Got Talent?

That’s the burning question companies will be asking in the twenty-first century when they think about where to locate their business. So it’s a question that states will have to be able to answer.

In today’s footloose world, business needs have changed. Fast-growing industries, including those in computers, biomedicine, finance, and health care are thriving in part because they have smart, educated people on board. Old factors—low costs, low taxes and little regulation—are not nearly as important as talent. The bottom line is that growth industries want to be where the talent is.

And states want the talent, too. Differences in college attainment rates statistically explain more than two-thirds of the variation in per capita income among states. In other words, the conventional wisdom holds true—the more education you have, the more money you make. And one recent study found that college graduates pay four to five times as much in state income taxes as high school graduates and that college graduates are much less likely to require expensive health care, welfare or housing assistance.

But do states have the talent required? It’s not clear. As the demand increases, the talent supply in the United States is stagnant.

For decades, the United States has stayed ahead of the talent curve because of the vast number—and high educational levels—of the baby boomers. Since the 1960s, the number of American adults with college degrees has quintupled, and with each retirement wave, older workers have been replaced by younger workers who are better educated.

But who will replace the baby boomers? The replacement pool, Generation X, born between 1965 and 1977, and Generation Y, born between 1978 and 1990, isn’t big enough to replace every retiree. The growth in the American labor force is likely to come from immigrants, not from home-grown workers.

Educational gains are slowing down as well. Between 1980 and 2000, the percentage of workers with a college degree grew from 21 percent to 30 percent. But recent estimates say it is likely to rise to only 33 percent by 2020.

Meanwhile, international competition is growing. Today only 14 million of the world’s 88 million college students are Americans. The entry of China, India and the former Soviet Union into the global trading system has effectively doubled the global labor supply. Now, more than ever, other nations are developing skills to compete for jobs that historically would have been done by Americans.

So states have to assess how much talent they’ve got now—and how they can get more, both by attracting smart, educated people and by creating an educational pipeline that will produce more talent in the future.