University's steadying influence can help region weather economic storms

By Martin Shields, contributing writer

Economists – typically a gloomy bunch even on their sunniest days – are increasingly pessimistic about the national economy in 2008. A number of prominent observers, including former Federal Reserve Bank Chair Alan Greenspan and Former U.S. Treasury Secretary John Snow, have warned that the U.S. economy could head into a recession later this year. Colorado's economy tends to follow U.S. trends, and most state forecasts predict a significant slowdown in employment growth as well.

While our predictions for Northern Colorado are not so bleak, our models show regional job growth will be tepid this year. One of the reasons that the Fort Collins area may not be hit as hard as the state or the region is the prominence of Colorado State University. While the University does not make the region recession-proof, its steadying influence can help the area weather national storms.

Typically, the local economic impacts of universities are felt in myriad ways. Of course, the most important is employment provided by the institution itself. For example, CSU employed more than 7,500 workers in 2007, generating more than $300 million in payroll. And most of these workers live in Larimer County, thus helping provide a steady stream of customers to local restaurants, shopping centers, and service providers.

The university effect

Nearly 25,000 CSU students also create significant local economic impacts. Through their spending on housing, food, and the like, CSU students are critical in helping maintain local vibrancy, especially in the areas near campus.

A study recently released by the state’s Department of Higher Education documents the magnitude of these types of spending activities on the state economy. Overall, the study shows that higher education in Colorado accounts for almost 98,000 jobs and annual economic activity totaling more than $4.25 billion.

While such spending is certainly crucial to local economic stability, CSU’s steadying influence goes beyond these impacts. In particular, through technology spin-offs, licensing, and other forms of business assistance, the University helps create and support important economic activity in a diversity of sectors both in Northern Colorado and across the state.

One of the most exciting new regional initiatives is AVA Solar, a photovoltaic company that is expected to provide more than 500 manufacturing jobs, which has been well-documented in Competitive Edge. But there are numerous other CSU start-ups, as well, including Heska Corporation and Solix Biofuels.

And other firms are attracted to the University’s ability to draw and fill the talent pool. For example, In-Situ moved to Fort Collins from Laramie in 2004 due to its need to need for workers with specific skill sets that were not sufficiently available in Wyoming.

Growth of worker earnings

The role of universities as economic engines has been a topic of interest in economics research over the past 15 years. In a 2004 study, Harvey Goldstein and Catherine Renault of the University of North Carolina found that the research and technology creation efforts of universities indeed have a positive and statistically significant effect on the growth of average worker earnings in U.S. metropolitan statistical areas (MSAs).

The magnitude of these effects depends on city size. In a follow-up 2006 study, Goldstein collaborated with Joshua Drucker to look at how the impacts of universities vary by MSA size. One important finding is that university research and development expenditures are most pronounced in medium-sized MSAs, such as Fort Collins-Loveland (i.e., those having between 75,000 and 200,000 non-farm jobs). The authors conclude that "the medium category seems to represent the one size for which a research base is extremely important to regional economic development."

The authors attribute this finding to the concept that universities can act as forces of agglomeration.

Size matters

One widely held view in the economic development of cities is that size matters. In this theory, large cities develop competitive advantages through the geographic concentration of economic activity of both related and diverse businesses. These benefits arise through shared business service networks, common labor pools, and the like. Such concentration leads to important spillover effects across businesses that typically only arise in very large places.

Many regional economists think that cities such as Fort Collins are still too small to generate notable agglomeration effects. Goldstein and Drucker, however, argue that research universities can substitute for these critical agglomeration forces in medium-sized cities.

Viewed as a whole, then, research universities can play a significant role in helping the region and state through turbulent economic times.

Martin Shields is a regional economist and an associate professor of economics at Colorado State University.

Sources: "The Economic Development Impacts of Universities on Regions: Do Size and Distance Matter," Harvey Goldstein and Joshua Drucker, Economic Development Quarterly 20(1):22-43, 2006.