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Reseeding growth in the Garden State

By Tyler Duvall, Mike Kerlin, Paula Ramos, Zachary Surak, and Steve Van Kuiken

The Garden State can build a future-oriented, high-growth economy by addressing challenges in business, infrastructure, investment, and its workforce.

New Jersey has a strong, diverse economy, but it has not lived up to the full potential of its economic advantages. The Garden State has had a slow recovery from the global recession and lags the nation in both GDP and productivity growth. However, our economic analysis suggests that the state can reignite growth by addressing four issues: a shortage of young fast-growth companies to drive job creation, costly and inadequate infrastructure, too few middle-skill workers for today’s jobs, and modest returns on economic incentives.

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The trauma of the 2008-09 recession left many states, including New Jersey, reeling. And, like other places—and the US economy overall—New Jersey has not gotten back to the rate of growth seen before the global financial crisis. However, the state has an outstanding opportunity to build on its many strengths and become a growth economy. New Jersey remains one of the top states in terms of GDP. Its people are among the country’s best educated, and household incomes are among the highest in the country. New Jersey is a leader in finance, technology, and advanced manufacturing. It has a uniquely advantageous location for participating in international trade and providing logistics services on the Northeast Corridor.

Yet New Jersey has underperformed the rest of the nation in terms of GDP growth for two decades and has had a slower recovery than other states since the recession (exhibit). US GDP advanced by 1.4 per cent per year from 2005 to 2015, but growth in New Jersey averaged just 0.3 percent. Employment and median income in the state were flat between 2006 and 2016.

New Jersey has been trailing the US economy since the 1990s

In a new report, Reseeding the Garden State’s economic growth: A vision for New Jersey, McKinsey’s New Jersey Office, with assistance from the McKinsey Global Institute, traces the sources of slow growth and identifies ways to re-accelerate growth in the nation’s eighth-largest state economy. According to the research, four factors have been limiting the dynamism of New Jersey’s economy, depressing growth:

  1. The state has relatively few young companies that have grown into major employers.
  2. Aging transportation infrastructure exacts a toll on productivity and high maintenance costs divert public funds from other uses.
  3. There is a growing shortage of middle-skill workers (those with some post-secondary education but without a four-year college degree) with the training for new jobs in areas such as health care.
  4. Other states get higher returns on economic incentives for businesses, partly because they focus more on young, high-growth companies. New Jersey’s economic incentives have focused more on retaining jobs.

New Jersey has an opportunity to convert the forces that are inhibiting growth into growth enablers, by adopting best practices of other states and using its own best practices more broadly. If it does and again matches the US GDP growth rate, we estimate that New Jersey’s GDP could be more than $150 billion higher a decade from now. This would also create more than 250,000 additional jobs.

For example, New Jersey could follow the lead of other states to improve the environment for fast-growing young companies, which are the leading source of new jobs nationally. Today, few New Jersey startups reach large scale: only 5 percent of large businesses in the state are ten years old or younger, compared with 11 percent across the United States. New Jersey could help more companies scale up by emulating states such as Indiana, New York, and Tennessee, which have improved access to financing for startups, reduced regulatory burdens, and established public-private partnerships to nurture young companies with incubators and accelerator programs.

One of New Jersey’s biggest challenges is its transportation infrastructure. Traffic congestion costs New Jersey motorists $5.2 billion per year in wasted fuel and lost time. Businesses lose an incalculable amount of productivity to delays in moving supplies, goods, and personnel. Congestion ranks second only to the high cost of doing business as the reason companies cite for not locating or expanding in New Jersey. Business leaders rank New Jersey 44th among states for infrastructure quality. The massive cost of maintaining existing infrastructure keeps New Jersey from addressing the basic causes of congestion. Other states have found ways to fund improved transportation infrastructure through optimized capital spending (stretching infrastructure dollars through better project selection and management), rebalancing traffic flows, and transit-oriented development.

While New Jersey has a highly educated labor force compared with other states, it still faces skills mismatches in its labor market: too few middle-skill workers are trained for today’s jobs in fields such as health care and transportation. Contributing to this shortage is the outmigration of millennials. Other states have gone further than New Jersey in launching effective public-private efforts to address these skill gaps. New Jersey has a smaller share of young workers in apprenticeship programs than the United States overall and states such as Pennsylvania and Maryland have done more to work with schools and local employers to prepare workers for employment in industry clusters and create community college programs that certify workers for in-demand jobs.

Finally, New Jersey has a particular opportunity to target fast-growth young companies and investors with incentives. On average, states spend 40 cents for every dollar of corporate investment they induce through tax abatements and other incentives. Between 2010 and 2016, New Jersey offered $1.80 in incentives for every dollar of capital spending by the companies it targeted. New York paid 20 cents for every dollar of new private investment. Other states, such as Virginia, get better returns by continually monitoring programs and strictly enforcing terms—and pursuing claw-backs when necessary.

The Garden State faces a complex and multi-faceted growth challenge. By addressing these four issues, New Jersey has the opportunity to boost productivity and growth. It will take dedicated efforts by the public and private sectors, and the involvement of residents, to solve these problems. By focusing on its unique strengths, New Jersey can emerge with a future-oriented economy and serve as a growth leader nationally.

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