Making the Indianapolis workforce more competitive.

• Author: Powell, Philip T.

High-skilled creative talent is the main driver of economic success in metropolitan regions. (9) Transforming regions into hubs for such scarce talent is the focus of modern workforce policy. This occurs both through upskilling current residents and attracting well-trained and well-educated new residents. Talent recruitment has replaced business recruitment as the main concern for economic developers.

Positioning talent as the main driver for economic development is harder for regional economies historically structured and networked for manufacturing. Those economies evolved to support and reward large corporate enterprises, expansive fixed assets, economies of scale and productive use of low-skilled labor. Contrast this with the hallmark of modern competitive regions--well-networked industry clusters of small- and medium-sized enterprises that staff themselves with college graduates, leverage advanced technology and focus on entrepreneurial innovation. (10) The preeminent modern region, Silicon Valley, arose out of farmland and fruit orchards; it was a greenfield venture. (11) Birthing and building a 21st-century business ecosystem amidst industrial-era social and physical infrastructure is a harder task and frames the challenge of Midwestern regions like Indianapolis that were once the economic engine of the nation. (12)

Building a competitive workforce in Indianapolis faces major challenges

Among the 200 largest metropolitan areas in the United States in 2022, Indianapolis ranked 146th in job growth and 120th in wage growth in a report published by The Milken Institute. (13) A 2014 Harvard study placed Indianapolis in the eleventh percentile in economic mobility among U.S. metropolitan areas. (14) Among the 150 largest metropolitan areas, a 2023 analysis from WalletHub ranked Indianapolis 64th in workforce educational attainment and 88th in educational system quality. (15)

The data confirms that workforce transformation can only occur if Indianapolis removes structural impediments to improvements in human capital. (16) Such impediments hold Indianapolis back while other regions advance. In May 2013, average hourly earnings of all employees in Indianapolis were 101% of the national average. Ten years later in May 2023, they were 90% of the national average. (17,18)

A 2022 study from Ascend Indiana and EmployIndy attributes part of this decline to a lack of skilled workers to fill high-paying jobs. (19) Failure to reverse this trend will relegate the Indianapolis region to a peripheral source of value for industries that drive prosperity in the modern economy.

Our analysis focuses on the labor market, industry composition and drivers of economic growth anchoring the metropolitan region. Comprehension of workforce dynamics, employment patterns and demographic trends can help businesses, community leaders and policymakers formulate a strategy that makes Indianapolis more competitive.

Indianapolis and Indiana must confront a geographic poverty trap

Indianapolis is a major anchor for the Indiana economy, setting the pace for workforce performance. The metropolitan area accounts for 39% of state GDP and 36% of state personal income. (20) A population of 2.1 million is 31% of the state's population of 6.8 million. Population growth since 2020 of 1.5% more than doubled the state's growth of 0.7%. (21) Similarly, labor force growth of 3.7% since 2020 was more than twice the state's growth of 1.8%. (22,23)

The metropolitan area's unemployment rate of 2.8% in 2022 was even lower than the state unemployment rate of 3.0%. (24,25) Average employee earnings of $29.84 per hour in metropolitan Indianapolis were 3% higher than the state average of $28.93 per hour in 2022. (26,27) As a workforce leader for Indiana, Indianapolis can generate labor improvements that positively impact other regions in the state.

Table 1 identifies the 20 major occupations (out of 211) in Indianapolis with the highest workforce concentrations relative to national averages using Bureau of Labor Statistics (BLS) data from May 2022. (28,29) By definition, a major occupation represents at least one in a thousand jobs (0.1% of employment) in Indianapolis. The location quotient (LQ) measures relative workforce concentration and is equal to the occupation's local share of employment divided by the occupation's national share of employment. An LQ greater than one implies occupational employment more concentrated than the rest of the nation and signals regional specialization in a certain type of work.

Of the 20 most concentrated major occupations, 13 align with three industries that dominate the Indianapolis economy--manufacturing, logistics (warehousing, storage and transportation) and health care. The Defense Finance Accounting Service (DFAS) headquarters generates the high concentration of financial specialists and payroll clerks, the U.S. Postal Service regional processing facility accounts for the high share of postal workers and the presence of 40 institutions of higher learning explains elevated LQs for science technicians and health specialty educators. (30)

The industries in which a region has comparative economic and geographic advantage naturally drive a disproportionate share of income growth. As witnessed in the Indianapolis region data, such industries typically determine which occupations have the highest relative concentration in a region. Logically, employment in these occupations is expected to grow faster than others.

Except for physicians, financial specialists and health specialty educators, occupations with the highest relative concentration in Indianapolis pay an annual wage lower than the national average. This offers a worrisome explanation for why wage growth in Indianapolis significantly lags the nation. When employment growth structurally depends upon expansion in low-wage jobs, regional economic innovation and productivity are foundationally low. The longer this persists, the stronger a region molds itself to specialize in serving peripheral and low-income segments of the U.S. economy. This seeds an expansion in relative poverty that becomes harder and harder to reverse over time. (31)

The LQ comparisons reveal that occupations with the highest relative concentration in Indianapolis also typically exhibit high relative concentration within Indiana. There is a low average difference of 0.5 between quotients in absolute value terms.

Except for three outliers--payroll clerks tied to DFAS, higher education instructors and staff linked to the regional postal sorting facility--state LQs are above one. This reinforces the position of Indianapolis as a determinant of state workforce and industry trends and is not a surprise given that the metropolitan area accounts for over a third of the state's economic activity. Thus, by extension, Indiana must manage the same geographic poverty trap threat that confronts Indianapolis. Both Indianapolis and Indiana face a race against time in their work to recharge and reinvigorate workforce performance.

Little advancement of the Indianapolis economy since the Great Recession

The Greater Indianapolis Chamber of Commerce (Indy Chamber) benchmarks Indianapolis against four peer metropolitan areas in other states--Charlotte, Columbus (OH), Denver and Nashville--in tracking the performance of the Accelerate Indy regional development strategy. (32) These four regions mimic Indianapolis in terms of size, geography and economic structure but exhibit momentum to which Indianapolis can realistically aspire.

Talent development, business advancement, placemaking and regional brand amplification are the four pillars of the strategy. Affordability, lower crime rates, shorter commute times and higher homeownership rates allow Indianapolis to excel beyond its peers in placemaking. (33) In terms of talent development and business advancement, though, Indianapolis contrasts poorly with its peers. Among 23 performance indicators that are tracked by the Indy Chamber for these two pillars, Indianapolis either lags three or all four peers for 17 of them. (34,35) Among the five regions, Indianapolis scores better than fourth place in terms of net in-migration, poverty rate, venture capital, foreign exports per worker and completion of associate degrees and professional certifications.

Table 2 presents a comparative analysis of the trajectory of Indianapolis, its four peer regions and the United States since the Great Recession in terms of real gross domestic product (GDP), which is GDP that's been adjusted for inflation. Divide total real GDP in a geographic area by its population to derive per capita real GDP. Per capita real GDP is the best-established index of economic development for a region. Divide real GDP by employment to get real labor productivity. Real labor productivity measures workforce quality and the earnings potential of jobs in a region. Growth in both must match other regions for a metropolitan area to preserve competitiveness. Between 2007 and 2021, per capita real GDP grew 16% in the average peer region and 14% nationwide, but only 1% in Indianapolis. During the same period, real labor productivity grew 19% in the average peer region and 18% nationwide, but only 3% in Indianapolis. With growth rates barely above zero, Indianapolis experienced little to no economic development or workforce advancement during a 14-year period.

Indianapolis missed the opportunity wave that significantly transformed the economies of other metropolitan areas. Despite anemic real productivity gains, employment in Indianapolis still grew 14%. This means job expansion in Indianapolis occurred primarily in low-paying occupations not tied to the most innovative sectors of the national economy.

Among peer regions, Nashville performed the best. Per capita real GDP in Nashville went from 88% of Indianapolis in 2007 to 108% of Indianapolis in 2021. Nashville's total real GDP growth was more than triple that of...