The Montana Wage Disparity 

Pat Barkey | Director, University of Montana Bureau of Business and Economic Research 

I’d like to spend a few moments talking about a problem that is too important to ignore. That is the fact that Montana is a low wage state.

In fact we are among the lowest in the whole entire economy. It is difficult to speak dispassionately about this situation; it is about how much money people make and that can be quite personal. But we need to speak about this dispassionately as a policy problem if we are to make any progress. It’s not just your low wages or my low wages, it is the entire economy’s low wages and it is a serious problem.

So let’s start talking about what that problem is. First let us look at Montana’s ranking in terms of earnings per job. Earnings per job are precisely that, they are the wages and salaries that we earn as payroll workers in the state of Montana divided by the total number of jobs. So it is the average pay rate per job.

If you take all the 50 states and compute the average earnings per job, you find that Montana in the last 21 years has ranked 48th, 49th, or 50th. In fact in 2009 our earnings per job, which is about $33,761, ranked us 49th among the 50 states, ahead of only South Dakota. In that same year the United States average was $45,550.

This is the scope of the problem we are dealing with.

It has some very important consequences. Not only are low wages bad for our own individual economic well-being, but low wages for the entire economy make us a poor tax base state. As a state we can’t afford to buy the same kinds of roads, the same kinds of universities, the same kinds of parks, as states with higher wages. And that is a concern for all of us.

So this is a big issue. I think it is one we need to squarely confront.

Now what we really need to understand is why Montana has low wages. Here what I would like to do is start with just a couple reasons which are not the reasons Montana pays low wages. For example, Montana is not a low wage state because Montana employers are overly greedy or excessively cheap. There is absolutely no evidence that suggests that Montana employers are any different than anywhere else. They’re not simply pocketing extra profits because they are paying us low. It is also not because Montana is a beautiful state. It is often said that Montanans are willing to work for less because we get to enjoy the wonderful environment that we live in. There is some evidence of what is called the amenity effect of wages, a number which supports this hypothesis. But it is pennies on the dollar for the differences that exist between Montana wages and wages elsewhere.

What we really need to understand is that wages are an entity which is ultimately anchored by the value of what we as workers produce. It is not possible for employers to pay wages which are excessively higher or lower than the value of what we produce. So if we get back to trying to understand where wages come from, ultimately it will be anchored by the value of the goods that we produce.

This is an even less thrilling outcome to realize that we make less money, to then be told by an economist like myself that the value of what we produce is lower than other states.  And yet we have to recognize this fact and some of this is because of reasons which are benign, which has nothing to do with us as workers, and other reasons which are fundamental to what we do in our jobs.

The first reason has to do with what the mix of economic activity is in Montana. If you look at all the kinds of things we do to earn a living in the state, we can classify ourselves into a number of discreet industries: retail trade, manufacturing, wholesale trade, and other industrial classifications for our businesses. Some of these pay more than others.

We can split these industries into high and low paying industries. The highest paying industry in the United States is something called management of companies. Second highest is mining, next is finance and real estate, and technical and manufacturing follows. These are the top paying industries in the U.S. If you look at the shares of employment which exist both in Montana and in the United States, what you see is that with the exception of mining, Montana has light shares. For example in manufacturing the national average in 2009 was about nine percent of the U.S. workforce; Montana was a lot lower than that with only four percent.

In other words, Montana has a lower presence in the industries which typically pay higher wages. And that is one reason for our low wage.

On the flip side are the lowest paid industries: accommodation, food, retail, and arts and entertainment. These are industries where Montana has a higher than average presence. So we have higher than average percentages of employment in these industries, and all of them are low paying industries. That contributes to us being a low paying state.

But sadly even if you look within the high paying industries and see the rate of pay of Montana workers vs. the United States, you find that even within these very specific categories, Montana in industry after industry pays less than the U.S. average. And in some cases particularly less. If you look at finance and real estate, where the US average wage is over $83,000, the Montana number is much less at under $50,000.

What that is saying is that the jobs that Montana workers have in those industries are fundamentally different and they are typically different in their scope and responsibility. So if you are a banker in New York you are much more likely to be involved in a national or international enterprise. Whereas in Montana you are more likely to be a branch manager in a smaller community where you are managing less funds and so forth. Those are the easiest examples to understand.

By the way, these are all averages. This does not mean that if you stay in Montana you are going to make a wage that is less than your U.S. counterpart. But the averages speak for the entire economy, and this is something that is very important for policy makers to really take on, roll up our sleeves, and understand.

That gets to the real issue: What can be done about it?

I think the first thing we need in talking about Montana’s low wage status is to simply throw away, cancel, or somehow neutralize the existing class warfare rhetoric that exists about this issue. It is not about the distribution of the pie. It is not because workers need to organize, bargain harder, and get more money out of the greedy owners, which is essentially shifting pieces of the pie from one piece to the other. It is not the pieces of the pie. It is the size of the pie.

We also need to look very seriously, and look as researchers, and understand that it is not all about taxes. It is not even mostly about taxes. It is not an issue of Montana’s onerous tax environment or onerous legal environment that has led us to this outcome. I think you have to conclude this is not a problem for which we should plug in our favorite solution. It is a problem which is very specific. In fact, denial and finding scapegoats is really something we have been very good at. We’ve been doing it for decades. And as we have seen absolutely nothing has changed.

We need to understand that our state government did not cause this problem. Our state government cannot pass a law to fix this problem. It is not that easy. State government can lead efforts to address the problem. State government can facilitate and they can create an environment in which growing higher paid jobs is easier. That is what we can expect from state government. But this problem will take more.

In fact that is really one of the first things we need in order to address this problem. The first thing that is apparent, but I think a lot of people choose to ignore, is that the natural evolution of the economy, which is happening all around us, is not solving this problem. We have evolved in America as we have in Montana into a services economy. We’ve evolved into a situation where we have more workers employed producing services than we are producing physical goods. That has happened everywhere. And yet Montana remains a low wage state. So the natural evolution of our economy, our dismal ranking compared to other states, should instruct us that inaction has not changed the result.

I think the other thing we need to understand, a bit more difficult, is that this is primarily a private sector outcome. We can’t solve the problem by paying state workers more. It has to come about in the private sector. In the case of the private sector it is going to take private sector investment, incentives, and development. It is like a natural organism that needs to be steered in a new direction.
Really what we need to understand about Montana’s low wage status is that it is not going to be solved by all of us making more money doing the same thing we do now. There isn’t a worker in America that wouldn’t want more money to keep doing the same thing. If you’re looking at the entire economy, that is simply not going to happen. It is the nature of our jobs that has to change and that will go along with increasing our pay.

I think the second thing we can do is to really take a candid look around to see what kind of work and what kind of activities are associated with high pay and then try to understand what, if any of those ideas or initiatives or actions, can be transplanted successfully in Montana. When you look at the path to high wage jobs, there are really two complementary paths. In the traditional goods-producing side of the economy, high wage jobs are usually associated with high rates of capitalization. This means mechanized, automated factories and workers working with expensive machines that enables individual output to be very high and thus supports a very high wage for those workers. That does exist in Montana and there is room for growth particularly in our energy sector. You can take a coal worker who, combined with a truck, can load up 400 tons of coal. That is a tremendous value from one worker. High mechanized environments are certainly something that Montana can work to improve.

But the bulk of the economy today, particularly concerning labor, deals with the services economy.

Many people equate services with low pay, and that is not true. In fact services are the highest paying jobs in the economy, particularly services which require specialized skills. Specialized skills, what do I mean by that? A lawyer has specialized skills above a sales clerk. A lawyer makes more money than a sales clerk because they are specialized. Specialized skills start with our education system. But that is only the first part. They also grow by developing industry and developing niches that can support and grow our work force. Skills are basically our education and our experience.

Secondly we need specialized demand. By this I mean larger markets. Large markets can support many different types of niches. If you have smaller markets, they require generalist jack-of-all-trades, which typically support smaller wages. So links to larger markets are critical. That is one reason why many economists, many researchers, think that large wages are now and will always be an urban phenomena, and they are very difficult or impossible in the services economy in smaller areas.

Finally we should recognize what kinds of companies pay high wages. Of course it depends on industry, but we need to also recognize that it is larger companies which pay higher wages on average. This really bucks the trend of Montana. We think of ourselves with pride as being a small business state. Well, there is a cost to being a small business state. And we have seen that with respect to our wages.

So what can our leaders do about this situation? Here I’m going to offer just a few suggestions. We expect our leaders to take action on this difficult problem. One thing that is typically mentioned with leadership is typically called strategic action, which is essentially trying to pick winners or industries to support. Trying to understand what kinds of high paying industries could locate in Montana and then using public resources to try to nurture and grow those industries, whether through tax breaks, special incentives, etc., is certainly very appealing but it also has a less than successful track record. It is difficult to pick winners for those in the private sector; it is even more difficult for the public sector, which is typically risk averse, to pick winners.

A second thing is nurturing a legal and tax environment for business growth. That is always important. That is not just important for high paying jobs, it is important for all types of jobs and certainly something we should be doing all the time. But I would like to stress that it is not just the tax side, but also the services side. What kinds of services can government give us? How prompt and efficient are reviews? How professional is the support that industries get from the regulatory agencies they deal with?

But I’d like to just close with two other points because these are not mentioned as often. The first is what I would like to call infrastructure, both the physical and social infrastructure of the state of Montana. We are a different state. We are geographically distant. Transportation access is absolutely vital if we’re to grow markets of the size that can support the specialized industries which ultimately pay higher wages. The physical infrastructure is vital.

But so is the social infrastructure. By that I mean universities, support for education, and support for innovation. Montana pays the lowest amount of state support in higher education of any state in the country, by a large factor. Our state support for higher education is one-fifth the size of the most generous state, which happens to be Minnesota. Is that consistent with growing a work force with specialized skills? I would argue no. That is both a cause and an effect of being a low wage state. Somehow that vicious cycle has to be broken.

Finally I would mention our culture of business. There are some things about Montana which are inconsistent with aspirations for being a low wage state. Higher wages are associated with things we don’t like to associate with Montana, like urbanized environments and big business. There is no reason why we should necessarily trust or love big business, but as a cultural perception certainly bashing big business and furthermore simply using that term is something which the longer it remains in our dialect, the harder it will be to grow and support and get investment for businesses in this state. That is key to growing our wage base.

The low wage in Montana is something that we can stuff under pillow and ignore for another 20 years and we’ll get the same outcome for those 20 years. I believe it is a bi-partisan issue. I don’t think there is any worker or company in Montana that doesn’t wish they had higher wages. Companies like to retain their work force as well. They would like to pay the kind of wages that can attract and retain a talented work force that might be attracted to other states.

It is something we are not going to grow out of, everyone agrees it is needed, but it is a hard problem because it requires us to not simply trend along with the rest of the country, but to actually do something so that we can grow our economic base, so that we can actually overtake other states, so that we can become at least a higher paying state.

Thank you very much.