Tuesday, July 13, 2010

Marcellus Shale, Dutch Disease, the War for Talent and parachute workers

Leaving aside any controversy, take as a given that Marcellus shale is going to have a big employment impact across Pennsylvania.  Even so, is that an unambiguiously good thing? 

Economics can be awfully counterintuitive sometimes. 

There is a concept in economics called “Dutch Disease”, otherwise known as “resource curse” or more stylistically as the “paradox of plenty”. All the talk of how big the Marcellus boom is sure raises the spectre of a Dutch Disease impact across some areas of Pennsylvania. It’s already been raised as a concern for parts of Canada which have similarly been impacted by high energy prices in recent years.  Natural Gas booms are not new within the US and from a few years ago at least one Wyoming paper once asked: When is Boom a Bust?  All variations on a theme.

The overall veracity of Dutch Disease can be debated. It is usually, though not always, talked about in the context of developing economies. What really got me thinking about this was remembeing some papers by former CMU economist Seth Sanders and colleagues looking at the legacy impact of past energy booms on Appalachian regions. It’s hard not to think there might be analogies today. Read:

The Opportunity Cost of a High School Education: Evidence from the Coal Boom and Bust, by Dan A. Black, Terra G. McKinnish and Seth G. Sanders. April 2004

The conclusion is pretty clear that energy booms in mining communities had the impact of pulling down educational attainment rates and pulling down lifetime earnings potential.  Potentially it is the human capital extension to Dutch Disease.  The question is whether anything similar is part of what is happening now?

Yes, I know a lot of these jobs are highly skilled.  Which brings up something I was thinking about over the weekend.  Where are the mostly highly skilled workers coming from? This is more counterintuition. Think about this news story from the weekend:  Airport traffic rises a 2nd straight month.  I have a strong suspicion that a large part, if not all, of the 1.5% increase in number of passengers at the airport this May versus last May is being generated by Marcellus shale-related workers. As many know, most of the Marcellus shale workers are not local hires, but folks coming in on short assignments... often as short as a week at a time, from traditional oil and gas regions of the country.  A lot of those folks are flying in and out of Pennsylvania through Pittsburgh and are showing up in the numbers.  Flying in and out like that generates a lot of passenger-trips.

Let's add up some numbers.   The story says the May 2010 passengers at the airport came to 709 thousand.  The 1.5% increase eqates to 10,600 more trips over the course of a month.  On average about 350 a day.  Could there be 350 Marcellus workers flying in or out of Pittsburgh each day?  If for sake of parsing you assume they are here on week long stints, it works out to 2,500 itinerant workers at any given time.  Given all the news headlines is that an unreasonable number? Headines have us thinking that number is several times higher.  Bottom line, I'd love to see detailed data on where passenger originations arriving in Pittsburgh have increased over the last year to be generating this newsworthy 1.5% increase in local traffic at the airport.  If that all works out, is the interpretation of the airport passenger trends the same as it may appear?  It's a question worth asking.


Anonymous BrianTH said...

I have been thinking about the Resource Curse/Dutch Disease issue quite a bit. As touched on in some of the materials, there is a decent argument that the causation works at least partially in the other direction, meaning that societies with the relevant problems (corrupt and inefficient government, civil strife, low investment rates in education and general infrastructure, and so on) are more likely to end up dependent on resource-extraction due to default. But even given that view, we should be careful to make sure we are not such a society!

Among other things, to me that means we should be very focused on making sure the additional public revenues from Marcellus are being invested in ways that will enhance growth and productivity in other sectors, which again means education, general infrastructure, and so on. And we should be skeptical about too much in the way of rapid tax reduction, because that is how things can go very wrong down the road (if your revenues become too sensitive to one particular industry's fortunes). But investing the revenues in diversified assets in order to offset future liabilities, ala Norway's Government Pension Fund, is not a bad idea.

One thing I am not so worried about, however, is the labor dynamics that some have suggested could explain the Dutch Disease. That may make sense when a whole national labor market is being affected, but the national situation in the U.S. is one of oversupply, not undersupply, of labor. So I wouldn't expect a significant labor shortage in other industries in Pittsburgh, regardless of the labor expansion associated with Marcellus.

Tuesday, July 13, 2010 9:53:00 AM  
Anonymous Anonymous said...


Tuesday, July 13, 2010 10:07:00 AM  
Blogger Burgher Jon said...


This is a great post. As an economics minor and MBA student I am ashamed I had not thought to apply Dutch Disease to this situation. However your calculations and speculations are really interesting; thanks for the post.


Tuesday, July 13, 2010 11:24:00 AM  
Anonymous MH said...

Could there be 350 Marcellus workers flying in or out of Pittsburgh each day?

The ones I have seen were very obviously gas workers just in how they were dressed. Just find a workstudy who doesn't look scary to TSA, give them $5 for the 28x, and send them to watch the security line.

Tuesday, July 13, 2010 11:03:00 PM  
Blogger C. Briem said...

Jonathan: thx

MH: you know, I would do that if I could. Wouldn't even need to give them the $5 for the bus if they were a student right?

Wednesday, July 14, 2010 8:00:00 AM  
Anonymous MH said...

True. However, it would be nice to spring for coffee.

Wednesday, July 14, 2010 11:17:00 PM  
Anonymous Anonymous said...

Many of the engineers being hired to work on the Marcellus are Penn State & Pitt grads. They have been working all around the world. Welcome home boys!

Wednesday, July 21, 2010 2:06:00 PM  

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