Why Walker’s Job Strategy Has Failed

He’s followed a much-touted strategy used by successful companies. Why hasn’t it worked?

By - Oct 17th, 2013 12:19 pm
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In his campaign to become Wisconsin’s governor, Scott Walker famously promised the creation of 250,000 private sector jobs by the end of his term. It is no secret that Wisconsin is on track to miss this target by a long shot. As the chart below shows, forecasting models based on current trends predict an increase of approximately 120,000 new private sector jobs by the start of 2015, about half the number promised. The blue line at the bottom shows how jobs have grown under Walker and (where the line gets very straight) how jobs are likely to grow over the last 18 months of his term.

New Wisconsin Private Sector Jobs

New Wisconsin Private Sector Jobs

The green line at the top shows job growth during this same period in the average state. It reveals that since Walker took office, Wisconsin’s rate of job creation has lagged well behind the nation. If Wisconsin had enjoyed that level of job growth, it would be on track to add around 190,000 private sector jobs over the four years of Walker’s term as governor, still short, but much closer to the rate of growth he promised.

The decision to count only private sector jobs actually serves to make Wisconsin’s job creation record look better than if all jobs were counted in the goal. Local government jobs have declined in Wisconsin even as they have increased in other states.

Wisconsin’s divergence can be seen by comparing its job growth with that of contiguous states. Wisconsin is behind Michigan, Minnesota and Iowa and competes with Illinois for last place.

Percent change in Nonfarm Employment Since 2011

Percent change in Nonfarm Employment Since 2011

Another sign of weakness in the Wisconsin job market is the behavior of the unemployment rate. As the Walker era started Wisconsin’s unemployment rate was well below the national average, but the gap has been shrinking. By contrast, Minnesota’s advantage over Wisconsin has been growing.

Unemployment Rate

Unemployment Rate

To achieve the promised 250,000 jobs, Wisconsin would have to add jobs at the rate of over 10,000 per month during the remaining months of the governor’s term. This is four times the rate up to now. But there is no evidence the growth has picked up in recent months.

These results raise the question of why candidate Walker was so confident that Governor Walker could create 250,000 new private sector jobs. Was this simply campaign rhetoric designed to win the election? To the contrary, the evidence suggests Walker genuinely believed that he had been given a model that would allow him to fulfill that promise.

This model promises healthy job growth if a state adopts certain government policies. Variations of this model are widely pushed by a small army of organizations on the right side of the spectrum, including think tanks, publications, trade associations, and lobbyists. It promises job growth through taxes that are low, a flat, limited government, and low labor costs. Among the many organizations pushing this model are the American Legislative Exchange Council (often called ALEC) and CEO magazine.

The model is spelled out in rich detail in a report entitled Rich States, Poor States, published annually by ALEC. It lists 15 “policy areas” (actually metrics) used to rate the states. These metrics, shown in the box below, help identify the factors most important to the model.

Alec's Rating System

Alec’s Rating System

In the business world a firm that builds its strategy around aggressively reducing costs and prices is described as following a “cost leadership” strategy. Businesses successfully following this strategy relentlessly drive down costs and prices. Well-known examples are Wal-Mart and McDonalds. In essence, ALEC and its sister organizations are advocating that states follow the example of companies like this.

While easy to describe, a cost-leadership strategy is often hard to implement effectively. The business landscape is littered with firms who tried and failed at a cost leadership strategy, when unable to lower their costs as much as competitors. Even firms successfully following this strategy find profits under constant pressure from competitors following the same strategy.

Do states adopting a cost-leadership strategy enjoy greater economic success? Many of the organizations advocating for this model also publish state business climate ratings based on how well states conform to it. These ratings allow one to test whether coherence to the model results in higher job growth and lower unemployment. One of these ratings, from Chief Executive magazine based on a survey of its subscribers, offers a good measure of which states are judged to follow the cost-leadership mode. As touted on the governor’s web site, Wisconsin has advanced from 41st to 17th during the Walker years.

The chart below shows a scatter plot of CEO magazine ratings (I have reversed the measure so that higher-ranked states are on the right) versus state unemployment rates. The graph shows that higher ranked states are just as likely to have high unemployment as lower-ranked; overall, there is no evident relationship between these state rankings by CEO magazine and each state’s level of unemployment.

Unemployment vs CEO Rankings for All 50 States.

Unemployment vs CEO Rankings for all 50 States.

And next is a comparison with recent job growth, which again shows higher-ranked states (toward the right) are just as likely to have low job growth as lower ranked states.

Job Growth vs CEO Rankings

Job Growth vs CEO Rankings for all 50 States

Despite the presence of several highly-rated energy producing states (unsurprisingly, the state with the highest job growth is North Dakota in the midst of an energy boom), the relationship between job growth and rankings is not statistically significant. Using rankings from other like-minded organizations and job growth over different periods gives similar results: the connection between success in the ratings and success in job creation is weak at best. Thus it appears a cost leadership strategy gives states little or no advantage in creating jobs.

Why haven’t states adopting the cost leadership model performed better economically? Several factors may be at work:

  • The very popularity of the cost leadership model means that a state adopting it will have lots of competition. With few exceptions, states with Republican governors follow this strategy. Savvy private-sector firms, by contrast, often search for underserved markets. For example, one tool used by business is perceptual mapping, in which competitive products are plotted on various scales, so that, for example, breakfast cereals may be mapped by taste versus nutrition. One aim of perceptual mapping is to find markets that are poorly served by existing competitors. By contrast, advocates of a cost-leadership strategy promote the same strategy for every state.

A state adopting a cost-leadership strategy is most likely to enjoy success in markets with few competitors; if for example, it is part of a regional market where only one or two states are using this strategy.

Advocates of a cost-leadership strategy often single out Texas as successfully using that strategy, enjoying strong job growth combined with low taxes and regulation.  The US Chamber of Commerce, an advocate of a cost leadership strategy, rates Texas as 3rd in short-term job creation, compared to 50th for Wisconsin. But Texas also underlines the social costs of a cost leadership model. Its 2011 poverty rate was 17.4% compared to 13.1% in Wisconsin and one quarter of its residents had no health insurance compared to 10% in Wisconsin.

  • As the Texas example suggests, to have a chance at successfully implementing the cost leadership model, Wisconsin may have to discard other strategies. People studying business strategies warn that firms that try to follow more than one are generally unsuccessful in either. This implies that a cost-leadership strategy may foreclose other strategies such as one based on quality of life.

An organization called the Information Technology and Innovation Foundation (ITIF) publishes a rating of the states, called the New Economy Index, listing “which states are thriving in innovation in the new economy.” A number of states rated low by CEO magazine are rated high by ITIF. For example, CEO rates California and New York at the very bottom, while ITIF rate them as numbers 4 and 11. Massachusetts, ITIF’s number 1, comes in as number 47 on CEO’s list. Only Virginia lands in the top ten on both lists. There is a statistically significant negative relationship between the two lists.

  • The rigid ideological principles underlying the model may make it hard to develop pragmatic responses to a state’s economic challenges. Underlying the model is a belief that government is bad, reflected in the decision to count only private sector jobs in Walker’s promise, suggesting that public sector jobs aren’t “real jobs.” The current weak economy is characterized by weak private-sector demand. In such a situation firms are unlikely to increase hiring until they see the need to do so to meet demand. But without more jobs, consumer demand is likely to remain sluggish. As Jack Norman points out, several of Walker’s initiatives, by cutting both public sector jobs and compensation, would have served to further depress consumer spending.

The model’s bias against progressive tax rates could also work against increasing consumer demand, since low-income people are much more likely to spend any extra income than those higher up. In a recession a strategy that keeps the top state income tax marginal rate, while expanding the earned income tax credit, is likely to be more effective in stimulating spending.

Without the analysis of more data, one cannot say for sure how much these and similar decisions explain the weakness of Wisconsin’s recovery, but they certainly contributed to it and undercut the jobs promise. That the Walker administration nevertheless adopted these counter-productive measures is evidence of the powerful hold the ideological underpinnings of the cost leadership model had over the governor and the people advising him.

In the upcoming gubernatorial election both the direction and the results of the Walker economic policy will be well defined. Much less clear is how a Democratic policy would differ. The burden will be on the Democratic candidate to advance a credible alternative.

Categories: Data Wonk, Politics

5 thoughts on “Why Walker’s Job Strategy Has Failed”

  1. Mike Bark says:

    Walker has 2 problems on this issue:

    1. The pledge itself was stupid to vein with. Politics 101 says you should never offer concrete numbers like this because if you miss the goal you will lose people. Put it this way, Mary Burke won’t be offering any concrete numbers like this and will only be offering vague platitudes. Had Walker simply said that he’d improve the economy he could point to several metrics that show the economy has been better. Instead, he’ll be saddled with the promise.

    2. Unfortunately, Walker has done ZERO to actually improve the business environment. Getting the budget under control has some merits, but I can say that as a business owner it’s not something I spend a ton of time worrying about. They passed a tepid tax cut that still keeps taxes higher than they were for the majority of Jim Doyle’s tenure.

  2. D says:

    75% of the jobs being created in this country are part-time and most probably low wage. Nothing Scott Walker or any politician does at this time is going to make a difference. I’m glad we have state finances under control. Get back to me about jobs when the economy improves. Arguing about who created the most McDonald’s and WalMart jobs is pointless.

  3. Bruce Thompson says:

    To Ed Heinzelman,
    Thanks for sharing your calculation. The Wisconsin employment reports offer some evidence in support of your thesis that the supply of workers makes the Walker jobs promise infeasible. The preliminary August reports shows unemployment of 205,600. Thus far 80,000 jobs have been added in Wisconsin during Walker’s term, leaving 170,000 to go on the promise. This implies that fulfilling the promise would have taken unemployment to almost zero, an unrealistic expectation.
    But, that said, the available evidence is that the jobs shortfall is a demand, not a supply, problem. If Wisconsin had added jobs at the same rate as the average state, half the shortfall projected for 2015 would disappear. But everyone agrees that national job growth has been disappointing. If national job growth were more robust and Wisconsin tracked that growth, a 250,000 gain would be in sight.
    In fact, one organization argued that the 250,000 promise was too low to bring Wisconsin employment back to the level it enjoyed before the crash, when population growth was included.
    I suspect that most of the explanation for the difference lies in the fact that there are many potential workers who are not counted as part of the labor force since they are not actively looking for jobs, but would be available if the jobs market were better.

  4. David Ciepluch says:

    Wisconsin has been in manufacturing decline for decades and permanent jobs losses from all the various plant closures of the decades and in recent history like paper mills in the Fox Valley, and car companies in Milwaukee, Kenosha, and Janesville are difficult to replace. It takes cooperation by all parties and viewpoints, and not the toxic spew of leadership that currently resides in our state government.

    The City of Madison has a near recession proof economy with the presence of State Government and the flagship university with 43,000 students. Many of of us citizens feed money into that local economy. In many ways Madison is in their own bubble economy.

    It takes cooperation, solution solving and planning and implementation by many over time by business interests and changing political administrations to provide a positive atmosphere for business development. You cannot have a governor and his cronies break promises to citizens, trample on past plans and progress, install ALEC fascist laws that citizens did not ask for, and steal 18% of their wages and not expect a negative fallout across the board. Plus turn back any federal funding for rail development and healthcare after Wisconsin being a net federal contributor of our tax dollars for over 100 years, and not feel negative economic outcomes. The state atmosphere is toxic with Walker’s rancid fascist stench and sell out of the citizens for his own personal gain.

    All tax breaks, state and federal, for decades that went to large businesses and the ultra wealthy have been a negative impact on the economy as it pulled dollars from consumers and out of the state. Public workers shop at local businesses and the shock to their salaries meant less local spending and sent some small businesses were swept out of existence in the negative tide. The very idea that large business creates jobs is a myth and actual tax breaks they have received since the 1980s have been used to off shore jobs and plants for a net job reduction of more than 3 million nationally over the last 15 years, and net creation of 2.3 million overseas. The recent chaos created by the right-wing concrete heads has cost the country an estimated $24 billion in lost economic activity and 300,000 jobs. Since 2010, their obstruction in seeking actual solutions through cooperation is estimated in losses in the trillions and 3 million jobs nationally.

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