                                                                         Employment cycles                70
 4
                                                                                                                                          60       After oil prices crashed,
 2                                                                                                                                        50

 0                                                                                                                                        40
                                                                                                                                                   Texas diversified and
–2
                                                                                                                                          30       the industry became a
                                                                                                                                          20
–4                                                                                                                Oil price
                                                                                                                                          10
                                                                                                                                                   much smaller share of
–6
     ’73     ’75     ’77     ’79     ’81     ’83     ’85     ’87    ’89      ’91     ’93     ’95   ’97      ’99        ’01    ’03   ’05
                                                                                                                                          0
                                                                                                                                                   the state’s economy.
NOTE: Employment data are seasonally adjusted and have had the time trend removed.
SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas; Department of Energy.




state’s ability to dodge national recessions                              estate boom cratered. Low oil prices ben-                            sector losing 280,000 jobs nationwide
is one reason Texas has done so much bet-                                 efited the national economy but sent                                 from March 2001 to July 2003. These job
ter. Eight of the 10 post–World War II                                    Texas into a steep decline. However, Texas                           losses plus those in high tech constituted
recessions followed oil price shocks. And                                 skirted the national recession again in                              50 percent of the total U.S. employment
unlike the nation as a whole, Texas bene-                                 1990, when West Texas Intermediate                                   decline. Texas lost 21,200 transportation
fited from high oil prices, especially in the                             crude spiked to $45 per barrel with the                              jobs, which, combined with its high-tech
1970s through early 1990s. As can be seen                                 Iraqi invasion of Kuwait (Chart 3d ).                                losses, accounted for 62 percent of the
in Chart 2, the Texas economy followed                                                                                                         state’s total.2
changes in oil prices fairly closely, with                                This Time Around                                                          Chart 5 illustrates Texas’ high-tech
employment rising and falling with the oil                                     Texas looked much more like the                                 roller coaster. California is included as a
price. The Texas employment cycle started                                 nation in the 2001 recession than it did in                          comparison, along with the United States.
diverging from oil-price movements in                                     past downturns, for two reasons (Chart 4).                           High tech grew very fast in the 1990s but
the 1990s as the economy diversified away                                 First, although oil prices were high, this                           came back down just as fast. High-tech
from oil and gas.                                                         recession was primarily due to a high-tech                           production in Texas grew six times as fast
      High oil prices were a boon to the                                  bust, not an oil price shock. Second, high                           as the state’s overall output. During the
Texas economy and helped it grow, even                                    oil prices do not help the Texas economy                             recession, Texas high-tech manufacturing
during national recessions, as seen in                                    as much as they have in the past.                                    lost 107,400 jobs, nearly a third of its
Chart 3. Oil prices that nearly tripled from                                   The collapse of high tech in the                                employment. Even though California
$4 to above $10 per barrel (refiners’ acqui-                              recent recession was greatly felt in Texas.                          started with a higher base and therefore
sition cost) sent the United States into                                  The state had a larger share of high-tech                            grew less in percentage terms, more jobs
recession in December 1973 but boosted                                    employment than the U.S. average, so job                             were created in Texas. During the build-
output and employment in Texas (Chart                                     losses in those industries were relatively                           up, total high-tech manufacturing jobs
3 a ). Oil prices started creeping up again                               higher. From March 2001 through July                                 increased by 47,000 in Texas, while they
in the late 1970s and rose from around $12                                2003 (the Texas recession), 39 percent of                            rose by only 17,000 in California. In semi-
per barrel in 1978 to almost $30 when Iraq                                the jobs lost nationwide were in high                                conductors, for example, California added
invaded Iran in September 1980. The U.S.                                  tech — 426,800 of them in manufacturing                              22,000 jobs, while Texas added 35,000.
economy went into recession — again,                                      and 610,000 in services. Fifty-one percent                           Texas also grew faster than the nation in
without Texas (Chart 3b ).                                                of the 208,900 jobs lost in Texas were in                            telecom services, adding 50,000 jobs dur-
      But just as high oil prices helped                                  high tech —51,900 of them in manufac-                                ing the ’90s, then losing 30,000 during the
Texas, low ones hurt it. The nation went                                  turing and 55,500 in services.                                       recession.
into recession again in August 1981, and                                       The events of September 11 also con-                                 Elsewhere in this publication, “Do
Texas followed 10 months later, the result                                tributed to Texas’ steep downturn. The                               Higher Oil Prices Still Benefit Texas?” dis-
of oil prices that began falling from record                              transportation industry is important to                              cusses how the relationship between oil
highs in March 1982 and the pull of the                                   the state’s economy and has a larger share                           and the Texas economy has evolved.
national downturn (Chart 3c ).                                            of total employment than in the nation.                              When the industry was a larger share of
      Texas had its own recession in 1986,                                Transportation was especially hard-hit by                            the Texas economy, higher oil prices were
when oil prices collapsed and the real                                    fallout from the terrorist attacks, with the                         always a net benefit to the state. That

4                  FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
Chart 3                                                                 changed in the late 1980s, when volatile              Chart 4
Texas and U.S. Economies in                                                                                                   Texas Looks More Like the Nation
                                                                        energy prices helped erode the promi-
Previous Recessions                                                                                                           (Total nonfarm employment)
                                                                        nence of energy-intensive and energy-
a. Texas Skirts Recession in the 1970s…                                 producing industries.                                 Index, April 2001 = 100
(Total nonfarm employment)
                                                                             After oil prices crashed, Texas diversi-         102
Index, December 1973 = 100                                                                                                                             U.S. recession
                                                                        fied and the industry became a much                   101                  April – November 2001
110                                                                     smaller share of the state’s economy. For                                                                      United States
108                                                                                                                           100
                        U.S. recession                                  example, oil and gas output, which
106                                                    Texas
                  December 1973 – March 1975                            accounted for nearly 20 percent of total               99
104
                                                                        Texas output in 1981, accounts for only                                                                        Texas
102                                                                                                                            98
100
                                                       United States    about 6 percent today. Similarly, oil and
                                                                        gas jobs account for only 2 percent of                 97
 98                                                                                                                              Oct. Mar. Aug. Jan. June Nov. Apr. Sep. Feb. July Dec.
 96                                                                     Texas employment, down from a high of                    ’00 ’01 ’01 ’02 ’02 ’02 ’03 ’03 ’04 ’04 ’04
 94                                                                     about 5 percent in 1982. The upshot is                SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of
   June Sept Dec. Mar. June Sept. Dec. Mar. June Sept.
                                                                        that rising oil prices benefit Texas much                      Dallas; National Bureau of Economic Research.
    ’73 ’73 ’73 ’74 ’74 ’74 ’74 ’75 ’75 ’75
                                                                        less now than they did in the past.
b. …and Again in 1980                                                        Texas is still a large producer and
(Total nonfarm employment)                                              exporter of oil and gas, and when prices              Chart 5
                                                                        go up, it helps producers, royalty owners             The Boom and Bust of High-Tech
Index, February 1980 = 100
                                                                        and the state through increased severance             Manufacturing…
110
108                     U.S.                                            taxes. So, unlike the rest of the country,
                     recession                    Texas                                                                       Jobs: Index, January 1990 = 100
106                 February –                                          Texas gets an offset. But that offset is              160
104                  July 1980                                          much less now than it was 25 years ago.                                                       Texas
102                                               United States              In sum, Texas’ economic perform-                 140
100                                                                     ance has been below par the past three
                                                                                                                              120                                  United States
 98
                                                                        years. Unlike other downturns, the 2001
 96
                                                                        recession was primarily due to a high-tech            100
 94
  Aug. Oct. Dec. Feb. Apr. June Aug. Oct. Dec. Feb. Apr. June           bust, not an oil price shock. And although
                                                                                                                               80                                         California
    ’79 ’79 ’79 ’80 ’80 ’80 ’80 ’80 ’80 ’81 ’81 ’81                     oil prices were relatively high, they did not
c. Texas Follows Nation into Recession in 1981…                         benefit Texas as much as in the past                   60
                                                                                                                                    ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05
(Total nonfarm employment)                                              because the state economy has diversi-
                                                                        fied. In addition, high tech grew very fast
Index, August 1981 = 100                                                                                                      …and Telecom Services
                                                                        in Texas in the 1990s, to a share that was
110
                                                                        higher than the national average. Texas’              Jobs: Index, January 1990 = 100
108
                   U.S. recession                                       higher share of industries that were hard-            210
106                                                                                                                                                                           Texas
                   August 1981 –                                                                                              190
104                                                                     hit in the recent recession was a major
                   November 1982
102                                                                     factor in the state’s prolonged downturn.             170
100                                                   Texas
                                                                                                                              150
 98                                                                                                                                                                     United States
                                                                        Yücel is a senior economist and vice presi-           130
 96                                                   United States
 94
                                                                        dent in the Research Department of the                110
   Feb. May Aug. Nov. Feb. May Aug. Nov. Feb.         May Aug. Nov      Federal Reserve Bank of Dallas.                                                                       California
    ’81 ’81 ’81 ’81 ’82 ’82 ’82 ’82 ’83               ’83 ’83 ’83                                                              90
                                                                                                                               70
                                                                        Notes                                                       ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05
d. …but Dodges the 1990 Downturn                                        1
                                                                            The Texas Coincident Index aggregates the          SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of
(Total nonfarm employment)                                                  movements of key regional indicators —                      Dallas.
                                                                            employment growth, the unemployment rate
Index, August 1990 = 100
104
                                                                            and gross state product—to gauge the state’s
                                                                            overall economic direction.
102                                                                     2
                                                      Texas                 One point to note is that both high-tech and
100                                                                         transportation employment were falling even
                                                                            before the onset of the recession. The two sec-
 98                           U.S.                    United States
                           recession                                        tors were responsible for 73 percent of all job
                         August 1990 –                                      losses in Texas from December 2000 to July
 96                       March 1991
                                                                            2003.
 94
      Feb. May Aug.         Nov.   Feb.   May     Aug. Nov.      Feb.
       ’90 ’90  ’90         ’90     ’91   ’91      ’91 ’91        ’92
SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas;
National Bureau of Economic Research.




                                                                                                             OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                                         5
Why Did Texas
Have a Jobless Recovery?
Pia M. Orrenius, Jason L. Saving and Priscilla Caputo




I    In early 2001, the U.S. and Texas
economies fell into recession. While the
National Bureau of Economic Research
Business Cycle Dating Committee
declared the U.S. recession over in
November of that year, job growth did not
                                              structural change in the economy. While
                                              much has been written on the nation’s
                                              experience during this period, there is lit-
                                              tle information on what caused the job-
                                              less recovery in Texas. For this reason, it’s
                                              important to examine these explanations
                                                                                              ers on firm payrolls. However, the house-
                                                                                              hold survey has a much smaller sample
                                                                                              size and depends on population estimates
                                                                                              that are not always reliable, mainly
                                                                                              because of uncertainty about immigra-
                                                                                              tion rates. Given these weaknesses and
resume until June 2003. Texas job growth      to see which of them can shed light on the      the adoption of a statistical method to
broke into positive territory two months      state’s experience.                             compensate for missed job growth in
later, and there is evidence that, like the                                                   start-up firms, most experts — and the
nation, economic activity in the state        Employment Statistics?                          BLS — consider the payroll survey the bet-
picked up long before that.                         Two Bureau of Labor Statistics (BLS)      ter gauge of employment.
     Following a typical recession,           surveys are the primary source for
employment begins to rise at about the        national and state employment data. The         Productivity Growth
same time output does. But in the two         establishment, or payroll, measure — offi-      or Uncertainty?
years after the 2001 recession, U.S. real     cially, Current Employment Statistics —              If the data are sound and the country
output growth averaged 2.5 percent, while     surveys about 400,000 work sites each           did experience a jobless recovery in 2002
employment growth was essentially zero.       month. Critics contend this survey under-       and 2003, could high productivity growth
The divergence between output and             states job creation at economic turning         or substantial uncertainty have been the
employment was even more pronounced           points because it misses employment in          cause?
in Texas, where real output — as measured     the new firms created during a recovery’s            U.S. productivity growth averaged 4.3
by gross state product — grew faster than     initial stages. The alternative, household-     percent during this period, and some
the nation’s, but employment fell at          based Current Population Survey contacts        experts believe that increase — well above
an average annual rate of 0.2 percent.        individuals directly about their employ-        the post – World War II average of about
Clearly, something was different this time.   ment status. According to this survey,          2 percent — enabled companies to step
     Many explanations have been offered      there has been little jobless about the         up production without hiring more work-
for the unusually weak labor market per-      recovery: Jobs have grown each year since       ers. Others believe the uncertain environ-
formance, including problems with meas-       the 2001 recession.1                            ment that followed various corporate
uring employment, high productivity                 The household survey might seem           accounting scandals and the 9/11 attacks
growth, widespread uncertainty in the         sounder than the payroll survey because         led to a wait-and-see approach by em-
wake of 9/11 and corporate scandals, and      it is not limited to wage and salary work-      ployers.

6         FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
    These factors likely played an impor-       Chart 1
tant role in the jobless recovery. But job      Texas Employment Tracks the Nation’s in 2001 and After
growth in 2002 – 03 was far below what          Index, 2000 = 100
Texas and the nation saw in earlier peri-       110
ods of relatively high productivity growth,
                                                100
such as the late 1990s, and substantial
uncertainty, such as the late 1970s. So          90                                                                              United States
there is more to the story.
                                                 80
                                                                                                                                Texas
Structural Change?                               70
     A widely read article from the Federal
                                                 60
Reserve Bank of New York offers another
explanation for the jobless recovery.2 Erica     50
Groshen and Simon Potter consider two
                                                 40
types of effects that could shake up labor                 ’78       ’80      ’82      ’84       ’86      ’88          ’90       ’92      ’94    ’96   ’98   ’00   ’02   ’04
markets: (1) short-term cyclical adjust-        NOTE: Data show total nonfarm employment.
ments that vary with the business cycle,        SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas.
and (2) longer term structural changes, in
which some industries decline while oth-
ers grow.                                       ance, is largely designed around the needs                                   the state level. In a jobless recovery, how-
     The economists contend that an             of the cyclically unemployed — people                                        ever, the traditional relationship between
unusually large amount of structural            who need short-term help with income                                         employment growth and overall eco-
change in the labor market, as opposed to       sustenance while they search for a job.                                      nomic activity breaks down. This means
temporary cyclical adjustments, hindered        The system is generally not designed to                                      payroll employment data may not have
the resumption of employment growth in          provide longer term retraining for dis-                                      accurately reflected the state’s overall eco-
2002 and 2003. When jobs shift across           placed workers whose sectors perma-                                          nomic health during 2002–03, making it
industries, new positions have to be cre-       nently shrink. Public job-training pro-                                      impossible to date the Texas recession
ated and filled, which takes far more time      grams are becoming more common, how-                                         using those numbers.
than simply recalling workers to their          ever. Lawmakers recognized the effects of                                         The NBER solves this conundrum for
jobs, as might occur with cyclical change.      structural change in the labor market in                                     the nation by using several variables in
So if structural change is on the rise, it      passing such bills as the Workforce Invest-                                  addition to employment — such as indus-
could explain the jobless recovery.             ment Act of 1998 and the Trade Adjust-                                       trial production and, especially, gross
     The kind of structural change              ment Assistance Reform Act of 2002.                                          domestic product — to date U.S. business
Groshen and Potter consider can result                Assuming structural change has                                         cycles.5 Most of these numbers are not
from a myriad of factors that cause some        accelerated at the national level, can the                                   available in a timely fashion at the state
industries to decline as others grow. These     same be said for Texas? Taking the                                           level, and they are not available at all on a
factors include technological and demo-         Groshen – Potter approach, we compare                                        quarterly or monthly basis, which would
graphic change, reorganization of pro-          recent patterns to earlier recessions to see                                 be needed to date the Texas recession.
duction, trade and outsourcing — any one        if structural change has increased in Texas                                       We use the national dates for a base-
of which can permanently alter a state’s or     and, if so, whether it helps explain the                                     line analysis of Texas. After all, Texas em-
nation’s industrial mix. Cyclical job losses,   state’s recent experience.                                                   ployment closely tracked the nation’s in
by contrast, move with the business cycle.                                                                                   2001 and thereafter, suggesting that simi-
As the economy enters a recession, jobs         Measuring Structural Change                                                  lar factors drove both economies into
are temporarily lost in response to soften-          To measure structural job change,                                       recession (Chart 1 ). Texas output also
ing demand. They are added back as the          Groshen and Potter compare employ-                                           tracked the nation’s reasonably well in
economy picks up again.                         ment growth in the recession and the                                         2001 and 2002 (Chart 2 ). That said, esti-
     Looking at job growth by industry,         recovery.3 They make this comparison for                                     mates of real output at the state level are
Groshen and Potter find that structural         each major industry over the length of the                                   subject to a higher degree of uncertainty
factors played a much greater role in the       recession as designated by the National                                      than at the national level, and there is
United States during 2001 – 02 than in          Bureau of Economic Research (NBER)—                                          anecdotal evidence Texas emerged from
earlier U.S. recoveries. They attribute this    March 2001 to November 2001.4 The recov-                                     the recession after the nation. To check
to a changing labor market in which cycli-      ery is defined as the 12 months following                                    the validity of our findings, we repeat the
cal job losses have been minimized and          the business cycle’s trough in November.                                     analysis using an end date of March 2003
structural changes are more pervasive.               Pinpointing recession dates for Texas                                   rather than November 2001.6
     This conclusion has important im-          is more complicated. Economic analysts                                            Chart 3 shows how Texas job growth
plications for public policy. The tradi-        often look to payroll employment growth to                                   fared during the 2001 recession and the
tional safety net in the United States, with    date state recessions because this is the                                    12-month recovery for each one-digit
such elements as unemployment insur-            most timely and reliable data available at                                   industry, the broadest category in the

                                                                                                OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                             7
Chart 2                                                                                                                                                      ness cycle. Industries that grew slower
Texas Real Output Tracks the Nation’s in 2001 and After
                                                                                                                                                             than the statewide average during the
Index, 2000 = 100                                                                                                                                            recession but faster during the recovery
110                                                                                                                                                          are in the procyclical flows quadrant
                                                                                                                                                             because they move with changes in the
100
                                                                                                                                                             business cycle. Industries that grew faster
 90                                                                                                                                                          than the statewide average during the
 80                                                                       United States                                                                      recession but slower during the recovery
                                                                                                     Texas
                                                                                                                                                             are in the countercyclical flows quadrant
 70                                                                                                                                                          because they tend to add jobs when the
 60                                                                                                                                                          rest of the economy declines but lose jobs
                                                                                                                                                             when the rest of the economy does well.
 50                                                                                                                                                               The size of each industry’s bubble on
 40                                                                                                                                                          the chart represents its share of total Texas
            ’78        ’80        ’82     ’84      ’86         ’88        ’90      ’92             ’94       ’96       ’98       ’00       ’02       ’04     employment in March 2001, when the
NOTE: Data show real U.S. gross domestic product and Texas gross state product.                                                                              recession began. The larger the bubble,
SOURCES: Bureau of Economic Analysis; Federal Reserve Bank of Dallas.                                                                                        the larger the industry’s share of the state’s
                                                                                                                                                             workforce at that time.
                                                                                                                                                                  The results suggest that the recent
                                                                                                                                                             business cycle has been dominated by
Chart 3                                                                                                                                                      structural gains and losses, as most major
Structural Change Prevalent Among Texas Industries in 2001–02                                                                                                industries fall into the structural change
Job growth in recovery (percent)                                                                                                                             quadrants in Chart 3. Manufacturing of
 4 Procyclical flows                                                                                                                                         both durable and nondurable goods suf-
                                                                                                                                       Structural gains
 3                                                                                                                                                           fered the largest structural losses,
                                                                                                   Government                                                whereas health services and government
                                                                                                                                       Health services
 2                                                               Construction                                                                                had the biggest structural gains. Overall,
 1                                                       Other services                                                                                      about 75 percent of March 2001 employ-
                                                                                                                                                             ment was concentrated in industries that
 0
                                                                                                             FIRE                                            subsequently underwent structural
–1                                 Nondurable                                                                                                                change. The next section breaks down
                                   manufacturing                                          Retail                                                             these major industries to take a closer look
–2                                                                                        trade
          Durable manufacturing                                      Wholesale                                                                               at job adjustments.
–3                                                  TCPU             trade                                                              Mining                    Industries with Structural Loss. Indus-
–4
                                                                                                                                                             tries in Chart 4 are classified according to
      Structural losses                                                                                                      Countercyclical flows           subsectors in the North American Indus-
–5                                                                                                                                                           try Classification System (three-digit
     –6           –5         –4          –3          –2            –1           0           1                      2         3             4             5
                                                             Job growth in recession (percent)                                                               NAICS codes). The southwest portion of
                                                                                                                                                             Chart 4 includes a number of high-tech
NOTES: TCPU is transportation, communications and public utilities. FIRE is finance, insurance and real estate. The recession is dated
       March to November 2001; the recovery is dated December 2001 to November 2002.                                                                         sectors, among them computer and elec-
SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas.                                                                                         tronic product manufacturing (includes
                                                                                                                                                             semiconductors); electrical equipment,
                                                                                                                                                             appliance and component manufacturing;
                                                                                                                                                             telecommunications; and Internet service
Standard Industrial Classification (SIC)                                    ery. If an industry grew slower than the                                         providers (ISPs), search portals and data
system.7 All growth rates are relative to the                               statewide average in each of the two peri-                                       processing services. High tech’s presence
average for total Texas employment dur-                                     ods, it falls in the southwest portion of the                                    in the structural loss quadrant is not sur-
ing the relevant period. For example, if an                                 chart, labeled “structural losses” because                                       prising, since the 2001 recession kicked
industry grew 5 pecent slower than the                                      these industries lose jobs regardless of                                         off a prolonged retrenchment and re-
Texas economy as a whole during the                                         overall economic conditions. If an indus-                                        structuring for the sector in Texas, a
recession, its growth rate is – 5 percent.                                  try grew more rapidly than the statewide                                         process from which the state has not fully
Likewise, if an industry grew 5 percent                                     average during both intervals, it is in the                                      emerged.
faster than the Texas economy during the                                    northeast portion of the chart, labeled                                               Apparel manufacturing also falls in
recovery, its growth rate is 5 percent.                                     “structural gains” because such industries                                       the structural loss quadrant. In contrast to
     The horizontal axis on Chart 3                                         gain jobs regardless of the overall econ-                                        high tech, the apparel industry has been
measures the relative growth rate during                                    omy.                                                                             declining in the United States and Texas
the recession; the vertical axis measures                                        The remaining quadrants deal with                                           for many years. Indeed, apparel experi-
the relative growth rate during the recov-                                  industries that rise and fall with the busi-                                     enced the largest job losses in percentage

8                 FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
terms during both the recession and the          accommodations.                                                      Comparing Texas Recessions
recovery.                                              It may be surprising that so few in-                                Is structural change a bigger factor
      The northeast quadrant of Chart 4          dustries fall into the cyclical category, but                        today than in the past?
shows the industries that grew faster than       it’s important to remember that we are                                    Groshen and Potter conclude that for
total Texas employment during the reces-         comparing each industry to the overall                               the United States as a whole, it is. More in-
sion and recovery. This quadrant consists        state economy. If an industry’s employ-                              dustries in the recent recession fell into the
mainly of sectors related to the provision       ment fell slightly during the recession and                          structural-change quadrants, compared
of health care and education, including          rose slightly during the recovery, it’s cate-                        with earlier recessions. They find that 79
local government.                                gorized as countercyclical because its                               percent of U.S. employment was in indus-
     Given recent policy and demographic         employment fell by less than the state                               tries affected more by structural than
developments, this trend is understand-          average during the recession and rose by                             cyclical shifts in the 2001 recession, up
able. Rapid advances in medical technol-         less than the average during the recovery.                           from about 50 percent in previous down-
ogy, coupled with an aging population,                 Recession Dating. What if the Texas                            turns.
are producing an increased emphasis on           recession was longer than the nation’s and                                It’s a somewhat different story for
health care, regardless of the business cycle.   did not end in November 2001? If so, the                             Texas. Chart 6 shows job adjustments by
     The rise in the economic return to          analysis so far biases the findings toward                           major industry during the recession and
education, the burgeoning youth popula-          structural change by attributing 2002 job                            recovery of the early 1980s.10 That reces-
tion and renewed public attention to edu-        losses to the recovery instead of to what                            sion was more severe than the recent one,
cational quality have produced an in-            may have been a continuing recession. To                             with several large industries — such as
creased emphasis on education that               check our results, we repeat the exercise                            durable manufacturing and mining —
doesn’t ebb and flow with economic con-          under the assumption that Texas emerged                              experiencing double-digit job losses. Nev-
ditions, either. Since local government is       from the recession in March 2003 — much                              ertheless, except for government, educa-
the largest provider of K – 12 education, it’s   later than the nation and about four                                 tion and health services, the losses were
not surprising that employment in this           months before employment growth                                      fairly concentrated in the structural cate-
sector rose during the recession, as well as     resumed in the state.                                                gories. In fact, Texans were about as likely
the recovery.                                          A few industries move from one quad-                           to work in structural-change sectors in the
     Countercyclical Industries. The south-      rant to another, but the overall picture is                          1982 – 83 recession as they were in 2001.
east corner of Chart 4 consists mainly of        one in which structural change still domi-                           The share of structural job losses was
industries in the energy sector. Rising          nates cyclical change (Chart 5). About two-                          about 72 percent during the earlier
energy prices were a contributing factor         thirds of employment is concentrated in                              period, compared with 76 percent in the
to the 2001 recession.8 As home to a major       industries undergoing structural change,                             2001 recession. While the relationship can
share of the U.S. energy industry, Texas         compared with three-fourths when No-                                 be seen a bit more easily in Chart 3 than in
benefits from high oil prices (although to       vember 2001 is used as the end date.                                 Chart 6, the two graphs confirm that
a lesser extent than when the industry
constituted a much larger part of the
state’s economy).                                Chart 4
     Since energy prices were higher dur-        Structural Change Prevalent in 2001–02: A Look at More Detailed Industries
ing the 2001 recession than during the           Job growth in recovery (percent)
2002 – 03 recovery, it makes sense that           20
                                                              Procyclical flows                                                                                                 Structural gains
energy is categorized as countercyclical
                                                                                                                                                      Local govt.            Warehousing &
for this period.9 Natural resource and min-       15                                                                        Rail                                             storage
                                                                                                                            transportation   Clothing                              Ambulatory
ing industries in this quadrant include oil
                                                  10                                                                                         stores                                health services
and gas extraction and mining support                                                                      Transportation
                                                                                                           equipment                                                              Waste
activities.                                        5                                                                                                                              management
                                                                                               Accommodations
     One notable countercyclical industry
                                                   0
that doesn’t fit into the natural resource                                                        Air
category is real estate. What high oil prices                                                     transportation
                                                   -5
                                                                                                                                                                   Oil & gas
did for natural resource industries during                                                                                                       Real estate       extraction
the recession, low-interest loans likely did     –10                                                               ISPs
                                                                       Computer & electronic    Electrical                                                                          Funds, trusts
for homebuyers.                                                        product mfg.             equipment,                                        Mining support activities         & other
                                                 –15                                                           Telecommunications                                                   financial
                                                                                                appliance &
     Procyclical Dating. Despite expecta-                        Apparel mfg.                                                                                                       vehicles
                                                                                                component mfg.
tions of “normal” cyclical losses, few in-       –20                                                                                              Pipeline
                                                                                                                                                  transportation
dustries fall into the procyclical category               Structural losses                                                                                            Countercyclical flows
                                                 –25
during and after the 2001 recession. The                –20                     –15             –10                   –5                     0                           5                           10
northwest quadrant of Chart 4 consists of                                                               Job growth in recession (percent)
only about 9 percent of total employment.        NOTES: The recession is dated March to November 2001; the recovery is dated December 2001 to November 2002. Educational services is
Among the industries in this quadrant are               behind local government in the northeast quadrant.
retail, transportation-related sectors and       SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas.


                                                                                               OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                                                   9
Chart 5
                                                                                                                                                   inventory, production and employment.
Structural Change Prevalent with Alternate Recession End Date
                                                                                                                                                   Additional contributing factors are a
Job growth in recovery (percent)                                                                                                                   decline over time in the severity of energy
 15 Procyclical flows                                                                                                         Structural gains     and food supply shocks and the deregula-
                                                                             Mining                 Highway, street &
                                                                             support                bridge construction                            tion of financial markets.
 10                                                     Electronics &        activities                                   Ambulatory                    But does structural change really
                                                        appliance stores                                                  health care
   5                                                                                                                                               explain the jobless recovery? Structural
                                                                                                                                    Warehousing
                                                                                                                                                   change, as measured here, was about as
   0                                                                                                                                               prevalent in Texas in the 2001 recession
                          Computer &                                                                                    Local
                                                                                                                        government
                                                                                                                                                   and ensuing recovery as in the early 1980s
 –5                       electronic
                          product mfg.                                                                                                             recession and recovery. The difference
–10                                                                                              State government                                  between the two periods is the severity of
                                     Telecommunications      Pipeline                                                                              the change. Job losses were much deeper
                                                             transportation
–15                                                                                                                                                in the 1982 – 83 downturn (and worse yet
              Apparel                                                                                                                              in 1986). Nevertheless, employment
–20           mfg.                                                                                                                                 rebounded with a short lag, and there was
       Structural losses                                                                                                Countercyclical flows      nothing like the jobless recovery experi-
–25
    –50            –40                -30           –20               –10                   0                 10               20               30 enced post-2001.
                                                        Job growth in recession (percent)                                                               Another possibility is that the invest-
 NOTES: The recession is dated March 2001 to March 2003; the recovery is dated April 2003 to March 2004.                                           ment bust that characterized the 2001
 SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas.                                                                              recession and its aftermath may have
                                                                                                                                                   driven both structural losses in the labor
                                                                                                                                                   market and the jobless recovery. The
                                                                                                                                                   investment bust followed the investment
Chart 6                                                                                                                                            boom that had characterized certain fast-
Structural Change a Major Factor in 1982–84                                                                                                        growing industries — led by high tech —
Job growth in recovery (percent)
                                                                                                                                                   during the 1990s. In Texas, for example,
  8 Procyclical flows
                                                                                                                                                   post-2001 venture capital commitments
                                                                                                                             Structural gains
                                                                                            Other services
                                                                                                                                                   fell sharply to about 20 percent of their
  6
                                                                                                                                                   2000 levels. The investment bust likely
                                                                                                                                                   delayed employment growth during the
                                                                                                                                                   recovery in the sectors that had been
  4                                                                                                     Retail trade              FIRE
                                                                                                                                                   booming. If this was the case, sectors that
                                                                                                                                                   were fast-growing before the recession
  2
                  Durable mfg.                                                                                                                     would fall into the structural loss category
                                                                  Construction
                                                                                                                                                   in our analysis. These industries may or
  0
                                                                                                                                 Educational       may not belong there, depending on
                                                          Nondurable
                                                                                                                                 services
                                                              mfg.                                                                                 whether they will eventually resume
–2
                                                                                                                                                   above-average job growth.
                                                                                                                               Health services          The data suggest that the investment
                                Mining                   TCPU                                          Government
–4
                                                                                      Wholesale                                                    bust played an important role in Texas
                                                                                      trade
       Structural losses                                                                                               Countercyclical flows       during the recent business cycle. In fact,
–6
                                                                                                                                                   of the state’s 16 fastest-growing industries
   –20               –15                  –10                –5                    0                     5                 10                  15
                                                       Job growth in recession (percent)                                                           in the 1990s, 10 appear in the structural-
NOTES: TCPU is transportation, communications and public utilities. FIRE is finance, insurance and real estate. The recession is dated
                                                                                                                                                   loss quadrant of Chart 4, meaning they
        March 1982 to March 1983; the recovery is dated April 1983 to March 1984.                                                                  shed jobs both during and after the 2001
SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas.                                                                               recession. Groshen and Potter show that
                                                                                                                                                   for the nation, seven of the 18 fastest-
                                                                                                                                                   growing industries fall into the structural
 structural change, as defined by Groshen international trade. A decline in the role of loss category.
 and Potter, is not new to Texas.                                         cyclical change, meanwhile, has been                                          It is likely that as these industries’
                                                                          linked to factors such as improved mone- expansion fell short of expectations,
 More Sectors Undergo                                                     tary policy, which appears to have less- investment dried up and employment
 Structural Change                                                        ened the duration and severity of U.S. declined. The industries include several
        Several explanations have been business cycles.11 Better supply chain man- high-tech subsectors, such as telecom-
 offered for the growing role of structural agement has also allowed firms to munications and ISPs, search portals and
 change in the U.S. economy, including respond more quickly to changes in data processing services. Not all fast-
 technological change and increasing demand and avoid sudden large swings in growing industries fall into the structural

 10            FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
loss quadrant, however. Three of Texas’        construction is at record levels, freed-up     Notes
fastest-growing industries in the 1990s are    capital and labor are moving into sec-         1
                                                                                                   Annual household employment was lower in 2002
in the structural gain category — ware-        tors — such as education and health—                than 2001, but yearly job growth is calculated
housing and storage, ambulatory health         where structural growth is most pro-                December-over-December and was 0.26 percent
services and social assistance.                nounced. Exports to China are booming,              in 2002.
                                                                                              2
                                               and the border economy is thriving as a             “Has Structural Change Contributed to a Jobless
Little New About                               result of freer trade with Mexico.                  Recovery?” by Erica L. Groshen and Simon Pot-
                                                                                                   ter, Federal Reserve Bank of New York Current
Structural Change                                                                                  Issues in Economics and Finance, August 2003.
     The Texas economy has undergone           Summary                                        3
                                                                                                   Alternative measures of structural change are
fundamental restructuring as the state              The aftermath of the 2001 recession is
                                                                                                   discussed at length in “Can Sectoral Realloca-
has diversified away from agriculture and      often described as a jobless recovery. It           tion Explain the Jobless Recovery?” by Daniel
energy and become more like the nation.        took Texas and U.S. employment almost               Aaronson, Ellen R. Rissman and Daniel G. Sulli-
These trends began in earnest in the 1970s     four years to reach their respective prere-         van, Federal Reserve Bank of Chicago Economic
and intensified in the 1980s with the drop     cession levels, which they finally did in           Perspectives, Second Quarter 2004.
in oil prices and collapse of the banking      January 2005. Many factors contributed to      4
                                                                                                   Groshen and Potter compare employment
sector. The 1990s saw tremendous growth        labor market weakness in 2002 and early             growth in the recession and the recovery for
of the state’s high-tech industries and fur-   2003, including high productivity growth,           two-digit industries as defined by the Standard
ther consolidation in the energy sector. In    the war on terror and corporate scandals.           Industrial Classification (SIC) system. SIC codes
                                                                                                   were replaced by the North American Industry
both the 1970s and again in the 1990s,              In their New York Fed article, Groshen
                                                                                                   Classification System (NAICS) in 2002.
Texas’ economic growth was character-          and Potter highlight another potential         5
                                                                                                   In a statement announcing the dating of
ized by large inflows of workers who           source of labor market weakness—struc-
                                                                                                   the 2001 recession, the NBER called real GDP
brought different skills and education         tural change. The economists imply that             “the single best measure of ‘aggregate eco-
with them and contributed to the state’s       because new industries are replacing old            nomic activity.’” See www.nber.com/cycles/
economic transformation.                       ones, jobs are being created and filled at a        recessions.pdf.
     The decline of industries paves the       slower rate than in past business cycles, in   6
                                                                                                   Texas payroll employment began to grow in
way for diversification and the growth of      which workers were simply laid off and              August 2003, while retail sales began to grow in
new sectors as workers, capital and know-      rehired by the same or similar employers.           September 2002. As a compromise, we selected
how are freed up to pursue better ends.             Applying the Groshen – Potter meth-            March 2003 as an alternative end date for the
For example, at one time, 90 percent of the    odology to Texas, we find that structural           state recession. Eleventh District Beige Book
                                                                                                   accounts also suggest the second quarter of
U.S. labor force was engaged in farming.       change also dominated cyclical change in
                                                                                                   2003 may have been the turning point for Texas.
Today, that number is a mere 3 percent.        the state during the last business cycle. We   7
                                                                                                   SIC codes are used in Charts 3 and 6 so that
     While this transformation is clearly      do not find, however, that the amount of
                                                                                                   employment by industry can be compared over
beneficial in the long run, in the short to    structural change has increased over time,          time. The newer, three-digit NAICS codes are
medium term, this type of change is not        as Groshen and Potter argue is the case for         used in Charts 4 and 5.
without its critics. People may primarily      the nation.                                    8
                                                                                                   See “Do Energy Prices Threaten the Recovery?”
see the negative connotations of struc-             Structural change is an enduring fea-          by Stephen P. A. Brown, Federal Reserve Bank of
tural change, without seeing the benefits.     ture of the state’s economy. But while              Dallas Southwest Economy, May/June 2004.
This may be because certain advances in        Texas labor markets experienced struc-         9
                                                                                                   In 2004, oil prices rose again, and they are cur-
trade and technological change have large      tural change in earlier recessions, they did        rently higher than they were during the 2001
benefits that are spread across many peo-      not experience drawn-out weakness once              recession. Natural gas prices have also
ple, such as all U.S. consumers, while the     a recovery was under way. In other words,           remained high.
                                                                                              10
costs of such advances can be small but        the recent jobless recovery remains a bit           The 1982–83 Texas recession is assumed to
concentrated on a select few (such as laid-    of a mystery. The investment boom and               have lasted from March 1982 to March 1983.
off textile workers).                          subsequent bust may have had something              This period roughly corresponds to the down-
                                                                                                   turn in both state output and employment.
     Texas has not been immune to the          to do with it. Many of the 1990s’ fastest-
                                                                                              11
forces of trade and outsourcing. Semicon-      growing industries ended up with the                See “New Economy, New Recession?” by Evan
                                                                                                   F. Koenig, Thomas F. Siems and Mark A. Wynne,
ductor production has moved out of             largest relative and most persistent job
                                                                                                   Federal Reserve Bank of Dallas Southwest Econ-
Austin and Dallas to Asia, for example,        losses. The extent of the state’s high-tech         omy, March/April 2002.
and major computer companies have              investment boom and subsequent bust
concentrated their software development        may help explain why the effect on Texas
in India, outsourcing thousands of jobs        employment growth was so significant
there. Big retailers and national banks        and lasting.
continue to expand in the state, often dis-
placing or absorbing local businesses in       Orrenius and Saving are senior economists
the process.                                   in the Research Department of the Federal
     At the same time, the state’s economy     Reserve Bank of Dallas. Caputo worked on
has many strengths. Workers and                this article while an economic analyst at
investors continue to flock to Texas, home     the Bank.

                                                                              OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                      11
                                   Industry Clusters in Texas
                                   Laila Assanie and Mine Yücel




                                   A
                                        Advances in technology have dramat-               An agglomeration economy, also
                                   ically reduced transportation and com-            known as a cluster, is defined as a geo-
                                   munication costs. Access to distant goods,        graphically concentrated group of indus-
                                   services and even labor has become much           tries related by technology or skills, with
                                   easier. Increased access to markets has           close linkages among buyers and suppli-
                                   also brought increased competition, pres-         ers. Clusters are important because they
                                   suring firms to reduce costs to maintain          provide their participants with easy and
                                   profitability. In this age of globalization, as   lucrative access to knowledge and special-
                                   Michael Porter notes, the importance of           ized resources required to operate effi-
                                   generalized urban economies diminishes,           ciently. This enhances participants’ pro-
                                   and agglomeration economies become                ductivity and spurs innovation. Clusters
                                   much more important.1                             also attract new business and investment

12   FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
to the region. It is this increased efficiency   Chart 1
                                                 Texas Compared with the United States
and the ability to innovate and attract out-
side investment that give cluster partici-       Location
pants a competitive advantage.2 A good           quotients
                                                  6                                                Oil and gas extraction
example of an industry cluster is the Dal-                                                                                           Support activities
                                                                                                                                     for mining
las telecom corridor that attracted hun-
                                                  5
dreds of high-tech manufacturing and                                                                                                                 Petroleum refining

services firms to the metro during the            4
high-tech boom in the 1990s.                                            Pipeline transportation

     Industry clusters lead and shape the         3                                               Chemicals                                    Petroleum and
                                                                                                                Oilfield
economic growth of a region. One simple                                       Natural gas         mfg.          machinery mfg.                 products
                                                                              distribution
way of determining industry clusters is           2          Electronic components                                                                                Wired telecom
                                                             and products mfg.                           Computer and peripheral
through economic base analysis. The eco-                                                                                                    Air transportation carriers                               Home health
                                                                                                         equipment mfg.
                                                  1                                                                                                                             Services incidental
nomic base of a region is defined as                  Communications                 Aircraft        Other                 Computer systems                                                           care services
                                                                                                                                                              Truck             to transportation
                                                      equipment mfg.                 and parts       telecom               design and related services
industries whose external demand gener-                                                                                                                       transportation
                                                                                     mfg.            services
                                                  0
ates outside revenues and stimulates local
economic growth. The assumption is that          SOURCE: 2000 Census IPUMS data; authors’ calculations.
nontraded goods and services tend to be
uniformly distributed, do not bring out-
side income into the region, and there-
fore, do not form the region’s economic          agglomeration with both Texas and the                                              com services 21 percent greater and elec-
base.                                            United States.                                                                     tronic components manufacturing, which
     To determine which goods and serv-                                                                                             includes semiconductor manufacturing,
ices produced in Texas and its major met-        How Texas Compares                                                                 is 44 percent higher than in the nation.
ropolitan areas are basic, or exportable,        With the United States                                                             Finally, the nation’s employment share in
we use location quotients (LQ), a tool                Historically, Texas has been known for                                        air transportation is approximately 60
commonly used to analyze the economic            oil, cotton and cattle. But in recent                                              percent less than that of Texas. Moreover,
base of a region. Location quotients com-        decades the state’s image has changed                                              the high-tech, oil and gas, and air trans-
pare the local economy with a reference          substantially. Today, the economic base is                                         portation industries are the largest em-
economy (for example, the Dallas econ-           more diverse and includes transportation,                                          ployers in Texas, confirming their impor-
omy with the U.S. economy) to identify           computer, semiconductor and telecom-                                               tance to the state’s economic base.
areas of specialization. The quotients are       munication firms.                                                                       Since higher concentration indicates
computed as follows:                                  Chart 1 plots the location quotients of                                       the presence of clusters, or specialization,
                                                 Texas with the United States as the refer-                                         these industries are the central drivers of
                                                 ence region.6 The chart shows that even                                            the Texas economy. The prominence
        local employment in industry i/
                                                 though Texas has diversified, the energy                                           of these industries—high tech, telecom-
  LQi = U.S. employment in industry i            industry is still a large part of its economic                                     munication services and air transporta-
            total local employment/
                                                 base. Oil and gas extraction and its sup-                                          tion—helps to explain why the state’s
             total U.S. employment
                                                 port activities, pipelines, natural gas dis-                                       economy fared worse than the nation’s
                                                 tribution, refining and oilfield-machinery                                         during the recent downturn. Despite the
     Location quotients higher than 1            manufacturing are still agglomerated in                                            high-tech bust, high-tech manufacturing
indicate that the regional concentration         Texas. However, high-tech and trans-                                               and service sectors remain clustered in
of these industries is greater than their        portation industries have been added to                                            Texas.7
national concentration and so they are           this mix. Computers, telecommunication                                                  Based on location quotients, nearly 35
likely to be part of the economic base of        services, semiconductors and air trans-                                            percent of Texas’ employment is in indus-
the region. The greater the location quo-        portation firms now have a larger pres-                                            tries that can be classified as “basic” or ex-
tient, the higher the concentration and          ence in Texas than in the nation.                                                  portable. In these basic industries, 17 per-
the more certain we are of the basic                  Looking first at energy-related indus-                                        cent of Texas’ workforce produces goods
nature of the industry.3                         tries, the state’s share of employment in                                          and services that satisfy nonlocal demand.
     Our location quotients are computed         oil and gas extraction and mining is nearly
using 2000 census employment data from           six times the national share. Much less                                            Texas Major Metros
Integrated Public Use Microdata Series           dramatic, yet significant, are the location                                             The major metropolitan areas in
(IPUMS) files.4 We first analyze Texas’ eco-     quotients for high-tech manufacturing                                              Texas account for more than two-thirds of
nomic base and compare the state’s geo-          and services. The share of computer and                                            the state’s employment, so the sectors that
graphic dispersion of industries with that       peripheral equipment manufacturing in                                              lead these metro economies determine
of the nation.5 We then look at the basic        Texas employment is 78 percent higher                                              the state’s overall economic base. The
activities of the six major metropolitan         than in the nation, wired telecommunica-                                           composition of economic activity varies
areas in Texas and compare the degree of         tion services 50 percent higher, other tele-                                       significantly among Texas’ major metros.

                                                                                                        OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                                                         13
                                                                                                                                                                             Each metro area specializes in a unique
 Chart 2                                                                                                                                                                     set of industries, diversifying and strength-
 Dallas Compared with the United States
                                                                                                                                                                             ening the state’s economy.8
 Location                                                                                                                                                                         Dallas. Location quotients for Dallas
 quotients                                                                                                                                                                   confirm the metro is the high-tech mecca,
   5
                                      Communications, audio and                                                                                                              transportation hub and telecommunica-
                                      video equipment mfg.
                                                                                                                                                                             tion nexus of Texas. Dallas’ share of work-
     4                                                                                                        Other
         Oil and gas                                                                 Air                      telecom          Wired telecom                                 ers in other telecom services, air trans-
                                                                                     transportation           services         services             Computer
         extraction                               Electronic components                                                                             systems                  portation services, communications
     3                                            and products mfg.                                                                                 designs and
                         Structural clay                                                                                                            related services
                                                                                                                                                                             equipment manufacturing and computer
                         products mfg.
                                                                                            Radio, TV and                                                                    systems design and services is twice or
     2                                                                                      computer sales
                                                                                                                                    Nondepository
                                                                                                                                                                             more when compared with the overall
                                                                                                               Data
                                                      Aircraft and            Railroad                                              credit and                               state. This concentration of high tech
                                                                                                               processing                                  Management of
                                                      parts mfg.              mfg.                                                  related
              Computer and peripheral                                                                          services                                    companies and
     1                                                                                                                              activities                               becomes even more striking when the
              equipment mfg.                                                                                                                               enterprises
                                                                                                                                                                             metro is compared with the United States
     0                                                                                                                                                                       (Chart 2 ). Employment shares of commu-
SOURCE: 2000 Census IPUMS data; authors’ calculations.                                                                                                                       nications equipment manufacturing are
                                                                                                                                                                             four times greater than in the nation,
                                                                                                                                                                             while those of telecom services (both
                                                                                                                                                                             wired and other) and air transportation
                                                                                                                                                                             exceed the national shares by three times.
Chart 3
                                                                                                                                                                             Moreover, although Dallas doesn’t have
Austin Compared with the United States
                                                                                                                                                                             much energy industry concentration
Location                                                                                                                                                                     compared with the state, oil and gas ex-
quotients
                                                                                                                                                                             traction is — surprisingly — Dallas’ fifth-
12
               Computer and peripheral                                                                                                                                       most-concentrated industry in compari-
               equipment mfg.
10                                                                                                                                                                           son with the nation. Despite the recent
                                                                                                                                                                             downturn, high-tech manufacturing and
 8                                                                                                                                                                           services firms remain key contributors of
                   Electronic components
                   and products mfg.                                                                                                                                         the metro’s economic base.
 6
                                                                                                                                                                                  Austin. High tech and state govern-
                                                                                                                      Public finance
                                                                                                                                                     Adminstration of        ment compose Austin’s economic base.
 4                     Radio, TV and                                                                                  activities
                                                 Other information                Computer system designs                                            human resource
                       computer stores                                                                                                               programs                This is evident from the metro’s location
                                                 services                         and related services

 2                                                                                                                                  Executive offices                        quotients, which surpass the state’s
                                                       Data processing          Legal services                                      and legislative bodies
                                                                                                      Colleges and                                                           employment shares in computer and
                                                       services                                       universities
 0                                                                                                                                                                           peripheral manufacturing (6.4 times),
SOURCE: 2000 Census IPUMS data; authors’ calculations.                                                                                                                       electronic components manufacturing
                                                                                                                                                                             (4.8 times), public administration of envi-
                                                                                                                                                                             ronmental quality programs (3.8 times),
                                                                                                                                                                             public finance activities (3.6 times), and
                                                                                                                                                                             executive and legislative bodies (3.3
Chart 4
                                                                                                                                                                             times). Compared with the nation,
Houston Compared with the United States
                                                                                                                                                                             Austin’s larger presence of computer and
Location                                                                                                                                                                     chip makers is even more pronounced
quotients                                                                                                                                                                    (Chart 3 ), and the metro’s share of work-
14
                 Support activities
                                                                                                                                                                             ers employed in these industries signifi-
12               for mining                                                                                                                                                  cantly exceeds the national share (11.5
                                                                                                                                                                             and 6.9 times, respectively). Although the
10                                                                                                                                        Pipeline
         Oil and gas             Petroleum                                                                                                transportation                     recent high-tech bust hit Austin hard,
         extraction              refining
 8                                                                                                                                                                           semiconductor and computer manufac-
                                       Oilfield machinery mfg.                                   Petroleum and petroleum                                                     turing industries remain key elements of
 6                                                                                               products, wholesale
                                                                                                                                                                             the metro’s economic base.
                                                                            Metals and minerals, except                                                      Management of
 4                     Natural gas                 Chemicals mfg.                                                        Water                               companies and        Houston. Houston is Texas’ oil and gas
                                                                            petroleum, wholesale
                       distribution                                                                                      transportation                      enterprises
                                                                                                          Air                                                                capital and home to the sixth largest sea-
 2                                                                   Computer and
                                          Petroleum and                                                   transportation              Architectural and                      port in the world. Not surprisingly, the
                                          coal mfg.                  peripheral equipment mfg.
                                                                                                                                      engineering services
 0                                                                                                                                                                           location quotients convey a similar story.
SOURCE: 2000 Census IPUMS data; authors’ calculations.                                                                                                                       Five of the 10 most geographically con-
                                                                                                                                                                             centrated industries compared with the

14                 FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
state as well as the nation are related to oil   Chart 5
                                                 San Antonio Compared with the United States
and gas production, drilling and oil serv-
ices (Chart 4). Given that the oil and gas       Location
industry is more prevalent in Texas than in      quotients
the United States, Houston exhibits much          6
                                                                                                                                                                                              National security
                                                                                                                                                                                              and international
stronger oil- and gas-related industry                                                                                                                                                        affairs
                                                  5
clusters in reference to the nation than to
                                                                                             Footwear mfg.
Texas. Location quotients for both                4
upstream and downstream oil and gas                                          Not specified                                                                                     Business
                                                                             utilities                             General                  Savings institutions
activities such as extraction, support            3                                                                                                                            support                  Restaurants
                                                                                                                   merchandise              including credit unions
                                                      Natural gas                                                                                                              services     Home         and other
                                                                                         Textile product           stores     Wired telecom
activities for mining, pipeline transporta-           distribution                       mills                                                                                              health care food services
                                                  2                                                                           carriers                                                      services
                                                                     Electric, gas,
tion, petroleum refining and wholesaling                             and other utilities
                                                                                                       Petroleum
                                                                                                                                                   Insurance
                                                                                                                                                                           Scientific
                                                                                                       refining         Electronic                                         R&D
of petroleum products more than double            1                                                                     shopping and
                                                                                                                                                   carriers and            services                      Traveler
                                                                                                                                                   related activities
when the base region changes from Texas                                                                                 mail-order houses                                                                accommodation

to the United States. Downstream activi-          0
ties such as petroleum refining and chem-        SOURCE: 2000 Census IPUMS data; authors’ calculations.
icals manufacturing also bolster port
activity. Hence, the share of water trans-
portation employment is twice as high in
Houston when it is compared with the rest
                                                 Chart 6
of Texas (2.6 times) as well as the nation       Fort Worth Compared with the United States
(2.4 times). Also, because Texas has a high
share of computer manufacturing, Hous-           Location
                                                 quotients
ton’s edge over the nation in computer
                                                  7
and peripheral equipment manufacturing                                                                                  Aircraft and parts mfg.

(2.5 times higher) is larger than its edge        6
over Texas (1.4 times higher).
                                                  5
     San Antonio. San Antonio’s economic                                                                                   Aerospace
                                                                                                                                                  Railroad rolling stock
                                                                                                                           products and
base thrives on tourism and the presence          4                                        Communications, audio           parts mfg.                                              Rail
                                                                                           and video equipment mfg.
of large insurance firms, electric and gas            Oil and gas                                                                                                                  transportation
                                                                                                                                                     Air transportation                                 Travel arrangements
                                                  3 extraction Paperboard boxes
                                                                                                                                 Warehousing                                                            and reservations
production and distribution firms, and                               and containers mfg.                                                                                                                services
                                                                                                                                 and storage
                                                  2                                                   Oilfield machinery mfg.
four military bases. Also, the metro has a
significant presence of health care organi-       1     Support activities                    Machinery mfg.                                        Wired
                                                                                                                                                                                   Computer systems
                                                        for mining                                                  Electronic components           telecomm
zations and recently has become home to                                                                                                                                            design and related
                                                                                                                    and mfg.                        carriers
                                                                                                                                                                                   services
several telemarketing companies (Chart            0

5 ). The metro exhibits similar employ-          SOURCE: 2000 Census IPUMS data; authors’ calculations.
ment share ratios when compared with
the state or nation. First, San Antonio’s
share of employment in national security
and international affairs is more than five      national share by 112 percent and the
times that of the nation as well as the          state share by merely 38 percent. Job
state, largely because of the strong mili-       losses during the recent downturn were                                                           Exportable goods and
tary presence in the metro. Second, there        mitigated in San Antonio because of the
is sizable specialization of insurance           metro’s low concentration of high-tech
                                                                                                                                                  services are important
providers and electric and gas producers         industries. Thus, the concentration of the                                                       because they generate
and distributors. Third, San Antonio has         metro’s base industries has held steady.
more than twice the share of its aggregate            Fort Worth –Arlington. Fort Worth–                                                          out-of-state revenue and
labor force employed in scientific re-           Arlington is a major air and rail trans-
search and development compared with             portation hub in Texas with historic ties to                                                     stimulate state growth.
the country and Texas. Last, specialization      oil, aircraft and aerospace product manu-
in industries related to tourist activity —      facturers. Fort Worth’s employment shares
general merchandise stores, restaurants          in aircraft, aerospace products and parts
and traveler accommodation services — is         manufacturing, communications equip-
at least one and a half times higher in the      ment manufacturing as well as air and rail
metro than in the state and nation. The          transportation are two to four times higher
only vivid difference is the concentration       than the state’s shares. This agglomeration
of workers in wired telecom services; the        becomes more prominent when com-
metro’s share of these workers exceeds the       pared with the nation (Chart 6 ). Fort

                                                                                                             OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                                                               15
Chart 7                                                                                                                                                        Michael E. Porter, Economic Development Quar-
El Paso Compared with the United States                                                                                                                        terly, vol. 14, February 2000, pp. 15–34.
                                                                                                                                                           3
                                                                                                                                                               Although the use of location quotients is preva-
Location
quotients
                                                                                                                                                               lent, this measure of the economic base can
12                                                                                                                                                             have shortcomings. Some of the pitfalls of
      Footwear mfg.
                                                                                                                                                               regional analysis using location quotients are
10                                                                                                                                                             underestimating the degree of geographic con-
                                                                           Household
                                                                                                                                                               centration if the reference region is a net
     Cut and sew apparel mfg.                                              appliance mfg.                                                                      exporter of the good or service and overestimat-
 8
                                                                                                                                                               ing the degree of geographic concentration if the
 6                                        Nonferrous metal                                                                                                     reference region is a net importer of the good or
                                          production and processing                                                            Restaurants                     service.
                                                                                                                 Savings                   National
                                                                                                                               and other
                                  Plastic                                                                        institutions              security and
 4                                                                                                                             food                        4
                                                                                                                                                               Integrated Public Use Microdata Series: Version
                                  products mfg.        Agricultural                          Warehousing         including                 international
                                                                          Truck                                                services
                                                       implements mfg.                       and storage         credit unions             affairs             3.0, by Steven Ruggles, Matthew Sobek, Trent
                                                                          transportation
                      Leather tanning                                                                      Radio,
 2    Natural gas     and products mfg.     Electronic                                                     TV and cable                                        Alexander, Catherine A. Fitch, Ronald Goeken,
      distribution                          components                             Services incidental     broadcasting             Justice and public
                                                                  Department                                                                                   Patricia Kelly Hall, Miriam King and Chad Ron-
                                            and products mfg.     stores           to transportation       services                 order activities
 0                                                                                                                                                             nander, Minneapolis, Minn.: Minnesota Popula-
SOURCE: 2000 Census IPUMS data; authors’ calculations.                                                                                                         tion Center, 2004. For more information, see
                                                                                                                                                               www.ipums.org.
                                                                                                                                                           5
                                                                                                                                                               The economic base is computed by adding sur-
                                                                                                                                                               plus service-export employment (individuals
Worth–Arlington’s employment shares in                                         Conclusion                                                                      employed in producing services in excess of
these same industries is more than three                                            The Texas economy thrives on a                                             local demand) to total manufacturing and min-
                                                                                                                                                               ing employment. Therefore, the share of Texas
to six times those of the nation. Since the                                    diverse mix of industries. Once known as
                                                                                                                                                               employment included in the export base is
recent recession, the composition of Fort                                      the land of oil, cotton and cattle, Texas has
                                                                                                                                                                 total manufacturing employment + total
Worth’s leading industries has remained                                        developed into a high-tech hub. High-
                                                                                                                                                                mining employment + {sum of [(LQ – 1/LQ) ×
unchanged.                                                                     tech and energy sectors are the state’s                                          employment] for all service-providing sectors
      El Paso. El Paso specializes in manu-                                    densest clusters, but Texas has many                                                         with LQ above 1.1}
facturing, trade and transportation                                            other industries whose shares in the state                                                 total Texas employment.
because of its close ties with Mexico                                          are higher than their shares in the nation                                  6
                                                                                                                                                               For Texas and all its major metropolitan areas,
(Chart 7 ). More recently, the metro has                                       and thus contribute to the state’s eco-                                         industries with high location quotients, which
seen substantial growth in its high-wage                                       nomic base. Nearly 35 percent of Texas’                                         have been referenced in the text as key contrib-
manufacturing and service sector. Gener-                                       employment is in industries that can be                                         utors of their respective economic bases, were
ally, the trade sector displays limited spe-                                   classified as basic, or exportable. In these                                    also the largest employers in the state and its
cialization. As a result of El Paso’s location                                 basic industries, slightly less than half the                                   major metros, unless otherwise noted.
                                                                                                                                                           7
along the U.S.–Mexico border, however,                                         workers are engaged in producing goods                                          Evidence from the 2000 and 2004 Bureau of
the metro’s employment share in ware-                                          and services that satisfy nonlocal                                              Labor Statistics data shows that the recession
housing and storage is twice that of Texas                                     demand. Exportable goods and services                                           did not change the ordering of Texas’ basic
                                                                                                                                                               industries. The location quotients of several
as well as the nation. The metro’s employ-                                     are important because they generate out-
                                                                                                                                                               high-tech industries declined slightly, but their
ment shares in footwear, cut and sew                                           of-state revenue and stimulate state                                            shares are still higher than U.S. shares.
apparel, textile and household appliance                                       growth. Moreover, because clusters                                          8
                                                                                                                                                               For an in-depth analysis of the attributes of the
manufacturing are more than 10 times                                           improve efficiency and innovation, the                                           Texas major metros and how each of them grew
higher than the state’s employment                                             formation and growth of clusters are                                             during the 1990s, see, “Economic Recovery
shares. These shares are also high when                                        important for Texas to maintain its com-                                         Under Way in Major Texas Metros,” by D’Ann
compared with the nation. Cut and sew                                          petitive edge in this era of globalization.                                      Petersen and Priscilla Caputo, Federal Reserve
apparel, footwear and household appli-                                                                                                                          Bank of Dallas Southwest Economy, March/
ance manufacturing exceed national                                             Assanie is an assistant economist and                                            April 2004.
shares by eight times. Despite the high                                        Yücel is a senior economist and vice presi-
shares, the passage of NAFTA has led to                                        dent in the Research Department of the
much of this manufacturing going across                                        Federal Reserve Bank of Dallas.
the border. Thus, the number employed in
these industries makes up only 4 percent                                       Notes
of El Paso’s total employment. The largest                                     1
                                                                                   See “Competitive Advantage, Agglomeration
employers in El Paso today are still closely                                       Economies and Regional Policy,” by Michael E.
tied to the maquiladora industry across                                            Porter, International Regional Science Review,
the border but are a different set of indus-                                       vol. 19, no. 1 & 2, 1996, pp. 85 – 94.
                                                                               2
tries, including plastic products manufac-                                         For more information on what clusters are and
turers, electronic component and product                                           how they affect competition and innovation, see
                                                                                   “Location, Competition and Economic Develop-
manufacturers, department stores, truck-
                                                                                   ment: Local Clusters in a Global Economy,” by
ing, warehousing and storage firms.

16               FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
   Economic Progress
in the Texas Economy                                                                                           S    Since 1969, the Texas economy has
                                                                                                               grown rapidly, consistently matching or
                                                                                                               exceeding the growth of the national
                                                                                                               economy from one decade to the next.
                                                                                                               Real personal income growth rates in
                                                                                                               Texas matched the U.S. rates even during
                                                                                                               the oil bust years of 1979–89 and
                                                                            Robert W. Gilmer                   exceeded U.S. rates in 1969–79 and
                                                                                                               1989–2001 (Table 1). Measured by total
                                                                                                               population, growth in Texas was substan-
                                                                                                               tially greater in all periods.
                                                                                                                    The state’s largest metropolitan
                                                                                                               areas—Dallas–Fort Worth, Houston,
                                                                                                               Austin and San Antonio, which together
                                                                                                               make up what is known as the Texas Tri-
                                                                                                               angle — have contributed the largest part
                                                                                                               of this growth, especially since 1979. Out-
                                                                                                               side the Texas Triangle cities, real income
                                                                                                               growth has failed to match U.S. growth
                                                                                                               since 1979, although population has
                                                                                                               expanded somewhat faster.
                                                                                                                    This growth has improved Texas’ eco-
                                                                                                               nomic position relative to the rest of the
                                                                                                               United States. Texas moved from the
                                                                                                               nation’s fourth most populous state in
                                                                                                               1969 to second in 2001, trailing California
                                                                                                               but ahead of New York and Florida. In
                                                                                                               terms of personal income, Texas has
                                                                                                               moved from the sixth largest state econ-
                                                                                                               omy in 1969 to the third largest today,
                                                                                                               behind California and New York.
                                                                                                                    The state’s large metropolitan areas
 Table 1                                                                                                       have similarly moved up the ranking of
 Growth of Population and Personal Income in Texas and the United States
                                                                                                               the nation’s largest cities.1 Dallas–Fort
 (Average percent per year)
                                                                                                               Worth, Houston and San Antonio made
                                                       Population
                                                                                                               most of their climb through these rank-
                               1969 –1979             1979 –1989              1989 –2001
   United States                    1.1                     1.0                    1.2
   Texas                            2.3                     1.9                    2.0
   Dallas–Fort Worth                2.4                     3.0                    2.6
   Houston                          3.4                     1.9                    2.3
   Austin                           4.1                     3.8                    3.9
                                                                                                                   In terms of personal
   San Antonio                      1.9                     2.1                    1.8
   Texas Triangle                   2.8                     2.5                    2.5
                                                                                                                   income, Texas has
   Rest of Texas                    1.7                     1.2                    1.3
                                                                                                                   moved from the sixth
                                                   Personal Income
                               1969 –1979             1979 –1989              1989 –2001
                                                                                                                   largest state economy
   United States                    3.7                     3.0                    2.9                             in 1969 to the third
   Texas                            6.0                     3.0                    4.3
   Dallas–Fort Worth                5.4                     4.7                    4.7                             largest today, behind
   Houston                          8.0                     2.4                    5.1
   Austin                           2.3                     5.6                    8.3                             California and New
   San Antonio                      4.7                     4.2                    4.0
   Texas Triangle                   6.5                     3.8                    5.0                             York.
   Rest of Texas                    5.2                     1.7                    2.9

 NOTE: Based on 1999 metropolitan area definitions of the Office of Management and Budget. Dallas–Fort Worth
       and Houston use the consolidated metro area definition.
 SOURCES: Bureau of Economic Analysis; author’s calculations.


                                                                                             OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS             17
Table 2
                                                                                                                                success of the Texas economy not by its
Rank of Texas Triangle Metro Areas in United States by Population and Personal Income
                                                                                                                                size, growth rates or ranking, but by the
                                                                 Population
                                                                                                                                state’s ability to improve the welfare of its
                                  1969                   1979                   1989                   2001                     citizens. In particular, we will look at the
  Dallas–Fort Worth                12                       9                      9                     8                      state’s ability to raise its per capita income
  Houston                          13                      10                     10                     9                      levels to those of the nation — to join and
  Austin                           75                      63                     63                    39
                                                                                                                                perhaps outperform the nation’s main-
  San Antonio                      37                      33                     33                    32
  Texas Triangle                    4                       4                      4                     3
                                                                                                                                stream. Income per person presents a
                                                                                                                                number of flaws as a measure of general
                                                               Personal Income                                                  welfare, but it serves here as a widely rec-
                                  1969                   1979                   1989                   2001                     ognized and useful summary of the stan-
  Dallas–Fort Worth                13                      10                      9                     8                      dard of living.3
  Houston                          16                       9                     10                     9
  Austin                           86                      69                     55                    37                      Texas Per Capita Income
  San Antonio                      45                      39                     38                    35                          In 1969, per capita income in Texas
  Texas Triangle                    9                       4                      3                     3                      was $3,373, or 87.7 percent of the U.S.
SOURCES: Bureau of Economic Analysis; author’s calculations.                                                                    level. Fueled by the oil boom after 1973,
                                                                                                                                Texas’ per capita income grew rapidly to
                                                                                                                                briefly exceed that of the United States by
Table 3                                                                                                                         1981– 82 (Chart 1). The 1980s oil, banking
Contribution to Texas Personal Income Growth                                                                                    and real estate bust quickly erased these
                                                                   Percent                                                      gains, and by the end of the decade, state
                              1969 –1979           1979 –1989         1989 –1999         1989 – 2000            1989 – 2001     per capita income had returned to 87.9
  Texas                          100.0                100.0               100.0                100.0              100.0
                                                                                                                                percent of the U.S. level.
  Dallas–Fort Worth               23.6                 31.9                30.7                 31.3               30.6             The 1990s brought new advances rel-
  Houston                         28.5                 23.8                28.2                 28.6               29.7         ative to the nation as oil, high tech and a
  Austin                           4.1                  6.0                 8.7                  8.6                8.3         free trade- and maquiladora-inspired
  San Antonio                      6.3                  8.1                 7.1                  6.9                7.0         boom along the Texas –Mexico border
  Texas Triangle                  62.6                 69.8                74.6                 75.4               75.5         produced another burst of Texas eco-
  Rest of Texas                   37.4                 30.2                25.4                 24.6               24.5
                                                                                                                                nomic growth. By 1998, Texas per capita
SOURCES: Bureau of Economic Analysis; author’s calculations.                                                                    income returned to 94.4 percent of U.S.
                                                                                                                                levels and made no further progress
                                                                                                                                through 2001.
ings between 1969 and 1979 (Table 2).2                              8.3 percent. The combined metro areas,                          We can examine Texas per capita
Since 1979, Dallas–Fort Worth and Hous-                             collectively designated the Texas Triangle                  income growth both geographically and
ton have shared the eighth through tenth                            in the table, accounted for three-fourths                   by the components of income—wages
spots in population and personal income,                            of the state’s income growth between 1989                   and salaries, proprietor’s income, prop-
while San Antonio moved slowly upward                               and 2001.                                                   erty income, transfers and other sources.
to 32nd in population and 35th in per-                                   In this article, we will measure the                   By component, the most interesting
sonal income.
    Austin, however, made steady and
dramatic gains. In 1969, at No. 75 in pop-                          Chart 1
ulation, Austin was the size of                                     Convergence of Texas to U.S. Per Capita Income Levels
Canton, Ohio, or Fort Wayne, Ind. But by                            Index: U.S. per capita income = 100
2001, at 39th, Austin’s population com-
                                                                    120
pared favorably with that of Nashville or
                                                                    110                                                                                         Triangle cities
New Orleans. During the same period,
Austin surged from 86th to 37th in per-
                                                                    100
sonal income.
                                                                     90                                                                                                      Texas
    Table 3 summarizes the contribution
of these different metro areas to Texas’                             80
personal income growth. Except for the
oil bust years, Houston contributed                                  70
                                                                                                                                                                       Rest of Texas
nearly 30 percent of growth, and Dallas–                             60
Fort Worth’s growth exceeded Houston’s
by the late 1970s. San Antonio’s growth                              50
                                                                          ’69            ’73              ’77             ’81   ’85       ’89        ’93         ’97                 ’01
contribution held steady at 6 to 8 percent,
while Austin’s doubled from 4.1 percent to                          SOURCE: Bureau of Economic Analysis.


18             FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
                                                 Table 4
results come from the growth of wages
                                                 Growth Rate of Real Per Capita Personal Income and Factors Contributing to Its Growth
and salaries and proprietor’s income. The        (Average percent per year)
geographic designation focuses largely on
the Texas Triangle cities, which have                                                          Component Percentage Point Contribution Per Capita
fueled both the state’s growth and most of                                Personal         Nonfarm wages        Proprietor’s   Property    Transfer    Other
its recent convergence to U.S. per capita                                  income           and salaries          income       income     payments    income
                                                   1969 –1979
income levels.
                                                   United States               2.6                 1.6              –.1           .3          .4        .4
                                                   Texas                       3.6                 3.0              –.2           .2          .2        .4
Framework for Analysis                             Dallas–Fort Worth           2.9                 2.1               .1           .2          .2        .4
     The general framework used here is            Houston                     4.4                 4.2              –.1          –.1          .1        .3
shown in Table 4, which summarizes per             Austin                      3.4                 2.7              –.1           .3          .1        .5
capita income growth in Texas by compo-            San Antonio                 2.7                 1.3               .1           .3          .4        .6
nent of income, geographic area and time           El Paso                     1.4                  .9               .2           .3          .6       –.6
                                                   Texas Triangle              3.5                 2.9                0           .1          .1        .4
period from 1969 to 2001.4 The data are
                                                   Rest of Texas               3.4                 2.8              –.5           .4          .3        .4
presented as percentage point contribu-
tions to average annual real per capita            1979 –1989
income growth in each region and time              United States               2.0                 1.4                0           .7          .1       –.1
                                                   Texas                       1.1                  .2                0           .7          .2         0
period.5
                                                   Dallas–Fort Worth           1.6                 1.1               .1           .4           0       –.1
     For example, the growth of per capita         Houston                      .5                 –.8               .5           .6          .2         0
income in Texas from 1969 to 1979 aver-            Austin                      1.9                 1.7              –.6           .6           0        .1
aged 3.6 percent per year, with most of the        San Antonio                 2.0                 1.1               .1           .7          .1        .1
growth (3 percent per year) coming from            El Paso                     1.7                  .2              –.2           .7          .1        .9
wages and salaries per capita and smaller          Texas Triangle              1.2                  .3               .2           .6          .1         0
contributions from property income (0.2            Rest of Texas                .6                 –.6              –.5          1.1          .4        .2
percent), transfer payments (0.2) and              1989 – 2001
other per capita income (0.4). Proprietor’s        United States               1.7                 1.8               .1          –.1         .2        –.2
income per capita grew more slowly than            Texas                       2.2                 2.4               .4          –.4         .1        –.3
other components, reducing the growth              Dallas–Fort Worth           2.0                 2.4               .2          –.3         .1        –.3
                                                   Houston                     2.7                 2.3              1.0          –.6         .1        –.2
rate by 0.2 percent.
                                                   Austin                      2.9                 4.2               .1          –.7        –.1        –.6
     The components of income defini-              San Antonio                 2.2                 2.1               .7          –.3         .2        –.5
tions follow standard conventions for              El Paso                     1.7                  .9               .8          –.2         .5        –.3
accounting for personal income in the              Texas Triangle              2.4                 2.5               .5          –.4         .1        –.3
national income and product accounts.              Rest of Texas               1.6                 1.5                0          –.4         .4          0
The definitions are fairly obvious: non-
                                                 SOURCES: Bureau of Economic Analysis; author’s calculations.
farm wages and salaries; farm and non-
farm proprietor’s income earned by sole
proprietorships, partnerships and tax-                Chart 2 shows the path of the four                          in fact, it may be this very proximity that
exempt corporations; property income             cities since 1969 in terms of income                             guarantees their different personalities.
from dividends, rent and interest; and           growth relative to the nation’s. The gains                       Because no pair of cities in the Texas Tri-
transfer payments for no current services        and losses of the boom and bust in oil and                       angle is more than 240 miles apart, each
rendered. The “other income” category is         real estate are visible in all four cities, but                  has assumed a role in the state economy
a residual made up mainly of benefits            most notably in Houston and Austin. All                          that sets it apart and makes it distinct
paid to wage and salary workers, but it          cities made gains in the 1990s, especially                       from the others.6
also includes a residence adjustment for         Austin. San Antonio made the least                                    Dallas–Fort Worth. Dallas–Fort Worth
workers who live and work in different           progress, despite beginning from the low-                        is a major inland transportation hub and
areas.                                           est per capita base. The two high-tech                           distribution center for Texas, Louisiana,
     The rationale for the geographic focus      metros began losing ground in relation to                        Arkansas and Oklahoma and claims the
on the Texas Triangle has partly been dis-       the United States well before the national                       world’s fifth busiest airport. Following the
cussed above, primarily because three-           recession began in 2001, with Austin                             oil bust, Dallas emerged as the state’s
fourths of the region’s personal income          peaking at 110 percent of U.S. levels in                         banking and financial center. Dallas and
growth came from these metro areas after         1999 and Dallas–Fort Worth at 112 per-                           Fort Worth also have a significant presence
1989. Also, most of the forces driving           cent in 2000. Houston reached 115 per-                           of oil-related activity, notable on any
income convergence have come from the            cent of U.S. per capita income in 2001.                          standard except that set by Houston.
Triangle cities. While per capita income         San Antonio stood at 88 percent.                                 High-technology industries, especially
levels were, on average, well above                   The fact that the four cities have such                     telecommunications, became a major
national norms and rising through the            different income levels and very different                       center of growth in the 1990s.
1990s within the Triangle, they were             behavior over time might seem surprising                              Houston. Houston’s bread and butter
falling back to near 70 percent outside of it.   in light of their geographic proximity. But,                     remains oil and natural gas, with oil pro-

                                                                                                OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                19
Chart 2                                                                                                            industry, with such features as Fiesta
Convergence of Texas Triangle Cities to U.S. Per Capita Income Levels
                                                                                                                   Texas, SeaWorld, the River Walk, El Mer-
Index: U.S. per capita income = 100                                                                                cado and others. Lackland Air Force Base,
140                                                                                                                Fort Sam Houston and Randolph Air
130
                                                                                                                   Force Base provide a major military pres-
                                         Houston
                                                                                                                   ence.
120                                                                                                                     One could speculate that if Texas’
                                                               Dallas–Fort Worth
110
                                                                                                                   geography had been only slightly differ-
                                                                                                    Austin
                                                                                                                   ent—with navigable rivers or a saltwater
100                                                                                                                inlet that cut into the heart of the state—
 90
                                                                                                                   the four cities could easily have been one.
                                                                                               San Antonio         The port, the inland distribution point
 80                                                                                                                and the political capital would all have
 70                                                                                                                been colocated. Because the four Triangle
      ’69           ’73            ’77             ’81   ’85            ’89        ’93   ’97                 ’01
                                                                                                                   cities play such different economic roles,
SOURCE: Bureau of Economic Analysis.                                                                               adding up their current populations pro-
                                                                                                                   duces a not far-fetched approximation of
                                                                                                                   what might have been a single metro area.
                                                         ducers, oil services and machinery com-                   The combined ranking of the Triangle
                                                         panies, refineries and petrochemicals                     cities (bottom of Table 2) shows that such
                                                         directly or indirectly accounting for half                a combination would rank third among all
                                                         the metro area’s jobs. The Texas Medical                  U.S. consolidated metro areas—behind
                                                         Center and Johnson Space Center, along                    New York and Los Angeles but ahead of
                                                         with companies such as Continental Air-                   Chicago—in both personal income and
                                                         lines, American General Insurance and                     population in the 1990s.
                                                         HP/Compaq, help define the non-oil part                        It is difficult to generalize about the
                                                         of Houston’s economy. Houston is the                      area outside the Triangle, or to easily char-
                                                         state’s major deepwater port—the second                   acterize an area that includes cities as dif-
                                                         largest in the country based on tonnage —                 ferent as El Paso, Amarillo, Texarkana and
                                                         and home to the state’s international busi-               Beaumont. The decline of agriculture
                                                         ness community.                                           throughout the second half of the 20th
The fact that the four                                        Austin. Because it is the state capital              century played a large role in the region’s
                                                         and site of the University of Texas’ main                 poor performance.
Texas Triangle cities                                    campus, Austin’s major strength has his-                       In addition, the Texas–Mexico border
have such different                                      torically been a robust government sector.                acts as a drag on any measure of eco-
                                                         Beginning in the late 1960s, Austin began                 nomic progress or welfare in the state,
income levels and                                        developing a significant presence in high                 including per capita income. Gilmer,
                                                         technology: IBM in 1967, Texas Instru-                    Gurch and Wang have already examined
very different behavior                                  ments in 1969 and Motorola in 1974. The                   the Texas border cities using the same
                                                         arrival of chipmaker-consortium Semat-                    framework employed here.7 The border
over time might                                          ech in 1988 provided the momentum for                     cities’ average per capita income is only
seem surprising                                          the 1990s. Today, about 120,000 employ-                   50 to 60 percent of the national average
                                                         ees—25 to 30 percent of the local work-                   and has only occasionally matched or
in light of their                                        force—are tied to technology industries,                  exceeded the state’s overall growth rate
                                                         and Dell Inc. has emerged as the city’s                   (such as Laredo in the 1990s). El Paso, by
geographic proximity.                                    most important technology employer.                       far the largest Texas–Mexico border city,
                                                         Austin is also renowned for its music                     saw its per capita income fall from 73 per-
                                                         industry. Billed as the “Live Music Capital               cent of the U.S. average in 1969 to 63 per-
                                                         of the World,” the city sponsors a number                 cent in 2001. Although the border saw
                                                         of festivals and conventions based on                     gains in income and jobs in the 1990s,
                                                         music.                                                    rapid population growth due to high
                                                              San Antonio. San Antonio’s historic                  birthrates and in-migration meant living
                                                         role has been as the distribution point for               standards did not improve nearly as much
                                                         South Texas and northern Mexico, a role                   as overall growth statistics might indicate.
                                                         that has grown with the rapid expansion
                                                         of the maquiladora industry and the                       How Income Grew in Texas
                                                         implementation of the North American                          Except for the oil bust years, Texas’
                                                         Free Trade Agreement. Tourism is a major                  per capita income outgrew the nation’s by

20           FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
                                                Table 5
a significant margin (see Table 4). The dif-
                                                Impact on Per Capita Income of Industry Mix, Differential Regional Earnings
ference was a full percentage point from        and Jobs Per Capita
1969 to 1979 (3.6 versus 2.6) and by half a
percentage point from 1989 to 2001 (2.2                                                     Percentage Point Contribution to Annual Growth Rate
versus 1.7). With the oil bust and recovery                                Wages and salaries                 Industry                Differential                  Jobs per
factored in, however, the difference in                                       per worker                        mix                regional earnings                 capita
                                                  1969 –1979
favor of Texas narrows to 0.2 percent (2.3
                                                  Texas                               1.5                         1.3                        .2                        1.5
versus 2.1 over the 32-year period), and
                                                  Dallas–Fort Worth                    .8                         1.1                       –.2                        1.3
per capita income rises from 88 percent to        Houston                             1.9                         1.1                        .8                        2.3
94 percent of the national average.               Austin                              1.2                         1.2                         0                        1.4
      Also except for the oil bust years,         San Antonio                         1.2                         1.5                       –.3                         .2
most of the growth in Texas’ real per             Texas Triangle                      1.4                         1.2                        .2                        1.5
capita income came from increases in real         Rest of Texas                       1.5                         1.5                         0                        1.2
wages and salaries per capita—83 percent          1979 –1989
from 1969 to 1979 and 109 percent from            Texas                                .3                           .8                      –.5                        –.1
1989 to 2001. Only during the years of the        Dallas–Fort Worth                    .9                           .9                       .1                         .2
oil and banking crisis did real wages and         Houston                             –.2                           .7                      –.8                        –.6
                                                  Austin                              1.2                         1.2                         0                         .5
salaries fail to contribute strongly to
                                                  San Antonio                          .5                         .8                        –.3                         .6
income growth; only 17 percent of growth
                                                  Texas Triangle                       .4                          .8                       –.4                        –.1
came from that source from 1979 to 1989.          Rest of Texas                       –.3                         .8                       –1.0                        –.4
Growth in property income (most proba-
                                                  1989 – 2000*
bly in the first half of the 1980s) was the
                                                  Texas                               1.8                         1.4                        .4                         .8
major factor contributing to income
                                                  Dallas–Fort Worth                   2.1                         1.3                        .8                         .7
growth during the decade of the down-             Houston                             1.9                         1.5                        .3                         .5
turn.                                             Austin                              3.7                         1.3                       2.4                        1.5
      Proprietor’s income makes its largest       San Antonio                         1.2                         1.4                       –.2                        1.1
contribution from 1989 to 2001. Houston           Texas Triangle                      2.1                         1.4                        .6                         .8
has the strongest contribution from the           Rest of Texas                        .7                         1.0                       –.3                         .8
self-employed in this period (1 percent)        * Data extend only to 2000 due to a change in the distribution of jobs from the Standard Industrial Classification to North American Industry
and during the previous period as well            Classification System in 2000, making it impossible to compare 1989 with 2001.
(0.5 percent). In 16 cities in Texas and        NOTE: Differences due to rounding error.
Louisiana, all with strong ties to oil, the     SOURCES: Bureau of Economic Analysis; author’s calculations.
first result of the oil bust was a large num-
ber of new “proprietors,” presumably new        1979 and negative from 1989 to 2001.                                     resources, labor supply, infrastructure or
businesses started by people unemployed             Other income per capita makes its                                    other local factors. This region-specific
by the downturn.8 This forced entrepre-         largest contribution from 1969 to 1979, is                               advantage is called differential regional
neurship was followed in the late 1980s         neglible from 1979 to 1989 and turns                                     earnings.9
and early 1990s by rapidly growing propri-      slightly negative in the most recent
                                                                                                                              WS/P = WS/E × E/P = industry mix ×
etor’s income, the fruit of the businesses      period.
                                                                                                                              differential regional earnings × E/P
that succeeded. The often-used analogy of
a forest fire leaving behind the seeds for      A Closer Look at Wage                                                         Table 5 summarizes the contribution
the forest’s regeneration seems to apply to     and Salary Growth                                                        of each of these elements to real per capita
Texas in recent years, with entrepreneur-           Because wages and salary growth per                                  income.10 The first column is wages and
ship sowing the seeds. On average, propri-      capita account for such a large share of                                 salaries per worker; the second and third
etor’s income contributed 0.5 percent to        Texas per capita income, we will examine                                 columns divide this category into two
per capita income growth in Texas Trian-        it more closely. We can divide wages and                                 parts. The fourth column is the employ-
gle cities in the 1990s.                        salaries per capita (WS/P) into two parts:                               ment population ratio, or jobs per capita.
      Property income (dividends, rent and      wages and salaries per employee (WS/E)                                        Industry mix was a significant factor
interest) was the biggest contributor to        and the employment population ratio                                      in all areas and in every period. Texas was
per capita income growth during the oil         (E/P).                                                                   clearly shedding low-wage jobs and
bust and recovery years. The 1980s saw a                                                                                 replacing them with better-paying jobs
                                                                  WS/P = WS/E × E/P
large run-up in property values, which fell                                                                              throughout the entire period.
back slowly late in the decade but drove        Further, we can offer two reasons for the                                     We also see gains from differential
up rental values, and a sharp hike in inter-    growth of wages and salaries per                                         regional earnings in the two periods of
est rates due to inflation and tight mone-      employee: (1) improvements in the indus-                                 rapid growth. In the 1990s the Texas
tary policy increased income from inter-        try mix that allow more workers to move                                  Triangle cities added 0.6 percent per year
est-earning sources. The contribution of        into higher-paying industries, or (2) spe-                               to per capita income thanks to these
property income is small from 1969 to           cific advantages the region offers in                                    advantages. The measure highlights the

                                                                                                 OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                                             21
                                                                                                 state’s booms and busts: Houston added
                                                                                                 0.8 percent per year from 1969 to 1979,
                                                                                                 which turned to –0.8 percent the follow-
                                                                                                 ing decade. Large regional differentials in
                                                                                                 Austin (2.4 percent) and Dallas–Fort
                                                                                                 Worth (0.8 percent) mark the 1990s tech
                                                                                                 boom. A look back at Chart 2 shows that
                                                                                                 these cities were already giving back some
                                                                                                 of their tech gains by 2001.
               During the two decades of strong growth,                                               During the two decades of strong
                                                                                                 growth, the state generated jobs faster
               Texas generated jobs faster than the rate                                         than the rate of population growth,
               of population growth, despite rapid                                               despite rapid in-migration (Table 6 ). Per
                                                                                                 capita job growth has occurred inside and
               in-migration.                                                                     outside the Triangle cities despite the
                                                                                                 fact, as mentioned above, that the border
                                                                                                 cities were unable to attain job growth
                                                                                                 much faster than population growth. This
                                                                                                 contributed 1.5 percent per year to Texas
                                                                                                 per capita income growth (as seen in
                                                                                                 column 4 of Table 5 ) from 1969 to 1979
                                                                                                 and 0.8 percent from 1989 to 2000. The
                                                                                                 slight decline in the 1980s (– 0.1 percent)
                                                                                                 was primarily due to slower job growth
               Table 6                                                                           in Houston and areas outside the Triangle.
               Employment and Population Growth, 1969–2001
                                                                   Job Growth*                   Summary and Conclusions
                                             1969 –1979             1979 –1989     1989 – 2001        Measured by standards of population,
                 United States                    2.2                    1.8           1.5       employment and income growth, the
                 Texas                            3.8                    1.8           2.7       Texas economy has outperformed the
                 Dallas–Fort Worth                3.6                    3.2           3.0       U.S. economy since 1969. As shown in
                 Houston                          5.8                    1.3           2.7       Table 7, by 2001 the state as a whole had
                 Austin                           5.5                    4.4           4.9       raised its per capita income to 94 percent
                 San Antonio                      2.0                    2.6           2.7
                                                                                                 of the national average, up from 88 per-
                 Texas Triangle                   4.3                    2.5           3.0
                 Rest of Texas                    3.0                     .8           2.0       cent in 1969. Over the same period, the
                                                                                                 average annual growth rate of per capita
                                                              Population Growth*                 income was 2.3 percent for Texas versus
                                             1969 –1979             1979 –1989     1989 – 2001   2.1 percent for the United States.
                 United States                    1.1                     .9           1.2            Economic progress has been uneven
                 Texas                            2.3                    1.9           2.0       over time. The oil boom briefly pushed
                 Dallas–Fort Worth                2.3                    3.0           2.6       Texas per capita income above the
                 Houston                          3.4                    1.9           2.3       nation’s in 1981 – 82. In the subsequent
                 Austin                           4.1                    3.8           3.9       collapse of oil, banking and real estate,
                 San Antonio                      1.9                    2.1           1.8
                                                                                                 Texas fell back to almost its 1969 position
                 Texas Triangle                   2.8                    2.5           2.5
                 Rest of Texas                    1.7                    1.2           1.3       relative to the United States. Most subse-
                                                                                                 quent progress has come since 1989, and
                                                                Jobs Per Capita*                 it primarily can be attributed to more jobs
                                             1969 –1979             1979 –1989     1989 – 2001   available to the general population and
                 United States                    1.1                     .8            .3       an improving mix of jobs with higher
                 Texas                            1.5                    –.1            .7       salaries.
                 Dallas–Fort Worth                1.3                     .2            .4            Table 7 also indicates the uneven
                 Houston                          2.3                    –.6            .4       geographic progress. In fact, the forces of
                 Austin                           1.4                     .5           1.0       convergence to U.S. levels have mostly
                 San Antonio                       .2                     .6            .9
                                                                                                 come from the Texas Triangle metropoli-
                 Texas Triangle                   1.5                    –.1            .5
                 Rest of Texas                    1.2                    –.4            .7       tan areas of Dallas–Fort Worth, Houston,
                                                                                                 Austin and San Antonio. All these cities
               * Annualized growth rates.                                                        have outperformed the United States
               SOURCES: Bureau of Economic Analysis; author’s calculations.                      since 1969, with the most dramatic gains

22   FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
coming out of Austin. The addition of                    Table 7
a large high-technology workforce to a                   Performance of Regions of the Texas Economy
stable, if less-well-paid, government and
                                                                                       2001 per                               Annual growth rate
university base fueled both rapid growth                                             capita income             Percent of        1969–2001
and rising per capita income in the state                                              (dollars)               U.S. level     (percent per year)
capital. Except for San Antonio, all the                      United States               30,413                   100                2.1
cities enjoy living standards above the                       Texas                       28,472                    94                2.3
U.S. average.                                                 Dallas–Fort Worth           33,247                   109                2.2
     The uneven nature of Texas’ eco-                         Houston                     34,916                   115                2.5
nomic history makes it difficult to predict                   Austin                      31,511                   104                2.8
future progress. The geographic concen-                       San Antonio                 26,887                    88                2.3
                                                              Texas Triangle              32,897                   108                2.4
tration of growth seems unlikely to
                                                              Rest of Texas               21,357                    70                1.8
change, but the state’s advantages relative
to the rest of the nation (as measured                   SOURCES: Bureau of Economic Analysis; author’s calculations.
by differential regional earnings) were
dominated by the oil boom from 1969
to 1979 and to some extent by the high-
                                                              growth and the locational advantages of the                   to the North American Industry Classification
tech expansion of 1989 – 2001. Advantages                     state’s largest metro areas.                                  System, beginning in 2001. This made it impos-
were concentrated first in Houston,                      4                                                                  sible to compare the distribution of jobs and
                                                              The framework was developed by Daniel H. Gar-
then in Austin and Dallas–Fort Worth.                         nick. See “Accounting for Regional Differences                income by industry in 1989 and 2001.
Predicting the source or location of the                      in Per Capita Personal Income Growth,
next great round of expansion is impossi-                     1929–79,” by Daniel H. Garnick, Survey of Cur-
ble.                                                          rent Business, vol. 62, September 1982, pp.
     However, since 1969 Texas’ cost                          24–34, and “Accounting for Regional Differ-
advantages, tax advantages, climate and                       ences in Per Capita Income Growth: An Update
                                                              and an Extension,” by Daniel H. Garnick and
lifestyle have prepared the ground for fur-
                                                              Howard L. Friedenberg, Survey of Current Busi-
ther growth and development, including                        ness, vol. 70, January 1990, pp. 29–40.
periodic excesses. These Sunbelt advan-                  5
                                                              Constant dollars are obtained by deflating with
tages should persist, making renewed                          the personal consumption expenditure deflator
economic expansion in Texas and contin-                       (1996 = 100) for all areas.
ued progress in raising the state’s living               6
                                                              “The Simple Economics of the Texas Triangle”
standards simply a matter of time.                            (January 2004) and “The Texas Triangle as
                                                              Megalopolis” (April 2004), both by Robert W.
Gilmer is a vice president at the Federal                     Gilmer, in Houston Business, Federal Reserve
Reserve Bank of Dallas.                                       Bank of Dallas.
                                                         7
                                                              “Texas Border Cities: An Income Growth Per-
                                                              spective,” by Robert W. Gilmer, Matthew Gurch
Notes                                                         and Thomas Wang, The Border Economy, Fed-
1
    The statistics for Dallas–Fort Worth and Hous-
                                                              eral Reserve Bank of Dallas, June 2001, pp. 2–5.
    ton use their consolidated metropolitan statisti-
                                                         8
    cal area definition throughout this article. The          “Finding New Ways to Grow: Recovery in the Oil
    ranking of metro areas includes consolidated              Patch,” by Robert W. Gilmer, Houston Business,
    metropolitan statistical areas (CMSAs) but then           Federal Reserve Bank of Dallas, July 1996.
    excludes all the parts of these CMSAs (metro-        9
                                                              The actual calculation of industry mix and differ-
    politan and primary metropolitan statistical              ential regional earnings is spelled out carefully in
    areas) in the subsequent ranking process.                 Garnick and Friedenberg (1990). The calculation
2
    The end years used here—1969,1979,1989 and                depends on the definition of hypothetical income
    2001— are all peak years in the U.S. business             (H ), total wages and salaries that would have
    cycle. Although Texas and its metro areas did             been earned in Texas if compensation were paid
    not always follow the U.S. cycle, particularly in         at the national rate in each industry. Hypotheti-
    the 1980s, these years were typically times of            cal income was calculated using the wage and
    economic expansion for Texas, making compar-              salary employment categories in the Bureau of
    isons to the U.S. economy appropriate.                    Economic Analysis’s Regional Economic Infor-
3
                                                              mation System, essentially a one-digit definition
    The most notable flaw in the use of per capita
                                                              in the Standard Industrial Classification. Using
    income as a measure of welfare is that it tells us
                                                              this definition,
    nothing about the size distribution of income
    among the population. However, this article                  WS/P = industry mix × differential regional
    divides per capita income into enough cate-                   earnings × E/P = H/E × WS/H × E/P.
    gories by component and geography to give            10
                                                              The data in Table 5 extend only to 2000 because
    some insight into how income growth is affected           of the change in the industrial classification sys-
    by regional wage levels, job growth, population           tem from the Standard Industrial Classification

                                                                                                        OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                  23
Texas Border Benefits from
Retail Sales to Mexican Nationals
Keith R. Phillips and Roberto Coronado




O    Over the past 10 years, trade between
the United States and Mexico has
boomed, partly because of the significant
reduction in tariffs from NAFTA and the
strong growth in the maquiladora indus-
try. Along with the expansion in trade,
                                                                                                                                       in Mexico but also on the U.S. side due to
                                                                                                                                       increasing border interlinkages. The
                                                                                                                                       maquiladora industry has been the main
                                                                                                                                       economic growth driver along the
                                                                                                                                       Texas–Mexico border.
                                                                                                                                            Several studies have addressed the
there has been strong population growth                                                                                                issue of cross-border retail trade as part of
along the northern border of Mexico.                                                                                                   a larger question of the maquiladora in-
Generally, the population in Mexican bor-                                                                                              dustry’s impact on the regional economies
der cities is significantly larger than in the                                                                                         of U.S. border cities. The first studies on the
corresponding U.S. sister cities. Moreover,                                                                                            subject date back to the early 1970s and
the South Texas border metros are a short                                                                                              indicate that a significant portion of
drive from the industrial city of Monter-                                                                                              maquiladora salaries was spent on the U.S.
rey, which had a population of 3.8 million                                                                                             side of the border, mainly on food and
in 2000. The large and growing population                                                                                              clothing. More specifically, one study esti-
on the Mexican side of the border repre-                                                                                               mates that a 10 percent increase in
sents an important consumer base for                                                                                                   maquiladora employment translates into a
retail stores in U.S. border towns.                                                                                                    23 percent increase in retail sales in
     While commercial trade between the                                                                                                Brownsville, a 13 percent increase in
United States and Mexico is well docu-                                                                                                 Laredo, an 11 percent increase in El Paso
                                                                                                El Paso Convention & Visitors Bureau




mented, less is known about the size of                                                                                                and a 7 percent increase in McAllen.2
the nations’ cross-border retail trade.                                                                                                     Perhaps the first researcher to study
Though small in comparison with com-                                                                                                   the impact of the maquiladoras along the
mercial trade, this retail trade is a signifi-                                                                                         Texas border in a comprehensive manner
cant part of many border city economies.                                                                                               was J. Michael Patrick.3 His main conclu-
In 2003 alone, there were more than 38                                                                                                 sion regarding cross-border retail trade
million noncommercial crossings at the                                                                                                 activity is that growth in the maquiladora
bridges along the Texas–Mexico border.                                                                                                 industry in Mexico stimulates U.S. border
Many of these individuals were coming to                                                                                               job growth mostly in the retail and service
purchase goods to take back to their home        areas having the biggest share of their                                               sectors, not in the manufacturing sector
country. Due to differences in national          retail sales going to Mexican nationals will                                          as commonly perceived.
policies such as environmental laws, taxes       be impacted the most by large swings in                                                    One of the first studies to quantify the
and consumer safety regulations, people          the value of the peso. We thus check that                                             impact of Mexican nationals on retail
cross daily to purchase goods and services       our estimates are consistent with the                                                 trade on the U.S. side of the border was
on both sides of the border.                     effects on local retail sales of movements                                            done by the San Diego Chamber of Com-
     Since most of the retail trade con-         in the real dollar/peso exchange rate.                                                merce in 1979.4 Through surveys, the
ducted on the U.S. side of the border is                                                                                               study estimated that 7.5 percent of San
done in cash, it is difficult to document the    Previous Research on Border Retail                                                    Diego’s retail sales ($407 million) could be
share of retail spending by Mexican                   Traditionally, the border has been a                                             attributed to Mexican nationals. In 1993,
nationals. In this article, we use a simple      region of fast population and job growth                                              according to a study by the San Diego Dia-
consumption function to estimate the             compared with the rest of the United States                                           logue, about 42 percent of the people who
amount of retail spending that is essen-         and Mexico. The Border Industrialization                                              crossed into San Diego were Mexican
tially exported to Mexico via cross-border       Program—enacted in 1965 by the Mexican                                                nationals with the main purpose of shop-
shoppers.1 Since the true amount spent by        government after the United States ended                                              ping. They accounted for $2.8 billion in
Mexican nationals is not known, it is diffi-     the Bracero Program—gave birth to the                                                 retail sales.5
cult to estimate the accuracy of our meas-       maquiladora industry, which in turn inten-                                                 More recently, in 2002, Charney and
ures. Theory tells us, however, that metro       sified the border region’s growth, not only                                           Pavlakovich-Kochi estimated the eco-

24        FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
nomic impact of Mexican visitors to the         aged 46 percent. For each of the four bor-       Table 1
economy of Arizona. They found that             der MSAs, they multiplied 0.46 by total          Border Exported Retail Sales,
                                                                                                 1978–2001
Mexican visitors spent $962 million, with       personal income to get an estimate of
                                                                                                                                  Average share
the vast majority in department stores (41      retail sales purchased by the local popula-
                                                                                                                                     (percent)
percent) and grocery stores (25 percent),       tion and then subtracted sales to locals
                                                                                                   Brownsville                         25.7
mostly in border counties.6 Similarly, on       from total sales to get net exported retail
                                                                                                   El Paso                             11.3
the Texas–Mexico border, the Center for         sales. If the value of net exported retail
                                                                                                   Laredo                              51.1
Border Economic Studies at the Univer-          sales is negative, that means more local           McAllen                             35.6
sity of Texas – Pan American estimated          income is spent outside the local econ-
                                                                                                 SOURCE: Authors’ calculations.
that total expenditures by Mexican visitors     omy than income spent by outsiders in
in the lower Rio Grande Valley amounted         the local community. While it is evident
to $1.4 billion in 2003.7                       that many Mexican nationals cross the
     Other studies have focused on the          border to shop, U.S. citizens also cross               We use the results from the model to
impact of exchange rate fluctuations on         into Mexico to dine at restaurants and to        estimate exported retail sales for the four
U.S. border retail sales. For instance, Diehl   buy local handicrafts, medicines, liquor,        Texas border MSAs. Table 1 reports the
concludes that the 1982 Mexican eco-            dental services and other products and           average share of exported retail sales for
nomic crisis that triggered peso devalua-       services. Border residents also vacation         these four areas during our estimation
tion stunned South Texas retailers by cut-      and shop at other destinations in the            period. According to our results, in 2001,
ting retail sales as much as 80 to 90 per-      United States. Remittances to family             Mexican shoppers accounted for more
cent in many border businesses.8 Simi-          members in Mexico can also reduce the            than $2 billion in retail sales, representing
larly, Patrick and Renforth estimate,           amount of local income spent on local            0.75 percent of total retail sales in Texas. In
through the use of almost 4,000 surveys,        retail goods and thus reduce net exported        2001, McAllen was the biggest net ex-
that the 1994 peso devaluation resulted in      retail sales.                                    porter of retail sales to Mexicans, with
a strong 41.8 percent decline in retail              Using a constant fraction of local per-     almost $1 billion in sales, representing 33
sales, but the results varied by city, store    sonal income to estimate the amount that         percent of its total local retail trade activ-
type, distance from the border and rela-        locals spend on retail—and using this            ity. Laredo came in second with $540 mil-
tive domestic market size.9 Gerber docu-        amount to estimate net exported retail—          lion in exported retail sales, or 39 percent
ments the relationship between peso             produces reasonable results. However, we         of total retail sales. Brownsville registered
value fluctuations and total taxable sales      can further refine the model by decom-           $256 million (16 percent of total retail
in San Diego and Imperial counties,             posing personal income into three com-           sales), while El Paso, the biggest of the
where he finds that an unanticipated 10         ponents, allowing the coefficient on each        four cities in terms of population, ex-
percent decline in the value of the peso        component to differ. The border region           ported only $215 million (6 percent) to
depresses total taxable sales by approxi-       has a low employment-to-population               Mexican nationals. El Paso’s figure is well
mately 1 percent in San Diego County and        ratio due to its young labor force and high      below its average exported retail sales of
2.22 percent in Imperial County.10              unemployment rates. It also has persist-         11.3 percent and is primarily due to the
     Many of the studies, however, are          ently low per capita personal income yet         contracted maquiladora activity south of
region- and time-specific, making com-          strong job growth rates. If these factors        the border. Ciudad Juárez registered its
parisons across regions and over time dif-      play differing roles in retail spending, it is   worst maquiladora performance in 2001
ficult. Also, many of the studies were done     important to separate them out. We divide        and 2002, with employment declining
using time-consuming, labor-intensive,          personal income (Y) as follows:                  almost 25 percent.
and thus expensive, survey techniques                                                                  On average over the 1978–2001
                                                            Y    ( POP      (
that would be difficult to perform consis-
tently over time and across regions. To
                                                    Y=    (POP × ( EMP          × EMP ,          period, Mexican nationals accounted for
                                                                                                 1.6 percent of Texas retail sales, or $5.1
overcome these limitations, we use a sim-                                                        million on a daily basis. Chart 1 shows
ple consumption function approach that          where POP is population and thus Y/POP is        that over time Laredo has the highest
produces a consistent annual time series        per capita income, POP/EMP is the inverse        share of exported retail sales to actual
of exported retail sales for the four metro-    of the employment-to-population ratio and        total sales, followed by McAllen, Browns-
politan statistical areas (MSAs) on the         EMP is total employment. We then try to          ville and El Paso.
Texas–Mexico border.                            estimate the impact of the three compo-
                                                nents of personal income on retail sales         Sensitivity to Exchange Rate Swings
Using a Different Approach                      across the 23 non-border Texas MSAs. We               Although there is no straightforward
     Phillips and Manzanares propose a          use quarterly retail sales data at the metro     way to determine the accuracy of our
simple model in which it is assumed that        level from 1978 to 2001, available from the      results, retail sales from Mexican nation-
individuals spend a fixed proportion of         Texas comptroller’s office. Annual personal      als should be sensitive to swings in the
their income on consumption, or in this         income for metro areas (less contributions       value of the peso. These swings represent
case, retail sales.11 For instance, they find   for social insurance) from 1978 to 2001 is       price shocks for Mexican nationals shop-
that from 1986 to 1998 retail sales as a        available from the Commerce Depart-              ping on the U.S. side, and border retailers
fraction of personal income in Texas aver-      ment’s Bureau of Economic Analysis.              know that sharp declines in the peso’s

                                                                                   OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS              25
Chart 1                                                                                                                                   Notes
Exported Retail Sales Shares                                                                                                              1
                                                                                                                                                  For a more detailed version of this article, please
Percent of total retail sales                                                                                       Real exchange rate            see “Exported Retail Sales along the Texas–Mex-
70                                                                                                                                                ico Border,” by Keith R. Phillips and Roberto
                                                                                                                                  .020
                                                                                                                                                  Coronado, Federal Reserve Bank of Dallas work-
60                                                    Laredo
                                                                                                                                                  ing paper (forthcoming).
                                                                                                          Real exchange rate      .016
50                                                                                                                                            2
                                                                                                                                                  See “Maquiladoras along the Texas–Mexico Bor-
                                                                                                                                                  der: An Econometric Evaluation of Employment
40
                                                                                                                                  .012            and Retail Sales Effect on Four Texas Border
30                                                                                                                                                SMSAs,” by Richard J. Holden, Texas Depart-
                                                                                                                      McAllen
                                                                         Brownsville                                              .008            ment of Community Affairs, Regional Economic
20
                                                                                                                                                  Development Division, February 1984.
                    El Paso
10                                                                                                                                            3
                                                                                                                                  .004            See “The Economic Impact of Maquiladoras on
  0                                                                                                                                               Border Development: A Rio Grande Valley Case
                                                                                                                                                  Study — Some Preliminary Findings,” by J.
-10                                                                                                                               0
      ’78 ’79 ’80 ’81 ’82 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01                                             Michael Patrick and Roland S. Arriola, paper
                                                                                                                                                  presented at the Western Social Science Associ-
SOURCES: Authors’ calculations; Federal Reserve Bank of Dallas.                                                                                   ation meeting, El Paso, Texas, 1987; “The
                                                                                                                                                  Employment Impact of Maquiladoras along the
Chart 2                                                                                                                                           U.S. Border,” by J. Michael Patrick, in The
Border Retail Sales Are Closely Related to Real Exchange Rate                                                                                     Maquiladora Industry: Economic Solution or
                                                                                                                                                  Problem?, ed. Khosrow Fatemi, New York:
Total retail sales index, 1978 = 100                                                                                 Real exchange rate
                                                                                                                                                  Praeger Publishers, 1990, pp. 31–35; and “The
650                                                                                                                               .020            Impact of NAFTA on Border Maquiladora and
                                                                                                                       McAllen
                                                                                                                                                  Industrial Activity,” by J. Michael Patrick, Tech-
550                                                                                                                                               nical Report, Center for Entrepreneurship and
                                                                                                                                  .016
                                 Real exchange rate                                                                                               Economic Development, University of Texas–
450                                                                                                                                               Pan American, 1991.
                                                                                                                                  .012    4
                                                                                                                                                  “Mexican Impacts on Retail Sales,” San Diego
350                                                                                                                                               Chamber of Commerce, San Diego Economic
                                                                                 Brownsville
                                                                                                                                  .008            Bulletin, vol. 27, no. 6, 1979.
                     Laredo                                                                                      El Paso
250                                                                                                                                       5
                                                                                                                                                  “Who Crosses the Border: A View of the San
                                                                                                                                  .004            Diego/Tijuana Metropolitan Region,” Technical
150
                                                                                                                                                  Report, San Diego Dialogue, University of Cali-
                                                                                                                                                  fornia, San Diego, 1993.
 50                                                                                                                               0
       ’78 ’79 ’80 ’81 ’82 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01                                    6
                                                                                                                                                  “The Economic Impacts of Mexican Visitors to
                                                                                                                                                  Arizona: 2001,” by Alberta H. Charney and Vera
SOURCES: Authors’ calculations with data from Texas Comptroller of Public Accounts and Banco de México.                                           K. Pavlakovich-Kochi, Research Studies, Eco-
                                                                                                                                                  nomic and Business Research Program, Univer-
                                                                                                                                                  sity of Arizona, July 2002.
                                                                                                                                          7
                                                                                                                                                  “The Economic Impact of Mexican Visitors to
value result in a sharp drop in Mexican                              Outlook                                                                      the Lower Rio Grande Valley 2003,” by Suad
shoppers. Under our model, exported                                       In mid-2005 the real value of the peso                                  Ghaddar, Chad Richardson and Cynthia J.
retail sales seem to be responsive to                                was above its 20-year average and the                                        Brown, Technical Report, Center for Border Eco-
changes in exchange rate (see Chart 1).                              maquiladora industry was continuing to                                       nomic Studies, University of Texas–Pan Ameri-
     If exported retail sales represents a                           bounce back from its downturn in                                             can, 2004.
significant portion of total retail sales,                           2001–03. Both of these factors should con-                           8
                                                                                                                                                  “The Effect of the Peso Devaluation on Texas
changes in the value of the peso should                              tinue to stimulate growth along the Texas                                    Border Cities,” by Philip N. Diehl, Texas Busi-
have statistically significant impacts on                            side of the border. Looking to 2006, Mex-                                    ness Review, vol. 57, May/June 1983, pp.
total retail sales. To asses this, we perform                        ico is hoping to have its second consecu-                                    120–25.
                                                                                                                                          9
some statistical tests on the sensitivity of                         tive presidential election without a peso                                    “The Effects of the Peso Devaluation on Cross-
overall retail sales to changes in the value                         devaluation. The Texas border commu-                                         Border Retailing,” by J. Michael Patrick and
                                                                                                                                                  William Renforth, Journal of Borderlands Stud-
of the peso. Results show that, in all MSAs                          nity is hoping for the same, as its economy
                                                                                                                                                  ies, vol. 11, Spring 1996, pp. 25–41.
but El Paso, changes in the real exchange                            ebbs and flows with the movements in the                             10
                                                                                                                                                  “The Effects of a Depreciation of the Peso on
rate have statistically significant impacts                          value of the peso and the accompanying
                                                                                                                                                  Cross Border Retail Sales in San Diego and
on total local retail sales. The magnitude                           waves of Mexican shoppers.                                                   Imperial Counties,” by James Gerber, working
of the impact was the largest in Laredo.                                                                                                          paper, San Diego State University, June 1999.
Since our results show that El Paso had the                          Phillips is a senior economist and policy                            11
                                                                                                                                                  “Transportation Infrastructure and the Border
smallest share of its retail sales going to                          advisor at the San Antonio Branch and                                        Economy,” by Keith R. Phillips and Carlos Man-
Mexican nationals and Laredo had the                                 Coronado is an assistant economist at the                                    zanares, The Border Economy, Federal Reserve
largest, these results are consistent with                           El Paso Branch of the Federal Reserve Bank                                   Bank of Dallas, June 2001.
our previous findings (Chart 2).                                     of Dallas.

26              FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
Texas Border
Employment and Maquiladora Growth
Jesus Cañas, Roberto Coronado and Robert W. Gilmer




                                                                                                                                                                    Courtesy of MexicoNow magazine
I    In the 1990s, the Texas economy
exceeded even the remarkable perform-
ance of its U.S. counterpart. State job
growth averaged 2.9 percent per year from
1990 to 2000, well ahead of the 1.8 percent
annual increases in the United States.
                                              increased retail sales in U.S. border cities;
                                              and rapid expansion of the maquiladora
                                              industry.
                                                  Maquiladora expansion came on the
                                              heels of NAFTA implementation and the
                                              1994–95 peso devaluation. In recent
                                                                                                                   the industry lose 290,000 jobs between
                                                                                                                   October 2000 and July 2003, many
                                                                                                                   observers are questioning the industry’s
                                                                                                                   future. Recession, rising wages in Mexico,
                                                                                                                   low-wage competition from countries
                                                                                                                   such as China and Mexico’s inability to
Three engines drove the Texas economy         years, however, this part of the border                              deal with growing problems in its compet-
forward in the 1990s: the oil sector, high    boom has turned to bust. After watching                              itive environment have all contributed to
tech (especially in Austin and Dallas) and
a boom in border-city employment.             Table 1
                                              Percent Job Growth Along the Texas–Mexico Border
Employment growth in the four largest
Texas border cities topped that of the                                    Texas                 El Paso                 Laredo              Brownsville   McAllen
nation, and the three south Texas cities        1991                         .7                    2.3                    4.3                    2.0        1.5
outperformed the state by a wide margin         1992                        1.9                    3.6                    8.7                    4.8        5.3
                                                1993                        3.3                    2.2                    3.6                    4.4        4.5
(Table 1).1
                                                1994                        4.3                    3.9                    7.2                    6.0        7.3
     The accelerated job growth along the       1995                        2.9                     0                    –5.5                     .4        2.7
Texas–Mexico border was the result of           1996                        3.2                    2.0                    5.1                    2.8        3.3
several factors: a quick Mexican recovery       1997                        4.4                    2.7                    7.6                    3.0        3.8
after the 1994 –95 financial crisis; tight      1998                        3.6                    1.1                    2.7                    2.3        5.6
labor markets in the United States that         1999                        2.2                    2.0                    5.3                    5.8        6.5
attracted employers to the border in            2000                        2.8                    1.5                    3.0                    5.1        5.1
                                              1990–2000                     2.9                    2.1                    4.1                    3.7        4.6
search of the region’s surplus labor; a
strong peso for much of the period, which     SOURCE: Federal Reserve Bank of Dallas, El Paso Branch, with data from the Texas Workforce Commission.


                                                                                            OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                         27
Chart 1                                                                                                                                     2 ). Throughout the latest recession and
Maquiladora Employment Growth
                                                                                                                                            slow recovery, manufacturing was the
Thousands, seasonally adjusted data                                                                                                         hardest hit part of the U.S. economy, and
1,400                                                                                                                                       maquiladora output and employment
1,300
1,200                                                                                                                                       generally followed the lead of U.S. indus-
1,100                                                                                                                                       trial production. In mid-2003, however,
1,000                                                                                                                                       strong U.S. industrial growth finally
  900
  800                                                                                                                                       returned, and as Table 2 shows, maqui-
  700                                                                                                                                       ladora employment has returned to re-
  600                                                                                                                                       covery as well. Job growth remains
  500
  400                                                                                                                                       uneven among the Mexican border cities,
  300                                                                                                                                       however, with Ciudad Acuña, Matamoros
  200                                                                                                                                       and Piedras Negras recovering more
  100
    0                                                                                                                                       slowly.
        ’80 ’81 ’82 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05

SOURCES: Federal Reserve Bank of Dallas, El Paso Branch, with data from INEGI.                                                              How Do Maquladoras Affect the
                                                                                                                                            Texas Border Economy?
                                                                                                                                                 The original vision for maquiladoras
the recent downturn.                                                  Tyco, General Electric and ITT.                                       was the “twin plant,” with capital-inten-
     This article looks at the maquiladora’s                               The maquiladora industry has been                                sive operations located a few miles inside
role in today’s Texas economy, especially                             highly cyclical since its inception, falling                          the U.S. border and low-wage, labor-
how it affects Texas border cities. We also                           into its first recession in 1974 with an 11.5                         intensive operations close by on the Mex-
assess the industry’s future and the                                  percent decline in employment. Table 2                                ican side. However, the bulk of U.S. man-
prospects for the maquiladora to again be                             shows the uneven effects of the latest                                ufacturing was already established in the
a significant factor in job growth in Texas                           maquiladora downturn on Mexican bor-                                  Midwest, and trucking deregulation
and Mexico.                                                           der cities. Maquiladora employment in                                 would make transportation links between
                                                                      Ciudad Juárez was higher than in all the                              the border and the Midwest both easier
Growth and Decline                                                    other cities combined when the recession                              and cheaper in the 1970s and ’80s. The
     The maquiladora industry began in                                began, and it has sustained the largest                               twin-plant vision was never realized along
1965 and experienced slow but steady                                  percentage losses from peak to trough                                 the border. Instead, the maquiladora sup-
growth under the Border Industrialization                             (27.7 percent). Piedras Negras, Nuevo                                 ply chain remained concentrated in states
Program. The canceled Bracero Program                                 Laredo and Matamoros also suffered large                              such as Illinois, Michigan and Ohio.
had used Mexican labor in agriculture,                                percentage losses, all in excess of 24 per-                                What economic impact would a new
and the replacement maquiladora was                                   cent. Ciudad Acuña and Reynosa were                                   maquiladora in Mexico have on a neigh-
designed to relieve the resulting high                                exceptions to the deep recession, with                                boring U.S. city? The list might run as fol-
unemployment rates in northern Mexico.                                Ciudad Acuña declining only 10.6 percent                              lows. To select and develop a site, U.S.
The new program used low-wage Mexican                                 and Reynosa continuing to grow through-                               legal, engineering and financial assistance
labor as a lure to draw U.S. manufacturing                            out the downturn. Newer plants, a better                              would be used. Once established, the new
to the region, allowing companies to                                  industry mix and a business-friendly                                  plant would rely on U.S.-based businesses
move production machinery and                                         environment account for their better per-                             for customs, brokerage, warehousing and
unassembled parts into Mexico without                                 formance.                                                             transportation services. The plant would
tariff consequences, as long as the assem-                                 The cyclical nature of the maquila-                              also purchase a variety of office, packag-
bled product was returned to the United                               dora industry is not surprising, given                                ing and industrial supplies. Corporate
States for final sale.                                                its close ties to U.S. manufacturing (Chart                           management, engineers and quality spe-
     Chart 1 shows the elevenfold increase
in maquiladora employment between
                                                                      Table 2
1980 and its peak in 2000, from 120,000
                                                                      Texas–Mexico Maquiladora Border Employment
workers to 1.3 million. In 1980, about 94
                                                                                                                 Peak                                        Trough
percent of maquiladora employment was
                                                                                                      Jobs                  Date                      Jobs              Date              April 2005
in the border states of northern Mexico.2
                                                                       Ciudad Juárez                262,550            October 2000               189,930           June 2003                213,389
Today, the share has slipped to 76 percent,
                                                                       Ciudad Acuña                  37,512           November 2002                33,541         February 2005               33,674
but the northern states still dominate. In
                                                                       Piedras Negras                15,222           February 2000                10,939         December 2004               11,187
2004, 2,810 operating plants accounted                                 Nuevo Laredo                  22,915           February 2000                17,171           April 2003                22,233
for about 9 percent of formal employment                               Reynosa                       86,925             April 2005                    N/A              N/A                       N/A
in Mexico, or 3 percent of the total labor                             Matamoros                     68,413            October 2000                51,900          August 2003                53,002
force. The companies operating under the
                                                                      NOTES: Seasonally adjusted data; border twin cities are as follows: Ciudad Juárez–El Paso, Ciudad Acuña–Del Rio, Piedras Negras–Eagle
maquiladora program are a who’s who of                                       Pass, Nuevo Laredo–Laredo, Reynosa–McAllen and Matamoros–Brownsville.
U.S. industry, including Delphi, Mattel,                              SOURCE: Federal Reserve Bank of Dallas, El Paso Branch, with data from INEGI.


28             FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
Chart 2                                                              research suggests that U.S. border                                    warehousing employment accelerated
Maquiladora Ties to                                                  states—with the exception of Arizona,                                 quickly. Business service employment,
U.S. Industrial Sector                                               where job losses ranged from negligible to                            especially personnel supply services,
Index, January 2000 = 100, seasonally adjusted                       small—gained jobs as a result of growth in                            computer programming and data pro-
110                                                                  the maquiladora industry.8                                            cessing, grew 45 percent from 1990 to
                                          U.S. industrial                 A more recent development has been                               2004. El Paso’s maquiladora-related busi-
105
                                          production
                                                                     the arrival of component parts and mate-                              nesses rely heavily on temporary staffing
100
                                                                     rial suppliers in U.S. border cities. Specific                        agencies to hire additional personnel to
95                                                                   examples can be found in El Paso, neigh-                              meet rising demand. Computer program-
90                                                    Maquiladora    bor to Ciudad Juárez, which is home to the                            ming and data service workers help mini-
                                                      employment
                                                                     largest number of maquiladora employ-                                 mize the burden of paperwork required by
85
                                                                     ees along the U.S. border. Over the past                              customs agencies to export or import
80                                                                   decade, an increasing number of rubber                                components. Legal employment grew 20
    2000       2001       2002       2003       2004      2005
SOURCES: Federal Reserve Bank of Dallas, El Paso Branch, with data   and plastics, electronics and electrical                              percent over the same period. Similar
         from INEGI; Federal Reserve Board.                          equipment, and metal fabricating plants                               results can be found up and down the U.S.
                                                                     have begun to operate in El Paso to serve                             border.
cialists would be drawn to the border to                             as suppliers to the maquiladora industry                                   The definitive study on the linkages
visit this plant, and they would spend                               (Chart 3).                                                            between maquiladoras and the border
money on food and lodging.3 Maquiladora                                   Components supplied include com-                                 economy, by Gordon Hanson, takes all
employees draw their salary in Mexico but                            puter housings, electrical wiring har-                                these factors into account.9 Hanson esti-
do a significant share of their shopping in                          nesses, special dies and tools, and electri-                          mates that a 10 percent increase in
the United States, stimulating employ-                               cal switches. About 26 plastic-injection                              maquiladora output in a Mexican border
ment in local retail and service sectors.                            molding plants can be identified, 31 metal                            city will increase employment in its U.S.
     These impacts on the U.S. border                                stamping companies, and 12 electric- and                              city pair by 1.1 to 2 percent. He provides
have been recognized for some time, and                              electronic-related companies. Together,                               more specifics by estimating that this
a number of studies were conducted in                                these companies employed 4,000 workers                                same 10 percent increase in output would
the 1970s and ’80s to quantify them. For                             in 2004. The manufacturing sectors that                               increase wholesale trade employment in
instance, in 1972, Ladman and Poulsen                                supply the maquiladoras paid about 40                                 the U.S. city by 2.1 to 2.7 percent, trans-
found that Agua Prieta, Sonora, maquila-                             percent more in hourly wages than the                                 portation services by 1.7 to 2.7 percent,
dora workers spent 40 percent of their                               low-wage apparel, textile and leather in-                             manufacturing by 1.2 to 2.1 percent and
wages in Arizona.4 Ayer and Layton esti-                             dustries that traditionally operated in                               retail trade by 1 to 1.8 percent.
mated the maquiladoras’ impact on value                              El Paso.
added and population, using an input–                                     Maquila manufacturing in Mexico                                  The Role of Recession
output model for the Arizona–Mexico                                  also positively influences El Paso’s                                       The recent recession has played an
border economy. They concluded that                                  employment in transportation, real                                    important role in the latest downturn of
Mexicans’ expenditures due to the growing                            estate, and legal and accounting services                             the highly cyclical maquiladora industry.
presence of twin plants increased value                              (Chart 4). Given the rapid increase in                                At the same time, maquiladoras have long
added by 14 percent and population by 11                             trade flows after 1993, transportation and                            served as a low-wage platform for U.S.
percent on the U.S. side of the border.5
     In a 1984 study of the Texas border,
Holden estimated that maquiladora                                    Chart 3
employment had a large impact on                                     Maquiladora Suppliers in El Paso
employment in the border communities                                 Index, 1990 = 100
of El Paso, Laredo, McAllen and Browns-                              350
ville. For instance, a 10 percent increase in
                                                                     300                                                                   Apparel
maquiladora payroll results in a 2 to 3 per-
cent increase in employment in El Paso                               250
and McAllen as well as a 3 to 4 percent                                                                                                                                    Plastics
                                                                     200
increase in Laredo and Brownsville.6
     In another study, Sprinkle found that                           150                                                                                 Metalworking
during the early 1980s Ciudad Juárez
                                                                     100
maquiladoras accounted for one of five
jobs created in El Paso, and these new jobs                           50
                                                                                                                               Electrical equipment
were concentrated in the service sector.7
Silvers and Pavlakovich assessed the rela-                             0
                                                                           1990      1991    1992     1993     1994     1995    1996      1997    1998      1999    2000     2001     2002    2003   2004
tive magnitude of employment gains and
                                                                     NOTE: North American Industry Classification System (NAICS) codes used in the chart were 3327, 3329, 3328, 3332, 3335, 3159,
losses across U.S. border regions due to                                   3261 and 3344.
maquiladora industry activity. Their                                 SOURCE: Federal Reserve Bank of Dallas, El Paso Branch, with data from Bureau of Labor Statistics.


                                                                                                                      OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                                   29
Chart 4                                                                                                                                                         detailed results are reported elsewhere.11
Service Employment in El Paso                                                                                                                                        To examine the future of the industry
Index, 1990 = 100                                                                                                                                               under various assumptions, we simulated
350                                                                                                                                                             maquiladora employment following its
                                                                                                                                                                second quarter 2000 peak. The base case
300
                                                                                                                                                                was the actual outcome through 2002, a
250                                                                      Transportation and                                                                     decline of 14.5 percent for the industry as
                                                                         transportation services
                                                                                                                                                                a whole. Scenario 1 (S1) assumed no
200
                                                                                                                                                                recession and that the U.S. unemploy-
                                                                                                           Real estate
150                                                                                                                                                             ment rate held firm at a historically low 4
                                                                                                                                                                percent through the end of the period.
100                                                                                          Legal and accounting services
                                                                                                                                                                Real relative wages rose in this scenario,
 50                                                                                                                                                             just as in the base case. Scenario 2 (S2)
  0
                                                                                                                                                                assumed the recession occurred but that
         1990         1991      1992      1993           1994   1995    1996    1997        1998    1999     2000        2001      2002    2003   2004          real relative maquiladora wages fell 6.1
NOTE: North American Industry Classification System (NAICS) codes used in the chart were 4889, 5311, 5312, 5313, 5411 and 5412.                                 percent after second quarter 2000 instead
SOURCE: Federal Reserve Bank of Dallas, El Paso Branch, with data from Bureau of Labor Statistics.                                                              of rising 16.8 percent. And scenario 3 (S3)
                                                                                                                                                                assumed the best of both worlds for
                                                                                                                                                                maquiladora managers, falling real rela-
manufacturing, and the rise of new low-                                          tion and Development and World Trade                                           tive wages and no recession.
wage alternatives such as China, India                                           Organization rules.                                                                 Chart 5 shows the results for all
and Vietnam has broadened U.S. options                                               To focus on the question of how                                            maquiladoras combined. This can be
for manufacturing. These very low-wage                                           maquiladoras will respond to economic                                          computed two ways: as the result of a sin-
competitors, plus rising real Mexican                                            recovery and which sectors would                                               gle estimate based on the sum of all
wages, have become a factor in pushing                                           benefit, we developed some econometric                                         maquiladora employment or as the sum
some maquiladora activity abroad. Mex-                                           estimates. As in other models, our                                             of the simulation results for 10 maqui-
ico generally has looked at the loss of the                                      methodology confirmed that past maqui-                                         ladora sectors. Fortunately, they agree
lowest wage jobs as an inevitable price of                                       ladora employment has primarily been                                           quite closely. Eliminating the U.S. reces-
progress, because increasing domestic                                            driven by the business cycle and relative                                      sion in S1 would provide an increase of
wage levels must be seen as a positive                                           real wages.10 Trends and dummy shift                                           approximately 20 percent in employment
aspect of economic development. The                                              variables were included to account for                                         in the simulation period, replacing a
government has expressed reluctance to                                           structural change, particularly testing for                                    decline of about 14.5 percent in the base
enter into subsidy programs to retain or                                         breaks with the 1994 implementation of                                         case. The percentage turnaround for S2 is
attract these industries, considering such                                       NAFTA and the 1994–95 financial crisis in                                      similar, and the combined effect in S3 is a
action as poor fiscal policy and a violation                                     Mexico. The general methodology follows                                        31 percent increase.
of Organization for Economic Coopera-                                            several papers by Branson and Love, and                                             Four individual sectors do not



 Chart 5
 Simulation Results

                                               Total Maquiladoras                                                                                          Sum of Maquiladora Sectors


                             Scenario 3                                                               31.3                                             Scenario 3                                                         31




                             Scenario 2                                             21.3                                                               Scenario 2                                     17.7




                             Scenario 1                                             21.3                                                               Scenario 1                                           20.1




      –14.5                                   Base                                                                                 -14.6                                Base



–20     –16     –12     –8       –4       0          4      8     12    16     20      24      28    32      36              –20    –16    –12    –8       –4       0      4      8      12      16    20      24   28   32    36
                                               Percent change in jobs                                                                                                   Percent change in jobs

 NOTE: The base cases in the two calculations are slightly different because the chemicals sector was excluded from the sum of regression results. There was a break in the data for this sector.
 SOURCE: Authors’ calculations.


30               FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
Table 3                                                   the rise of foreign competition means                                     Throughout the 1990s, the United
Maquiladora Sectors That Are Unresponsive                 even sectors returning to positive growth                            States supplied the vast majority of
to a U.S. Economic Rebound
                                                          with economic recovery may experience                                maquiladora industry inputs. In 2000, 90
(Percent change in jobs)
                                                          slower job growth than in the recent past,                           percent of maquiladora inputs were from
                                                Not       as some products within the sector are                               the United States and 9 percent were from
          Leather       Toys     Furniture   classified
                                                          commoditized.                                                        Asia, with China contributing only 1 per-
 Base      –25.6        –31.5      –8.7         –4.9
 S1         –7.8        –21.0      –8.9         –2.1           In assessing Mexico’s competitive                               cent (Chart 6). By 2004, 59 percent came
 S2         –6.8        –34.7      17.3        –22.1      prospects, the nation retains crucial                                from the United States and 35.7 percent
 S3         –7.4         –5.1       4.4          5.8      advantages over the rest of the world,                               from Asia, including 11.1 percent from
                                                          even as domestic wages rise. The most                                China. The United States remains the
SOURCE: Authors’ calculations.
                                                          important factor is proximity to the U.S.                            majority supplier, but this rapidly moving
                                                          market. For example, bulky items that                                trend continued to run in favor of Asia
respond to an upturn in the U.S. econ-                    have a high ratio of weight to value, such                           into 2005.
omy: leather, toys, furniture and a group                 as large-screen televisions or major appli-                               The vehicle for entry of foreign inputs
of other, unclassified maquiladoras. Their                ances, will remain competitive. Proximity                            to Mexico is 20 sectoral promotion pro-
simulation results are summarized in                      also matters if the inventory cycle is short,                        grams, or PROSECs, created by the Mexi-
Table 3. Combined, these maquiladoras                     if there are constant design changes or if                           can government in December 2000. They
accounted for 226,782 jobs at the second                  there must be frequent retooling. Mexico                             were created in response to implementa-
quarter 2000 peak, or 18.1 percent of the                 will also be competitive when quality is                             tion of NAFTA Article 303, which in Janu-
total. These sectors are unlikely to return               more important than price, such as with                              ary 2001 eliminated duty-free imports of
to growth with U.S. economic recovery.                    medical equipment or when intellectual                               maquiladora inputs from non-NAFTA
     The three largest maquiladora sec-                   property rights are critical.12                                      countries. The PROSECs protect the entry
tors, together accounting for 76.1 percent                                                                                     to Mexico of non-NAFTA components
of the peak employment, all respond pos-                  Texas-Based Suppliers                                                that are not readily available in the
itively to economic recovery in the simu-                      The maquiladoras’ contribution to                               domestic market, allowing them to enter
lations. In S1, electrical machinery                      U.S. border city growth in the 1990s                                 under reduced tariffs of zero to 5 percent.
records an 18.2 percent increase, in place                stemmed from (1) the spillovers from                                 Despite the paperwork and the need to
of a 26.1 percent decline. Textiles turn                  rapid maquiladora expansion in neigh-                                track the origin of thousands of parts to
around to record a 63.2 percent gain in S1,               boring Mexican cities and (2) the shift of                           comply with PROSECs, maquiladoras
and transportation equipment (which did                   many maquiladora suppliers to border                                 have apparently fully embraced the pro-
not decline after second quarter 2000)                    cities from their base in the Midwest. We                            grams.
grows by another 4.5 percent in this sce-                 have already shown how foreign competi-                                   Data are not available on exactly
nario.                                                    tion and rising real wages in Mexico have                            which inputs are being displaced, making
     In conclusion, less than 20 percent of               reduced the prospects for maquiladora                                it difficult to assess the impact on Texas
maquiladora employment is in sectors                      growth, but foreign competition is also                              border communities. For example, if the
that are unresponsive to economic recov-                  making significant inroads into the                                  1990s shift of suppliers to the border from
ery in the United States, and overall                     maquiladora supply chain. This raises the                            the Midwest was based on just-in-time
growth seems likely to continue. However,                 possibility of slowing, or even reversing,                           inventory needs, it may be difficult for
even those sectors that continue to grow                  the increase of U.S. border-city suppliers                           Asian suppliers to take their place. How-
in simulations are going to be influenced                 to the maquiladora industry.                                         ever, given the extent and pace at which
by foreign competition. The effect of for-
eign competition is often couched in                      Chart 6
terms of a product cycle, in which product                Mexican Maquiladora Imports by Country of Origin
development and testing occur in the
                                                          Percent
United States, initial long production runs
                                                          100
take place in Mexico and ultimately prod-
                                                           90                                                      2000
uct commoditization happens in China or                                                                            2001
                                                           80
another low-wage competitor. The more                                                                              2002
                                                           70                                                      2003
quickly and easily a product is commodi-
                                                           60                                                      2004
tized, the quicker it will move to China.                                                                          2005:Q1
Leather, toy and furniture sectors are                     50

often cited as no longer competitive in                    40

Mexico. But even within the most                           30
advanced sectors, we may find individual                   20
products susceptible to being lost to lower                10
wage countries in exactly the same way—                     0
                                                                         United States                 Asia without China                    China            Other
computers, cell phones, modems, print-
ers and disk drives, for example. Hence,                  SOURCE: Federal Reserve Bank of Dallas, El Paso Branch, with data from Banco de México.


                                                                                                        OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                   31
                                                                                                      5
                                              ernment has argued that this must be                         “The Border Industry Program and the Impact of
                                              seen as a highly desirable result of suc-                    Expenditures on a U.S. Border Community,” by
     Mexico retains                           cessful economic development and Mex-                        Harry Ayer and Ross Layton, Annals of Regional
                                                                                                           Science, vol. 8, 1974, pp. 105 –17.
                                              ico’s move up the product cycle. The next
     important                                generation of maquiladoras should not be
                                                                                                      6
                                                                                                           “Maquiladoras Along the Texas–Mexico Border:
                                                                                                           An Econometric Evaluation of Employment and
                                              judged by the ability to generate low-wage
     competitive                              jobs, but by productivity, value added or
                                                                                                           Retail Sales Effect on Four Texas Border
                                                                                                           SMSAs,” by Richard J. Holden, Texas Depart-
     advantages over                          rising wages. Critics, at the same time,                     ment of Community Affairs, Regional Economic
                                              claim Mexico simply has not done an ade-                     Development Division, February 1984.
     many of its low-wage                     quate job of preparing the way for more                 7
                                                                                                           “Project Link: An Investigation of Employment
                                              sophisticated manufacturing. To illustrate                   Linkages Between Cd. Juárez and El Paso,” by
     rivals, based on                         this point, many observers cite the failure                  Richard Sprinkle, University of Texas at El Paso,
                                              (so far) of proposed reforms in energy,                      December 1986.
     proximity to the                         labor law, taxes and telecommunications.                8
                                                                                                           “Maquila Industry Impacts on the Spatial Redis-
                                                                                                           tribution of Employment,” by Arthur L. Silvers
     United States,                           These and other reforms are badly needed
                                                                                                           and Vera K. Pavlakovich, Journal of Borderlands
                                              to prepare Mexico for a fine market econ-
                                                                                                           Studies, vol. 9, December 1994, pp. 47– 64.
     political and                            omy.
                                                                                                      9
                                                   Finally, it is not just the maquiladora                 “U.S.–Mexico Integration and Regional
     financial stability,                     industry that is affected by foreign com-
                                                                                                           Economies: Evidence from Border-City Pairs,”
                                                                                                           by Gordon Hanson, Journal of Urban Econom-
                                              petition, but the U.S.-based supply chain
     and the rule of law.                     as well. In 2000, 90 percent of inputs to the
                                                                                                           ics, vol. 50, September 2001, pp. 259 – 87.
                                                                                                      10
                                                                                                           For more information, see the papers from the
                                              maquiladoras came from the United                            Dallas Fed conference “Maquiladora Downturn:
                                              States, and four years later that number                     Structural Change or Cyclical Factors?” available at
                                              was only 59 percent. Texas border cities in                  www.dallasfed.org/news/research/2003/
                                              the 1990s developed rapidly as a critical,                   03maquiladora.html. In particular, see the pre-
Asian suppliers have taken market share,      new part of this supply chain, with suppli-                  sentations by Everardo Elizondo Almaguer,
it would be hard to argue that the            ers shifting from the Midwest to the                         Banco de México; William C. Gruben, Federal
                                                                                                           Reserve Bank of Dallas; James Gerber, San
maquiladora market share of Texas-based       U.S.–Mexico border. We lack industry
                                                                                                           Diego State University; and Ernesto Acevedo
suppliers has not been reduced. Future        detail to know exactly how the recent suc-                   Fernández, Ministry of Finance and Public
expansion of Texas-based suppliers is         cess of foreign suppliers is affecting Texas                 Credit.
likely to slow as well.                       border cities, but again, declining eco-                11
                                                                                                           “Maquiladora Downturn: Structural Change or
                                              nomic stimulus from maquiladora expan-                       Cyclical Factors?” by Jesus Cañas, Roberto
Conclusion                                    sion would seem to be the rule.                              Coronado and Robert W. Gilmer, International
     Mexico’s maquiladora jobs are grow-                                                                   Business and Economics Research Journal, vol.
ing once more, beginning with the             Cañas and Coronado are assistant                             3, August 2004; “Dollar Appreciation and Manu-
resumption of U.S. industrial expansion       economists at the El Paso Branch of the                      facturing Employment and Output,” by William
                                                                                                           H. Branson and James P. Love, National Bureau
in mid-2003. Mexico retains important         Federal Reserve Bank of Dallas. Gilmer is a
                                                                                                           of Economic Research, Working Paper No.
competitive advantages over many of its       vice president at the Federal Reserve Bank                   1972, July 1986; “The Real Exchange Rate and
low-wage rivals, based on proximity to the    of Dallas.                                                   Employment in U.S. Manufacturing: State and
United States, political and financial sta-                                                                Regional Results,” by William H. Branson and
bility, and the rule of law. The maqui-                                                                    James P. Love, National Bureau of Economic
ladora industry is stable, competitive and
                                              Notes                                                        Research, Working Paper No. 2435, November
                                              1
                                                  The four border cities contributed 6.8 percent of        1987; “The Real Exchange Rate, Employment
growing again.                                    the 2.3 million jobs generated in Texas from             and Output in Manufacturing in the U.S. and
     It is unlikely, however, to repeat the       1990 to 2000, while making up 6.1 percent of             Japan,” by William H. Branson and James P.
banner performance of the 1990s, at least         Texas employment in 1990.                                Love, National Bureau of Economic Research,
not in the near future. There were ele-       2
                                                  Mexican border states include Baja California,           Working Paper No. 2491, February 1988.
ments of unique, one-time stimulus in the         Sonora, Chihuahua, Coahuila and Tamaulipas,         12
                                                                                                           See “Maquiladora Downturn: Structural Change
1990s, with the collapse of the peso in           excluding Nuevo León.                                    or Cyclical Factors?” by Jesus Cañas, Roberto
1994–95 and the implementation of             3
                                                  “The Employment Impact of Maquiladoras                   Coronado and Robert W. Gilmer, Federal
NAFTA in 1994. Further, foreign competi-          Along the U.S. Border,” by J. Michael Patrick, in        Reserve Bank of Dallas Business Frontier, Issue
tion appears to have taken away the               The Maquiladora Industry: Economic Solution or           2, 2004.
                                                  Problem?, ed. Khosrow Fatemi, New York:
potential for any growth in several low-
                                                  Praeger Publishers, 1990, pp. 31–35.
wage sectors and probably has reduced         4
                                                  “Economic Impact of the Mexican Border Indus-
the growth potential of a number of other
                                                  trialization Program: Agua Prieta, Sonora,” by
sectors as well.
                                                  Jerry R. Ladman and Mark O. Poulsen, Arizona
     Rising real wages in Mexico have             State University, Center for Latin American Stud-
accelerated the transfer of low-wage jobs         ies, May 1972.
to other countries, and the Mexican gov-

32        FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
Do Higher Oil Prices
Still Benefit Texas?
Stephen P. A. Brown and Mine Yücel




                                                 T
                                                      Texas and oil. These two words have
                                                 gone hand in hand since 1889, when the
                                                 state started producing oil. Since then, the
                                                 Texas economy has often been driven by
                                                 volatile energy prices — suffering with low
                                                 oil prices and benefiting with high oil
                                                 prices.
                                                      The effects of energy prices on the
                                                 Texas economy were particularly evident
                                                 during the 1970s and 1980s (Chart 1). As
                                                 energy prices rose, the Texas economy
                                                 expanded at a rapid pace, with strong
                                                 employment and income growth.
                                                 Although the Texas economy continued to
                                                 expand until 1986, the oil and gas sector
                                                 began to slip as energy prices slid from
                                                 their 1981 heights. The oil price collapse
                                                 in July 1986 touched off a statewide reces-
                                                 sion and significant job losses.
                                                      Since the early 1980s, however, the
                                                 Texas energy industry has shrunk and
                                                 other sectors of the Texas economy have
                                                 grown. Despite these changes, Texas
                                                 remains the top oil and natural gas pro-
                                                 ducer in the United States and exports
                                                 most of its production of these two com-
                                                 modities to other states. Consequently,
                                                 the energy industry remains an important
                                                 driver of the state economy.
                                                      The diversification of the Texas econ-
                                                 omy away from energy and this sector’s
                                                 continuing importance to the state
                                                 prompt us to consider: How much do
                                                 swings in energy prices affect the Texas
                                                 economy today? How much has that rela-
                                                 tionship changed since the energy boom
                                                 years of the 1970s and 1980s?

                                                 Oil Production in Texas:
                                                 A Brief History1
                                                     The first economically significant oil
                                                 in Texas was discovered in Corsicana in
                                                 1894. Discoveries in Navarro County fol-
                                                 lowed. By 1901 the Spindletop oil field was
                                                 producing 75,000 barrels per day and had
                                                 contributed to the first Texas oil boom.
                                                     In the early 1900s, Texas produced rel-
                                                 atively little oil and gas — crude oil pro-

                                     OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS        33
 Chart 1                                                                                                                                                                         duction was only about 1.3 percent of
 Texas Employment Tracks Oil Prices in 1970s and 1980s
                                                                                                                                                                                 total U.S. production, and natural gas was
 Employment (in thousands)                                                                                                                        2004 dollars per barrel        0.1 percent of U.S. production. By 1952,
 800                                                                                                                                                                        90   Texas’ shares of total U.S. crude oil and
                                                                                                                                                                            80   natural gas production peaked at 45 and
 600
                                                                                                                                      Detrended Texas                       70   52.2 percent, respectively. Crude oil and
 400                                                                                                                                   employment
                                                                                                                                                                            60   natural gas production continued to
 200                                                                                                                                                                             increase in the state, with the peak for
                                                                                                                                                                            50
                                                                                                                                                                                 both coming in 1972.
      0                                                                                                                                                                     40
                                                                                                                                                                                      As oil and gas production increased in
                                                                                                                                                                            30   Texas, so did their importance to the state
–200
                                                                                                                                                                            20   economy. The creation of OPEC in 1960
–400                                                                                                                                                                             and subsequent oil price increases in the
                                                                                                                                      Refiners' acquisition cost            10

–600                                                                                                                                                                        0    1970s and early 1980s gave rise to a boom
                ’74           ’77               ’80             ’83                   ’86            ’89          ’92          ’95            ’98           ’01                  in the Texas economy. Oil and gas output
 SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas; Energy Information Administration; authors’ estimates.                                                     became an increasing share of Texas out-
                                                                                                                                                                                 put (Chart 2). In 1981, at the height of
                                                                                                                                                                                 world oil prices, oil and gas extraction was
                                                                                                                                                                                 about 20 percent of total Texas gross state
Chart 2                                                                                                                                                                          product.
Oil and Gas Extraction’s Share of Texas Output Peaks in 1981                                                                                                                          After reaching $38 per barrel in 1981,
                                                                                                                                                                                 oil prices began softening. Gradually slid-
Percent of Texas GSP
20                                                                                                                                                                               ing during the next few years, prices
                                                                                                                                                                                 finally collapsed to $11.82 per barrel in
                                                                                                                                                                                 July 1986. This led to a recession in Texas
15                                                                                                                                                                               that lasted 17 months and had a devastat-
                                                                                                                                                                                 ing effect on state employment.
                                                                                                                                                                                      The number employed in the Texas
10
                                                                                                                                                                                 mining industry (which is mostly oil and
                                                                                                                                                                                 gas extraction) rose from about 7,000 in
 5                                                                                                                                                                               1900 — 0.7 percent of total state employ-
                                                                                                                                                                                 ment — to 90,000 by 1950 — a 3.1 percent
                                                                                                                                                                                 share. At the oil and gas industry’s peak in
 0                                                                                                                                                                               1981, Texas employment in oil and gas
          ’63   ’65    ’67     ’69        ’71     ’73         ’75         ’77     ’79         ’81    ’83    ’85    ’87   ’89     ’91       ’93      ’95    ’97     ’99     ’01
                                                                                                                                                                                 extraction and oilfield machinery reached
SOURCE: Federal Reserve Bank of Dallas.
                                                                                                                                                                                 366,200 — 6 percent of total nonfarm
                                                                                                                                                                                 employment in the state (Chart 3). By the
                                                                                                                                                                                 time the oil industry bottomed out in
                                                                                                                                                                                 1987, 175,000 jobs had been lost in the oil
Chart 3                                                                                                                                                                          and gas extraction and oilfield machinery
Energy Sector Employment Declines After Early 1980s                                                                                                                              sectors.
Share of Texas nonfarm employment (percent)
 5                                                                                                                                                                               Refining and Petrochemicals
4.5                                                                                                                              Oil and gas extraction                               After the first Texas refinery opened in
                                                                                                                                 Chemicals and allied products
 4                                                                                                                               Oilfield machinery                              the Corsicana oil field in 1898, the petro-
3.5                                                                                                                              Petroleum and coal products                     leum refining and petrochemical indus-
 3                                                                                                                                                                               tries flourished in the state. In 1939 (the
2.5                                                                                                                                                                              earliest data available from the U.S. Cen-
 2                                                                                                                                                                               sus of Manufacturers), the chemical
1.5
                                                                                                                                                                                 industry employed about 6,800 produc-
 1
                                                                                                                                                                                 tion workers, and the petroleum refining
                                                                                                                                                                                 industry employed 19,000 (accounting for
 .5
                                                                                                                                                                                 5.5 and 15 percent of total manufacturing
 0
          ’67    ’69    ’71         ’73     ’75         ’77         ’79         ’81         ’83     ’85    ’87    ’89    ’91         ’93    ’95      ’97     ’99     ’01         employment, respectively). Refining’s
                                                                                                                                                                                 share of state output was highest in 1939
SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas.
                                                                                                                                                                                 at 28 percent of total manufactured
                                                                                                                                                                                 goods. By 1958, the Texas petroleum refin-
                                                                                                                                                                                 ing industry reached its zenith with 43,000

34                    FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
employees.                                     Chart 4
                                               Texas Economy Diversifies Away from Mining After Mid-1980s
     Today, the refining industry con-
tributes about 11 percent of Texas manu-       GSP index, 1971 = 100
                                               600
facturing output and 1.5 percent of total
                                                                       Trade                           Total
Texas output. Employment has also                                      TCPU                            Agriculture
                                               500
steadily declined to less than 0.3 percent                             Services                        Construction
                                                                       Manufacturing                   Government
of total Texas employment (Chart 3). The       400                     FIRE                            Mining
petrochemical industry provides about 12
percent of Texas manufacturing output,         300
1.6 percent of total Texas output and less
than 0.9 percent of total Texas employ-        200

ment.
                                               100
     The refining and petrochemical
industries provide some counterbalance           0
                                                     ’71      ’73     ’75      ’77      ’79     ’81     ’83      ’85     ’87      ’89     ’91         ’93         ’95         ’97         ’99         ’01
to the effects of changing energy prices on
the Texas economy. These two industries        NOTE: TCPU is transportation, communications and public utilities; FIRE is finance, insurance and real estate.
generally are hurt by rising oil and natural   SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas.
gas prices.

Diversification of the                         share of the Texas economy today than in                                 determine just how this relationship dif-
Texas Economy                                  the early 1980s.                                                         fered across the two periods, we analyze
     As output in the Texas mining indus-          To examine in more detail how the                                    the data in two different ways. We exam-
try shrank, output in other Texas indus-       Texas economy’s diversification away                                     ine how much of the actual fluctuation in
tries continued to grow after the mid-         from energy-producing industries has                                     Texas output and employment arose from
1980s. Texas saw output gains in manu-         affected its response to volatile energy                                 oil price shocks and other causes in each
facturing, construction, agriculture and       prices, we developed an econometric                                      of the two periods. We also estimate and
the service-producing sectors — whole-         model that captures the effects of oil price                             compare by how much Texas output and
sale and retail trade; transportation, com-    shocks on the Texas economy for the                                      employment would have responded to a
munications and public utilities (TCPU);       period 1970–2002.2 We find that the rela-                                10 percent oil price shock in each of the
services; finance, insurance and real          tionship between oil prices and the Texas                                two periods.
estate (FIRE); and government (Chart 4 ).      economy is considerably different today                                       We find changes in oil prices
Growing at a faster rate than total Texas      than it was during the oil boom and bust                                 accounted for a much higher percentage
gross state product, manufacturing, trade,     years of the 1970s and 1980s.                                            of fluctuations in the Texas economy in
TCPU, services and FIRE accounted for              Our analysis reveals that the relation-                              1970 – 87 than in 1988–2002. In the earlier
increasing shares of Texas output. In con-     ship between oil prices and the Texas                                    period, nearly half the fluctuation in Texas
trast, agriculture, construction and gov-      economy breaks between 1987 and 1988,                                    output (46 percent) arose from changing
ernment posted decreasing shares.              which indicates that the effects of chang-                               oil prices. In the latter period, however,
     A similar picture emerges for Texas       ing oil prices on the economy were differ-                               less than 10 percent of Texas output fluc-
employment since the mid-1980s. Ser-           ent in 1970–87 than in 1988 – 2002. To                                   tuations arose from oil price shocks. In
vices, construction and trade grew faster
than total employment and accounted for
                                               Chart 5
increasing shares of Texas nonfarm             Texas Employment Shifts Away from Mining After Early 1980s
employment (Chart 5 ). Employment
                                               Texas Employment Index, 1970 = 100
shares for TCPU and FIRE remained rela-
                                               475
tively constant, while those for manufac-                             Services                Construction
turing and government decreased along          425                    Trade                   TCPU
                                                                      FIRE                    Mining
with mining.                                   375                    Total                   Manufacturing
                                                                      Government
                                               325
Oil and the Texas Economy
                                               275
    Even without a rigorous analysis, it’s
evident the relationship between energy        225
prices and the Texas economy has               175
changed since the 1980s. Oil and gas pro-
                                               125
duction accounted for 19.4 percent of
Texas output in 1981 and only 6 percent in      75
                                                     ’70     ’72      ’74     ’76      ’78     ’80     ’82     ’84     ’86     ’88      ’90     ’92         ’94         ’96         ’98         ’00         ’02
2002. Similarly, output and employment
in energy-related industries, such as oil      NOTE: TCPU is transportation, communications and public utilities; FIRE is finance, insurance and real estate.
and gas field machinery, claim a smaller       SOURCES: Bureau of Labor Statistics; Federal Reserve Bank of Dallas.


                                                                                                 OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                                                              35
contrast, the fluctuations in U.S. GDP             Our estimates confirm                       gross state product by 2.6 percent and
accounted for about 40 percent of the                                                          employment by 1 percent. During the
fluctuations in Texas output in the latter         the Texas economy has                       1988 – 2002 period, a 10 percent increase
period.                                                                                        in oil prices would have raised Texas gross
                                                   become less sensitive                       state product by 0.4 percent with no sig-
The Response to                                                                                nificant net effect on employment.
Oil Price Shocks                                   to oil price fluctuations,                       We find evidence for two ways in
     The Texas economy’s response to an            but it still responds                       which the Texas economy has become
oil price shock is significantly different in                                                  less sensitive to fluctuations in oil prices
the two periods (Table 1 ). For 1970 – 87, we      favorably to higher                         than it was in the 1970s and 1980s. The
estimate that an oil price increase would                                                      first is that oilfield activity has become
have led to sustained gains in both output         energy prices.                              less sensitive to fluctuations in energy
and employment. In particular, a 10 per-                                                       prices. The second is that the energy
cent increase in oil prices would have led                                                     industry makes up a smaller share of the
to a 2.6 percent increase in Texas gross        in 1988 – 2002 would have yielded only a       Texas economy than it used to. Together
state product and about a 1 percent             6.6 percent increase in the rig count.         these factors have meant that Texas out-
increase in employment.3 An oil price                Similarly, oil and gas employment         put is about 15 percent as sensitive to oil
increase of 10 percent also would have          showed a much smaller response in the          price fluctuations as it was from 1970 to
temporarily boosted the growth rate of          second period. We estimate that a 10 per-      1987. Texas nonfarm employment no
the Texas economy, with output growing 1        cent increase in oil prices would have gen-    longer seems to be affected by oil price
percent faster during the next few quar-        erated a 9.5 percent increase in Texas oil     fluctuations.
ters and employment growing 0.1 percent         and gas employment for 1970 – 87 but only
faster over the next three to four months,      a 1.1 percent employment increase in           Brown is a senior economist and assistant
then a little slower thereafter.                1988 – 2002.                                   vice president and Yücel is a senior
     The economy was much less respon-               One reason for the weaker response        economist and vice president in the
sive to oil prices in the period 1988 – 2002,   in the rig count and employment may be         Research Department of the Federal
and the nature of the response was differ-      changes in technology. After the 1986          Reserve Bank of Dallas.
ent. In the second period, a 10 percent         crash in oil prices, companies improved
increase in oil prices would have led to        oilfield technology and produced more oil      Notes
only about a 0.4 percent gain in gross state    with fewer rigs. Therefore, the same rise in       This article was previously published under the
product. The net response of employment         oil prices brings forth fewer rigs and oil-        title “The Effect of High Oil Prices on Today’s
                                                                                                   Texas Economy,” in Federal Reserve Bank of
to a rise in oil prices is basically nil. The   field workers in the latter period. In addi-
                                                                                                   Dallas Southwest Economy, September/October
negligible result in employment may arise       tion, contacts in the industry say there are
                                                                                                   2004.
from the energy sector’s greatly muted          fewer prospects for new drilling in Texas,     1
                                                                                                   See “Oil and Gas Industry,” The Handbook of
response to oil price fluctuations in the       and companies are increasingly shifting
                                                                                                   Texas Online, www.tsha.utexas.edu/handbook/
latter period and the inability or reluc-       their drilling overseas.4                          online.
tance of oil companies to hire new                                                             2
                                                                                                   We use a vector-autoregressive model with oil
employees as energy prices rose.                Oil Price Effects on the                           prices, U.S. GDP, Texas gross state product,
     To further examine the channels            Texas Economy                                      Texas nonfarm employment, Texas employment
through which oil price shocks affect the            Over the past 20 years, the Texas             in oil and gas extraction, and the Texas rig count
Texas economy, we examined the effects          energy industry has shrunk while other             as variables.
of oil price shocks on the rig count and oil    sectors of the Texas economy have grown.       3
                                                                                                   These results are similar to those found in
and gas employment in both periods. We          Nonetheless, Texas produces more oil and           “Energy Prices and State Economic Perfor-
found that the rig count responded much         gas than any other state in the nation.            mance,” by Stephen P. A. Brown and Mine K.
                                                                                                   Yücel, Federal Reserve Bank of Dallas Economic
more strongly to oil price increases in the     Texas accounts for 20 percent of crude oil
                                                                                                   Review, Second Quarter 1995. Using input–out-
first period than in the second. For            and 26 percent of natural gas production
                                                                                                   put analysis, Brown and Yücel estimate that a 10
1970 – 87, we estimate that a 10 percent        in the United States (excluding federal off-       percent increase in oil prices would have
increase in oil prices would have boosted       shore). Texas also exports oil and natural         boosted Texas employment by 1.37 percent in
the rig count by 20 percent. In contrast,       gas to the rest of the nation. Conse-              1982 and by 0.3 percent in 2000.
the same percentage increase in oil prices      quently, higher energy prices still benefit    4
                                                                                                   Drilling has shifted toward natural gas in the
                                                the state —even if it is by less than in the       United States and Texas, but because natural
                                                boom years of the 1970s and early 1980s.           gas prices generally moved with oil prices dur-
Table 1
                                                     Our estimates confirm the Texas               ing the estimation periods, the shift may not
Effect of a 10 Percent Increase
                                                                                                   alter the rig count’s weakening response to oil
in Oil Prices on Texas Economy                  economy has become less sensitive to oil
                                                                                                   prices.
                 Texas              Oil         price fluctuations, but it still responds
          Texas nonfarm    Rig    and gas       favorably to higher energy prices. During
           GSP employment count employment
                                                the 1970 – 87 period, a 10 percent increase
1970–1987 +2.6%   +1.0%   +20%     +9.5%
1988–2002 +0.4%     0     +6.6% +1.1%           in oil prices would have boosted Texas

36        FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
The Changing Face of Texas
Population Projections and Implications
D’Ann Petersen and Laila Assanie




                                                             R
                                                                  Rich natural resources, abundant
                                                             land, a central location within the United
                                                             States and a business-friendly environment
                                                             have long attracted both immigrants and
                                                             U.S. natives to Texas. As a result, the state’s
                                                             population is faster growing, younger and
                                                             more diverse than the nation’s.
                                                                  These rapid demographic changes
                                                             present challenges for the future. As the
                                                             state’s baby boomer population ages,
                                                             more demands will be placed on housing,
                                                             health care and social services. Hispanics,
                                                             already a dominant force in Texas, are
                                                             expected to become the majority popula-
                                                             tion group by 2020. The significant
                                                             increase in this population (both immi-
                                                             grant and native) has far-reaching impli-
                                                             cations for education, housing and the
                                                             labor force. The key issue facing Texas will
                                                             be to reduce the economic and educa-
                                                             tional disparities prevalent among the
                                                             state’s ethnic groups as the population
                                                             continues to grow and evolve.
                                                                  This article looks at population
                                                             growth and demographic changes of
                                                             recent decades. Then, with projections
                                                             from the Texas State Data Center, we
                                                             examine some sectors of the economy
                                                             that will be challenged by these demo-
                                                             graphic forces in the coming decades.

                                                             Texas: Big and Getting Bigger
                                                                  Since the early 1900s, Texas has grown
                                                             faster than the nation. However, during
                                                             the Texas oil boom, the state’s population
                                                             growth accelerated. From 1970 to 1980, as
                                                             oil prices spiraled upward and people
                                                             flocked to Texas, its population grew by
       The key issue facing Texas will be to                 2.71 percent per year, while the nation’s
                                                             increased at a 1.14 percent pace (Chart 1).
       reduce the economic and educational                   Even during the 1980s, which witnessed
       disparities prevalent among the state’s               an oil and real estate bust, Texas almost
                                                             doubled the nation’s population growth.
       ethnic groups as the population                            During the 1990s, Texas again
                                                             exceeded expectations and grew by its
       continues to grow and evolve.                         largest amount yet, adding almost 3.9 mil-
                                                             lion residents and surpassing New York as
                                                             the second most populous state. Many
                                                             immigrants and residents from other

                                                 OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS           37
Chart 1                                                        Table 1
Texas and U.S. Population Growth,                              Total Population and Components of Population Change in Texas, 1950–2003
1970–2003
                                                                                                                                                              Percent change due to
Annual growth rate (percent)
                                                                                               Total         Natural           Net               Percent       Natural      Net
 3
                   Texas                                                    Population       increase       increase         migration           change       increase    migration
2.5                United States
                                                                1950         7,711,194
 2                                                              1960         9,579,677       1,868,483      1,754,652          113,831            24.23         93.91          6.09
                                                                1970        11,196,730       1,617,053      1,402,683          214,370            16.88         86.74         13.26
1.5
                                                                1980        14,229,191       3,032,461      1,260,794        1,771,667            27.08         41.58         58.42
 1                                                              1990        16,986,510       2,757,319      1,815,670          941,649            19.38         65.85         34.15
 .5                                                             2000        20,851,820       3,865,310      1,919,281        1,946,029            22.76         49.65         50.35
                                                                2003*       22,103,374       1,259,945        699,685          560,260             6.04         55.53         44.47
 0
        1970s          1980s        1990s          2003        *Through July 2003.
SOURCE: Census Bureau.                                         SOURCE:Census Bureau.



states were drawn to Texas’ strong econ-                      higher-than-average birthrate. This is                          a larger share of the state’s population
omy and rapidly expanding high-tech                           partly a result of the state’s Hispanic her-                    growth than natural increase (Table 1 ).
centers, such as Austin and Dallas’ tele-                     itage and its ties to Mexico, where total                       Interestingly, even with the state’s reces-
com corridor.                                                 fertility rates were 2.5 percent in 2004,                       sion in 2001 – 03, net migration remained
     Even with the drastic economic                           quite a bit higher than the United States’                      relatively high, thanks to strong interna-
downturn of 2001, which hit Texas much                        2.1 percent.1 In 2000, Texas was second in                      tional immigration, accounting for 44.5
harder than most other areas of the                           the country (behind Utah) in state rank-                        percent of Texas’ population increase.
nation, the state gained an additional 1.26                   ings for birth/fertility rates. Because birth-
million residents from 2000 through 2003,                     rates change slowly over time, Texas will                       How Has Immigration Changed
for a total of 22 million, again growing                      probably continue to see large natural                          the Face of Texas?
twice as fast as the nation. Although                         increases in its population despite                                 The healthy pace of Texas’ population
domestic in-migration—people moving                           changes in economic conditions or immi-                         growth that began in the 1990s is due in
to Texas from other states within the                         gration policies.                                               large part to strong international immi-
United States — slowed during Texas’ hard                          Perhaps the most important factor                          gration, which surpassed domestic in-
economic times, the state’s high birthrate                    behind Texas’ more recent population                            migration as a contributor to population
and a strong pace of immigration kept                         growth is the strong pace of net migration.                     growth in six of the nine years during the
population growing at a healthy speed.                        Historically, people have been drawn to                         1990s.2 Immigration reached historic pro-
The combination of these factors —                            Texas because of its abundant land and                          portions as the number of foreign-born in
higher international immigration, a high                      natural resources. In more recent years,                        Texas increased by approximately 1.38
Hispanic birthrate and less domestic                          people and businesses were drawn by                             million. In addition, immigrants kept
migration — resulted in Texas’ Anglo pop-                     Texas’ robust economy and favorable                             Texas population growing during the
ulation dipping below the majority level                      business climate. Net migration, which                          recent economic downturn and tepid
of 50 percent in 2003 for the first time                      includes both domestic in-migration and                         recovery. From April 2000 to July 2003,
since the 1800s.                                              international immigration, was highest                          Texas net migration totaled 560,260,
                                                              during periods of greatest economic                             including 430,048 (77 percent) interna-
Why the Rapid Growth?                                         expansion —the 1970s oil boom (58.4 per-                        tional immigrants (Table 2 ).
    Two major factors are spurring Texas’                     cent) and the 1990s high-tech/telecom                               Texas is one of the most popular im-
rapid population growth. One is the state’s                   boom (50.4 percent) — and accounted for                         migrant gateways to the United States.


Table 2
Total Population and Components of Population Change in United States and Texas

                                                                                                                                    Natural
                                                   Natural increase                                Net migration                    increase                  Net migration
                         Total
                      population                                                                                                                           Net         Net
                       change                                                             Net           Net                                     Total international internal
  Geographic         (April 2000–                                                    international    internal                        Total    change migration migration
    area              July 2003)              Births      Deaths          Total        migration      migration          Total      (percent) (percent) (percent)   (percent)
 United States          9,364,374           13,098,788    7,843,040     5,255,748      4,108,626            0           4,108,626        56.12        43.88      43.88         0
 Texas                  1,259,945            1,189,400      489,715      699,685         430,048         130,212          560,260        55.53        44.47      34.13        10.33

SOURCE:Census Bureau.


38              FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
Chart 2 shows the percentage growth of         Chart 2
                                               Growth of Foreign-Born, 1990–2000
the foreign-born population in the United
States, Texas and the state’s six major met-   Percent
                                               180
ros during the 1990s. The foreign-born
                                               160
population share in Texas rose significant-
                                               140
ly during the decade and in 2000 com-
                                               120
posed 14 percent of the population com-
                                               100
pared with 11 percent at the national level.
     In recent years, growth of the foreign-    80

born has been even more rapid in Texas’         60

major metros than in its border metros.         40

Between 1990 and 2000, the number of            20

foreign-born in the major metros more               0
                                                          U.S.             Texas         Austin           Dallas   El Paso          Fort Worth-   Houston          San Antonio
than doubled (112 percent increase),
                                                                                                                                     Arlington
while that of the border metros increased      SOURCE: Texas State Data Center.
51.6 percent, well below the state average
of 90.2 percent.3
     Of Texas’ major metros, only El Paso      Chart 3
(31.5 percent) and San Antonio (54.3 per-      Share of the Foreign-Born
cent) recorded foreign-born growth rates       Percent
below the U.S. average (57.4 percent),         30
mostly because many of the immigrants
                                               25               1990
in these metros entered the state in earlier
                                                                2000
years and their second-generation chil-        20
dren now reside there. Austin witnessed
                                               15
the strongest growth in the foreign-born
during the 1990s (172 percent), likely due     10
to the booming tech economy there. The
share of the foreign-born in Dallas, Fort       5

Worth and Houston grew by 152 percent,          0
131 percent and 94 percent, respectively.                U.S.             Texas         Austin           Dallas    El Paso          Fort Worth-   Houston          San Antonio
Shares of the foreign-born in the major                                                                                              Arlington
                                               SOURCE: Census Bureau.
metros are shown in Chart 3.
     This increase in immigration has
brought rapid change in the state’s ethnic
                                               Chart 4
composition. Because of Texas’ proximity
                                               Change in Ethnicity/Race for Texas
to Mexico, many of the state’s immigrants
                                               Percent
are of Hispanic origin. Hispanics are by far
                                               70
the fastest growing segment of the popu-                                  Anglo
lation. During the 1990s, Texas’ Hispanic      60                         Black
population grew at a pace of 54 percent,                                  Hispanic
                                               50
adding more than 2.3 million people. As a                                 Other
result, Hispanics now make up 35 percent       40
of the state’s population, compared with
                                               30
roughly 14 percent at the national level.4
Among states, Texas has the country’s sec-     20
ond-highest Hispanic population, behind
                                               10
only California.
     Texas’ population has changed in           0
                                                                   1980                           1990                       2000                           2003
other ways as well. Anglos’ share of the
total population has fallen — no longer        SOURCES: Census Bureau; Texas State Data Center.
above 50 percent — as their rate of growth
slowed in the ’90s and the first three years
of this decade, while blacks still account                In recent years, growth of the foreign-born has
for about 11 percent of the state’s popula-
tion (Chart 4 ). The number of people                     been even more rapid in Texas’ major metros
included in the “other” category has dou-
bled since the 1990s.5
                                                          than in its border metros.

                                                                                            OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                                    39
Chart 5                                                                                                                                 its ties to Mexican heritage, will move
Projected Proportion of Texas Population by Race/Ethnicity
                                                                                                                                        from 50 percent Hispanic (in 2000) to 61.1
Percent                                                                                                                                 percent in 2040. Even Austin, where His-
60
                                 Anglo        Black            Hispanic              Other
                                                                                                                                        panics make up only 26 percent of the
50
                                                                                                                                        total today, is expected to see a major
                                                                                                                                        increase in its Hispanic population by
40                                                                                                                                      2040 — up to 44 percent.
                                                                                                                                             Currently, large disparities mark
30                                                                                                                                      socioeconomic conditions among Texas’
                                                                                                                                        ethnic groups. Compared with their Anglo
20
                                                                                                                                        counterparts, Texas’ Hispanics tend to
10                                                                                                                                      have lower levels of education, have lower
                                                                                                                                        wages and depend more on state services.
 0                                                                                                                                      This is partly a result of immigration —
                      2010                            2020                                   2030               2040
                                                                                                                                        Mexican immigrants tend to have average
NOTE: Assuming net migration rate is half that of 1990–2000.                                                                            wages 40 percent below those of natives.7
SOURCE: Texas State Data Center.                                                                                                        These wage differences reflect that the
                                                                                                                                        immigrants are young, have scant job
                                                                                                                                        experience and speak little English.
Chart 6                                                                                                                                      While some of the difference between
U.S. Population by Age in 2003                                                                                                          immigrants’ and natives’ wages is made
Age group, in years                                                                                                                     up after substantial time in the United
85 and over                                                                                                                             States, disparities between groups
     75 to 84                                                                                                                           remain. Without changes in socioeco-
     65 to 74                                                                                                                           nomic conditions, this implies that Texas’
     55 to 64                                                                                                          Baby             future population could be less educated,
                                                                                                                       boomers
     45 to 54
                                                                                                                       (39 to 57
                                                                                                                                        less competitive, poorer and more in need
     35 to 44                                                                                                          years)           of state services such as health care and
     25 to 34                                                                                                                           welfare. Texas’ challenge is to reduce these
     15 to 24                                                                                                 Echo boomers              socioeconomic differences through in-
      5 to 14                                                                                                 (8 to 23 years)
                                                                                                                                        creased educational attainment and
     Under 5
                                                                                                                                        training, so Texas can compete in the
                0            5           10      15            20          25                30     35   40         45             50   nation’s workforce in coming decades.
                                                                          Millions
                                                                                                                                             Age. Texas’ overall population, like
SOURCE: Census Bureau, American Community Survey 2003.                                                                                  the nation’s, is growing older. This aging is
                                                                                                                                        a result of the maturing of the baby boom
                                                                                                                                        generation, which makes up the largest
    The dramatic rise in Texas’ Hispanic                              major ways over the next several decades:                         segment of our population. In 2003, the
population (both immigrant and native)                                in diversity and in age.                                          baby boomers spanned the ages 39 to 57
has far-reaching implications. Hispanics’                                  Diversity. The Texas State Data Center                       (Chart 6). The youngest of the baby boom-
higher-than-average birthrate suggests                                projects that by 2020, Hispanics will make                        ers will turn 60 by 2024. As they retire, the
that this demographic segment will con-                               up the majority of Texas’ population,                             baby boomers will put large demands on
tinue to grow at a more rapid pace than                               while Anglos will fall to the second-most-                        the Social Security system and other gov-
that of Anglos and blacks, even assuming                              populous ethnicity (Chart 5). By the year                         ernment programs for the elderly, such as
no immigration. In addition, Hispanics,                               2040, Hispanics will account for over 50                          Medicare. In addition, the boomers may
on average, are younger, which has ramifi-                            percent of all Texans, while one-third of                         drive housing demand toward move-up
cations for housing, education and the                                the population will be Anglo. Blacks are                          or second homes as well as houses more
labor force. In 2000, the median age of                               expected to make up 9.5 percent of Texas’                         popular with older adults or combined
Hispanics in Texas was 25.5 versus 38 for                             population in 2040, and other races (not                          families.
Texas Anglos. This compares with the                                  Anglo, black or Hispanic) are expected to                              One factor that may mitigate Texas’
median age for all Texans of 32.3 and for                             grow to almost 6 percent of the popula-                           aging population is that the fast-growing
the United States of 35.3. Currently,                                 tion.6                                                            Hispanic population has a different age
because of its Hispanic heritage, Texas is                                 For Texas’ border cities, which already                      structure than the Anglo population. As
the second youngest state in the nation,                              have large Hispanic populations, the                              Chart 7 shows, in 2000 the population in
behind Utah.                                                          changes could be even more dramatic.                              age groups over 35 was predominantly
                                                                      For instance, El Paso, 78.2 percent His-                          Anglo. For example, in 2000, 66 percent of
Population Projections                                                panic now, will likely increase to 90.3 per-                      Texans aged 55 – 59 were Anglo compared
       Texas’ population will change in two                           cent by 2040. Similarly, San Antonio, with                        with 20 percent that were Hispanic. Con-

40                  FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
versely, of Texans aged 5 and under, 44       Chart 7
                                              Texas Population by Age and Ethnicity, 2000
percent were of Hispanic heritage, com-
pared with 39 percent Anglo.                  Percent
                                              80
     If expectations of rapid growth hold
true for Texas’ Hispanic population, His-     70
                                                               Anglo
panics will make up a much higher per-        60               Hispanic
centage of most age groups by the year
                                              50
2040, with only those over 65 being pre-
                                              40
dominantly Anglo (Chart 8 ).8 The age dif-
ferential between the Hispanic and Anglo      30
populations has important implications        20
for education, housing and state services.
                                              10

                                               0
Demographics and Poverty                           Under 5    5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 to 44 45 to 49 50 to 54 55 to 59 60 to 64      65+
    Texas Becoming Poorer? Texas’ econ-                                                                         Age
                                              SOURCE: Texas State Data Center.
omy grew faster than the nation’s during
the 1990s, and all sectors added jobs.
Employment in Texas during this period
grew at an annualized average rate of 3.3
percent, above the nation’s 2.2 percent.      Chart 8
Despite this phenomenal growth in             Texas Population by Age and Ethnicity, 2040
employment, Texas has the eighth highest      Percent
poverty rate in the country and has not yet   80                Anglo            Hispanic
achieved per capita income parity with        70
the nation.
                                              60
     During the 1990s, Texas per capita
                                              50
income grew rapidly — at an annual aver-
age rate of 7.2 percent, which exceeded       40

the nation’s 5.7 percent. Consequently,       30
Texas, which began the decade at 89 per-      20
cent of U.S. per capita income, edged up
                                              10
to 95 percent of the U.S. average by 2000.
                                               0
Moreover, poverty rates in the state               Under 5    5 to 9    10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 to 44 45 to 49 50 to 54 55 to 59 60 to 64   65+
declined —from 18.1 percent in 1989 to                                                                             Age
15.4 percent in 1999 — thanks to a strong
                                              NOTE: Assuming net migration rate to the state is equal to that of 1990–2000.
economy.
                                              SOURCE: Texas State Data Center.
     Although Texans’ incomes improved
during the ’90s, succeeding years have
seen a reversal of this phenomenon.           Hispanics in Texas were poor.10 Their                                   paying jobs. In addition, because the non-
According to 2003 data, the Texas poverty     median household income was $29,873,                                    Anglo population in Texas is far younger
rate rose to 16.3 percent and Texas nomi-     far below the Texas average of $39,927.                                 than the Anglo population, a large per-
nal per capita income fell to 93 percent      This is an alarming number, given the                                   centage of non-Anglos are in their early
($29,372) of the U.S. average ($31,632) as    importance of this segment to Texas’                                    earning years, have scant work experience
the Texas economy slumped into the            future.                                                                 and thus are more likely to have lower
recession that started in 2001 and lasted          Blacks had the second-highest poverty                              incomes.
until mid-2003. The state’s higher concen-    rate (23.4 percent) with a median income
tration of high-tech and transportation       less than that of Hispanics. Anglos fared                               Implications
industries, which were the hardest hit,       best, with the lowest poverty rate (7.8 per-                                 If the income differential between Ang-
intensified the recession’s impact. Hence,    cent) and the highest median household                                  los and non-Anglos persists, a larger share
these industries shed a substantial num-      income ($47,162 in 1999) in Texas.                                      of Texans could be drawn into poverty in
ber of high-paying jobs, pushing down the          The disparity among ethnicities when                               the future. According to the Texas State
state’s per capita income more so than the    it comes to income and poverty is not sur-                              Data Center, the share of households with
U.S. average. Also, Texas’ recovery from      prising. Natives (predominantly Anglo)                                  annual incomes of $25,000 or less will in-
the recession has been unusually weak.9       are far more likely to have a high school                               crease from 30.7 percent (in 2000) to 37.5
     Ethnic Disparities. Among ethnic         diploma and some college education than                                 percent by 2040. Moreover, the percentage
groups, Hispanics are undoubtedly the         immigrants (predominantly Hispanic).11                                  of families with earnings exceeding $100,000
largest segment in poverty in Texas. In       Less-educated individuals tend to be                                    will fall from 11.5 percent to 8.5 percent.
1999, more than 1.6 million (25.4 percent)    lower-skilled workers employed in low-                                  The net impact could be a decline in real

                                                                                              OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS                                    41
                                                                                                                         San Antonio) ranked in the bottom third
                                    Where the Poor Reside in Texas                                                       among major U.S. cities in shares of high
                                                                                                                         school graduates.12
           The poor live all over the state, but the                living in poverty.                                        Again, the statistics vary by race. For
     border metros fare worst, with the highest                          In contrast, poverty levels in the major        instance, Anglos in Texas are more likely
                                                                                                                         to be high school graduates (87.2 percent
     poverty rates (see table ). Although poverty                   metros have rarely been above the state
                                                                                                                         in 2000) than their non-Anglo counter-
     rates declined in the border metros during                     average (see table). However, they have been         parts, especially Hispanics. In 2000, more
     the 1990s as the economy boomed, the                           higher than the U.S. average in some major           than half the Hispanic population in Texas
     share of the population below poverty level                    metros. For instance, since 1989, both San           did not have a high school diploma. Ang-
                                                                                                                         los are also more likely to attain higher
     remained well above the state average of                       Antonio and Houston have recorded poverty
                                                                                                                         levels of education than non-Anglos,
     15.4 percent in 1999. McAllen, Brownsville                     rates slightly higher than the U.S. average. In      excluding Asians. According to the Pew
     and Laredo had more than 30 percent of their                   fact, Houston is home to the highest number          Hispanic Center, Hispanics are half as
     population in poverty, while almost one-                       of poor Texans (623,493). Dallas traditionally       likely as Anglos to graduate from college
                                                                                                                         with a bachelor’s degree by age 26 (23.2
     fourth of those living in El Paso were poor.                   has posted lower poverty rates than the
                                                                                                                         percent for Hispanics versus 47.3 percent
           The picture for the border metros has                    nation, but the recent economic downturn             for Anglos). Much of the disparity is due
     not improved much since 1999. According to                     pushed its rate slightly above the U.S. aver-        to rapid Hispanic immigration into the
     2003 census data, Hidalgo County (McAllen                      age. The higher poverty rates in the Texas           state: immigrants’ wages and education
                                                                                                                         levels tend to be much lower than
     MSA), Cameron County (Brownsville MSA)                         border metros and some major metros may
                                                                                                                         natives’.13
     and El Paso County (El Paso MSA) rank                          be a result of their above-average shares of              Hispanics are expected to make up
     among the top four counties in the United                      international immigrants.                            the majority of the labor force in Texas by
     States with the highest share of individuals                                                                        2040. If this disparity between Anglo and
                                                                                                                         non-Anglo high school and college gradu-
                                                                                                                         ation rates continues, the Texas economy
                                                                                                                         could face several important challenges.
 Poverty Characteristics of United States, Texas and Its Major and Border Metros
                                                                                                                              First, according to the Texas State
                                            Individuals below poverty                        Percent below poverty       Data Center, by 2040 approximately 30.1
         Place                     1989               1999            2003                1989       1999     2003       percent of the labor force will not have a
     United States              31,742,864           33,899,812         35,846,289         13.1       12.4       12.7    high school diploma, up from 18.8 per-
     Texas                       3,000,515            3,117,609          3,508,230         18.1       15.4       16.3    cent in 2000.14 If that occurs, a higher
     Austin                        129,942              134,589            171,373         15.9       11.1       12.8    share of Texas’ workforce would be less
     Brownsville                   101,362              109,288            130,733         39.7       33.1       36.5
                                                                                                                         educated and low skilled, possibly making
     Dallas                        322,604              384,146            488,602         12.3       11.1       13.0
     El Paso                       155,298              158,722            189,596         26.8       23.8       27.4
                                                                                                                         the Texas economy less competitive.
     Fort Worth/Arlington          147,177              171,930            193,427         11.0       10.3       10.7         Second, empirical studies show that
     Houston                       494,457              572,410            623,493         15.1       13.9       14.1    low education levels are associated with
     Laredo                         50,116               59,339                n.a.        38.2       31.2        n.a.   lower income levels; therefore, failure to
     McAllen                       159,216              201,865            238,333         41.9       35.9       38.0    complete high school or college nega-
     San Antonio                   252,301              234,478            266,248         19.5       15.1       16.2    tively impacts average earnings.15 Earn-
                                                                                                                         ings data from the Census Bureau demon-
 NOTE: 1999 poverty data are the latest available for Laredo MSA.
                                                                                                                         strate this point (Chart 9). An increasing
 SOURCES: Census Bureau; Texas State Data Center.
                                                                                                                         number of less-educated laborers would
                                                                                                                         reduce the average income of Texans and
                                                                                                                         in turn decrease tax revenues collected by
income, reduced tax revenue per house-                              invested in Texas’ higher education sys-             the state.
hold and increased burden on the state                              tem returns $5 or more to the Texas econ-                 Third, overall enrollment in public
government to pay for welfare services in                           omy. Hence, it is essential that the educa-          schools is estimated to climb rapidly,
Texas. As the state is likely to depend pro-                        tion system keep up with the state’s                 growing at about half the state’s popula-
gressively more on non-Anglo Texans for                             changing demographics.                               tion growth rate, according to the State
future tax revenues, it is important to                                 Texas’ education record is nothing to            Data Center. Most of this increase in stu-
lessen the existing wage gap and educa-                             brag about. Texas ranks second to last               dent enrollment — Hispanics by almost
tion differential between ethnic groups.                            among the 50 states in its share of the              100 percent and the “other” category by
    Education and the Labor Force. One                              population 25 years or older with a high             71 percent — is expected to result from
way to reduce the wage gap is through                               school diploma (only 77.8 percent). Fur-             growth in the non-Anglo population
education and training. In fact, according                          thermore, in 2003 several Texas cities               because of its younger age structure.
to the Texas comptroller, every dollar                              (Dallas, El Paso, Fort Worth, Houston and                 Thus, state expenditure on public

42            FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
Chart 9
U.S. Mean Earnings in 2002 by Educational Attainment
$120,000

$100,000

 $80,000

 $60,000

 $40,000

 $20,000

       0
              No high       Graduate,        Some         Associate   Bachelor's   Master’s   Doctorate   Professional
                                                                                                                         Home ownership
           school diploma including GED     college        degree      degree      degree      degree       degree
                                                                                                                         is expected to
SOURCE: Census Bureau, Current Population Survey, 2003.
                                                                                                                         increase
                                                                                                                         dramatically
education as well as the number of stu-                           forces affecting the housing market and
dents requiring financial assistance could                        home ownership in the coming decades.
                                                                                                                         for minority
expand rapidly unless socioeconomic dif-                          It remains to be seen what boomers’ pref-              and foreign-born
ferences between races are reduced. Ris-                          erences will be — whether they remain in
ing education costs coupled with slow                             their current homes, trade up or purchase              households in
growth in tax revenues would adversely                            vacation homes. Most boomers are enter-
impact the state’s financial situation.                           ing the stage of life when earnings peak —             the coming
     However, it is naive to assume that                          thus, they may choose more affluent
the current income differential between                           homes or ones featuring amenities more
                                                                                                                         decades, especially
Anglos and non-Anglos will persist                                popular with empty nesters.                            in areas that
unchecked. Empirical research shows that                               The demographic shift of the baby
second and third generations of immi-                             boom generation leaves fewer households                have experienced
grants are more likely than their forefa-                         headed by those in the starter home mar-
thers to have access to higher level educa-                       ket, ages 25 to 34, which could mean a                 high levels of
tion and, therefore, are better equipped                          slowdown in starter home construction.
with skills required for higher paying jobs.                      However, immigrants and minorities, who
                                                                                                                         immigration,
Hence, the wage gap between non-Anglos                            have had historically lower home-owner-                like Texas.
and Anglos is likely to be reduced in the                         ship rates than Anglos, will likely take up
future.16                                                         some of the slack. Home ownership is
     For the Texas economy to remain                              expected to increase dramatically for
robust, it is essential that the state’s edu-                     minority and foreign-born households in
cation system make progress on at least                           the coming decades, especially in areas
two fronts: (1) investing in resources to                         that have experienced high levels of
improve overall student achievement,                              immigration, like Texas. Because Texas’
and (2) developing programs that help                             Hispanic population is younger and faster
bridge the educational attainment gap                             growing than the overall population,
between racial and ethnic groups.                                 many Hispanic-headed households will
     Housing. What does the future hold                           move into the prime home-buying age
for the housing industry as Texas’ popula-                        groups in the coming decades, which
tion changes over the next several                                could give Texas homebuilders a boost.
decades? The aging of the overall popula-                              This has important implications for
tion, along with the baby boomers, will                           the apartment market in the short run as
certainly impact the housing industry in                          well, with Hispanics currently more likely
Texas as well as every other state. The                           to rent than own. According to census
youngest baby boomers turn 40 this year,                          data, in 2002 the U.S. home-ownership
and boomers are turning 50 at the rate of                         rate for Hispanics was 48.2 percent versus
seven every minute and will continue to                           71 percent for Anglos. Thus, Hispanics
do so through 2013 (see Chart 6 ). This seg-                      have the potential to become a much
ment of the population, along with aging                          larger segment of the home-buying mar-
seniors, will be among the most potent                            ket.

                                                                                                      OCTOBER 2005 | FEDERAL RESERVE BANK OF DALLAS   43
Chart 10                                                               tion and will likely make up the majority                  9
                                                                                                                                       Also in 2003, Texas’ median household income
Between 2000 and 2040, Texas’ Health Care                              by the year 2020. Disparities in income                         ($40,674) was below the national average of
Costs Could Grow Faster Than Its Population                            and education between Hispanics and                             $43,564, putting Texas 32nd in terms of median
                                                                                                                                       household income among the states.
Percent                                                                other ethnic groups may be a challenge to
                                                                                                                                  10
300                                                                    Texas and its resources. The state could                        The Census Bureau uses a threshold updated
                                                                                                                                       every year for inflation to determine the poverty
250
                                                                       reduce such socioeconomic differences
                                                                                                                                       level. If an individual’s or family’s income before
                                                                       through increased educational attain-
200                                                                                                                                    taxes and excluding capital gains or losses falls
                                                                       ment and training so that in coming                             below the applicable threshold, the individual or
150                                                                    decades, the state’s workforce will con-                        family is considered poor. See the Census
100                                                                    tinue to be one of the most competitive in                      Bureau’s web site (www.census.gov) for poverty
                                                                       the nation.                                                     threshold schedule.
 50
                                                                                                                                  11
                                                                                                                                       See Orrenius and Viard, 2000.
  0                                                                    Petersen is an associate economist and                     12
          Population     Physician        Days of      Nursing home                                                                    American Community Survey 2003, Census
                          contacts     hospitalization   residents     Assanie is an assistant economist in the                        Bureau.
                                                                       Research Department of the Federal                         13
                                                                                                                                       See “Immigrant Assimilation: Is the U.S. Still a
  NOTE: Assuming net migration rate to the state is equal to that of   Reserve Bank of Dallas.                                         Melting Pot?” by Pia Orrenius, Federal Reserve
        1990–2000.                                                                                                                     Bank of Dallas Southwest Economy, May/June
  SOURCE: Texas State Data Center.                                     Notes                                                           2004.
                                                                           The data used in this article come from                14
                                                                                                                                       Projection provided by Murdock et al., 2002,
                                                                           two main sources, the Census Bureau and                     assuming net migration rate to the state is equal
      Texas’ housing market stands to ben-                                 the Texas State Data Center. The two sources                to that of 1990–2000.
 efit from its rapidly growing and diverse                                 differ somewhat in terminology regarding               15
                                                                                                                                       “Educational Attainment and Border Income
                                                                           race/ethnicity. Thus, in an attempt to keep
 population and its strong pace of interna-                                                                                            Performance,” by Thomas Fullerton, Federal
                                                                           the information consistent within the article,
 tional migration. Real estate firms of the                                                                                            Reserve Bank of Dallas Economic and Financial
                                                                           the authors use the terminology provided by
 future will be wise to market to both the                                 the Texas State Data Center. For more informa-
                                                                                                                                       Review, Third Quarter 2001.
 increasingly older Anglo population and                                   tion regarding the definitions of race/ethni-
                                                                                                                                  16
                                                                                                                                       See Orrenius, 2004.
 the younger Hispanic population. Addi-                                    city, see http://txsdc.utsa.edu/txdata/redistrict/
 tionally, while domestic migration                                        re-report.php and http://www.census.gov/
 dropped off during the recent economic                                    population/www/socdemo/compraceho.html.
                                                                       1
 downturn, a pickup in that segment of the                                 Census Bureau, International Database. For a
 population would benefit Texas housing.                                   definition of total fertility rates, see www.
                                                                           census.gov/ipc/prod/wp02/appE.pdf.
      Health Care. The aging of the Texas
                                                                       2
 population plus a rapidly growing popula-                                 See “The Second Great Migration: Economic
                                                                           and Policy Implications,” by Pia Orrenius and
 tion segment with different socioeco-
                                                                           Alan Viard, Federal Reserve Bank of Dallas
 nomic characteristics than the previous
                                                                           Southwest Economy, May/June, 2000.
 Anglo majority will dramatically affect the                           3
                                                                           Major metros exclude El Paso. The number for
 health care industry in Texas. The number
                                                                           El Paso has been included with the other border
 of instances of diseases and disorders is                                 metros.
 expected to increase in Texas. Trips to the                           4
                                                                           American Community Survey 2003, Census
 doctor, days in the hospital and the num-                                 Bureau, www.census.gov/acs/www/index.html.
 ber of people in nursing care facilities are                          5
                                                                           The term Anglos refers to non-Hispanic whites
 all expected to rise at rates faster than the                             only. The term blacks refers to non-Hispanic
 population growth rate (Chart 10). The                                    blacks of African as well as non-African origin.
 health care industry is currently one of the                              The “Other” category includes all people who are
 fastest growing sectors of the Texas econ-                                not Anglos, not Hispanics and not blacks. Native
 omy and will likely remain so as the need                                 Americans, Asians and multiracial people are
                                                                           grouped in this category.
 increases for long-term care facilities and
                                                                       6
 doctors who treat the elderly and a more                                  All projections provided by “The Texas Challenge
                                                                           in the Twenty-First Century: Implications of Pop-
 diverse population.
                                                                           ulation Change for the Future of Texas,” by Steve
                                                                           Murdock et al., The Center for Demographic and
 Outlook                                                                   Socioeconomic Research and Education,
      During the 1990s, Texas grew even                                    December 2002. Projections used in this article
 faster than expected, becoming the sec-                                   assume population growth due to net migration
 ond-largest state in the nation. Along with                               is half that of 1990–2000 unless specified oth-
 this growth, the population has become                                    erwise. See www.txsdc.utsa.edu.
                                                                       7
 older and increasingly diverse, and today                                 See Orrenius and Viard, 2000.
 it is no longer dominated by an Anglo                                 8
                                                                           Projections are based on the assumption that
 majority. Hispanics account for the                                       the net migration rate to the state is equal to that
 fastest growing segment of Texas’ popula-                                 of 1990– 2000.


 44               FEDERAL RESERVE BANK OF DALLAS | OCTOBER 2005
The Face of Texas: Jobs, People, Business,
Change is published by the Federal Reserve
Bank of Dallas. The views expressed are
those of the authors and should not be
attributed to the Federal Reserve Bank of
Dallas or the Federal Reserve System.

Articles may be reprinted on the condition
that the source is credited and a copy is
provided to the Research Department,
                                  .O.
Federal Reserve Bank of Dallas, P Box
655906, Dallas, TX 75265-5906. This
publication is available on the Internet at
www.dallasfed.org.



Richard W. Fisher
President and Chief Executive Officer

Harvey Rosenblum
Executive Vice President and
Director of Research

Managing Editor
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Research Department

Editors
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Kay Champagne
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