By STAN DIAMOND THE BUSINESS CLIMATE: Illinois in competition for new manufacturing jobs

As earlier articles in this series on economic development have suggested, Illinois is being challenged as a place where business can prosper. Stan Diamond attempts to clearly define and measure those factors used by the executives who make the decisions to locate new or expanding manufacturing firms in the U.S. This is the eighth article in this series, made possible by a grant from The Joyce Foundation.

THE ECONOMIC future of Illinois is on the line today. Old economic patterns which brought prosperity to our state are rapidly changing: The consumer electronics industries of Chicago have moved abroad, the smokestack industries of the north and the auto parts industries of central Illinois are fading. New and expanding industries are needed to fill the void created by change.

While Illinois has many virtues as a home to business, it also has drawbacks, and it isn't a simple matter for prospective employers to decide whether Illinois is the best place for their businesses. Using the latest research on how executives decide where to locate their businesses, this article presents a statistical overview of the Illinois business climate compared to other states, both adjoining and in the Sun Belt.

Before presenting this picture of Illinois, it is necessary to note that other business climate surveys have provided a great deal of misinformation to both public officials and the business community. Their major failing is that they have been used largely as weapons in the propaganda war between business interests and state governments and present contradictory conclusions. Whatever their origins, they are usually elaborate statistical compilations that purport to show the relative merits of states as potential sites for businesses. States are measured and compared in terms of the costs they impose on business (taxes, workers' compensation, energy and labor costs) as well as their ability to meet the needs of business (labor quality and quantity, size of markets). Invariably, studies sponsored by the state's business lobby show that Illinois has a poor business climate, while those sponsored by the Department of Commerce and Community Affairs (DCCA) demonstrate that Illinois is an excellent place to develop a business.

Such contrasting conclusions occur because the organizations that sponsor business climate studies have an economic stake in their conclusions, and their conclusions are therefore designed more to persuade than inform. For the past five years, for example, Alexander Grant and Company, a large Chicago accounting firm, has issued an annual analysis of manufacturing business climate across the nation.

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But the criteria for the study were selected by the staffs of state manufacturers' associations, which are basically lobbying groups who measure their success by how much they can cut government-related business costs. Their staffs are experts in government affairs, not manufacturing, and almost 54 percent of the weighted factors used in the Alexander Grant study are related to state government policies, with over 23 percent weighted toward expenditure and taxation. Using those priorities, the 1983 Alexander Grant study (issued in April 1984) ranked Illinois 44th nationally, while ranking Florida, South Dakota, North Dakota, Nebraska and Arizona as the top five manufacturing business climates.

Illinois looks much better when DCCA analyzes its business climate. It is one of DCCA's tasks to market Illinois to domestic and international businesses as an ideal place for new factories and other investments, and DCCA's studies emphasize Illinois' role as a transportation hub, its fine and numerous universities, its supply of energy and its cultural opportunities and diversity. When you compare these studies, you can barely tell they are dealing with the same state.

Because of their built-in biases these studies fail to provide a realistic model of the characteristics in a state and local area that business leaders look at when they make a decision to build a new plant or facility or to expand an old one. Too often these studies are loaded down with factors that recent research shows to be ignored by business leaders in making decisions about business location or plant expansion. Because of their irrelevancy, the elaborate statistical accounting of supposed costs and opportunities in most business climate studies is of no interest or use to either business or government.

Establishing the factors

But business climate studies need not be biased, unreliable and contradictory. If they use the objective factors that business executives use, and weight them accordingly, they can be tools for policy formulation, helping public officials analyze their state's comparative advantages and disadvantages against other states in the competition for jobs. Substantial research, generally ignored in most recent business climate studies, offers ways and means of discovering the relative strengths and weaknesses of the Illinois economy and forms the basis for this article's comparative analysis of Illinois' business climate.

The most useful and comprehensive research on business locations has been conducted by Roger W. Schmenner and is summarized in his Making Business Location Decisions (1982). Schmenner spent several years researching the subject, first at Massachusetts Institute of Technology and later at Duke University. Using interviews and surveys, he produced two earlier, though limited circulation reports. His 1982 monograph provides the most detailed perspective on location decisions currently available. Other useful studies include the econometric research of Dennis W. Carlton and a staff study of the Joint Economic Committee of Congress on the Location of High Technology Firms and Regional Economic Development (1982). These comprehensive studies were supplemented by interviews with officials in high technology firms having corporate headquarters in Illinois in order to obtain additional data on their location needs and priorities.

The research on which this study is based is concerned almost exclusively with manufacturing industries, particularly those with a national or regional market, and it does not cover the business location decisions of nonmanufacturing firms. These appear to be driven by the size and demands of their markets, especially in the service sector. Much of their orientation is toward local areas and is not subject to interstate

Business climate macro factors in business location decisions for Illinois, U.S., midwestern states and selected Sun Belt states competition. Where there is a regional or national orientation, as with financial and business services, location at the center of the market appears important: It is the largest city in each area that gets the regional offices of the international banks, insurance and computer services companies. New technology, however, may greatly influence the future location decisions of these firms by making interstate competition more feasible. In the late 1970s, for example, bank credit card companies started to relocate home offices in South Dakota and Delaware to escape the usury limits of much larger states.

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Any study that involves complex interstate comparisons, presented in a magazine format, must necessarily suffer from some limitations. For the sake of brevity, for example, we must use averages to measure various costs, even when these costs are not equally significant to all business. Industries with heavy energy demand will likely try to avoid areas with high energy costs, but an industry in which energy costs are only a small part of its expenses will not pay much attention to the price of energy in business location decisions. Statewide averages also obscure many advantages (or costs) in regions of a state. The costs of energy, land and labor, the quality of life and the availability of experienced personnel (managers, engineers, technicians) often vary widely across a state, and some costs vary even within local areas.

This study focuses on the "macro" factors that are most important in creating a state's business climate. "Micro" factors such as access to roads and railroads, the size of plant sites and the local infrastructure may come into play in the final choice, but it is macro characteristics, such as labor costs and energy costs, that give a state its business climate reputation. Throughout this study, data for the largest local area in a state have been used when statewide measures are not available.

A number of comparisons are essential to put Illinois' business climate into proper perspective. Illinois must first be compared with U.S. averages and with other midwestern states because the first stage of the site selection process generally involves selecting a region in which to build a plant and then a state within that region. Thus Illinois will be most often in competition with neighboring states for new business investments, and it is more important to see how it compares with these states than with other regions of the country. Because new manufacturing firms are generally locating in the Sun Belt, we will also contrast Illinois' business climate with that of a select group of states from that region.

The table provides business climate scores for the macro factors selected in this study for Illinois, the United States as a whole, other midwestern states and the five selected Sun Belt states. While Illinois fares better in some of these categories than it does in other studies, one cannot say that Illinois' business climate is highly attractive. What the reader will notice in comparing this study to earlier, more biased studies, is a difference in emphasis. Fiscal matters are given little emphasis

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here because recent research shows that business leaders do not give precedence to these factors in their location decisions. This recent research, such as that by Schmenner, suggests that business leaders give higher priority to labor costs, workforce characteristics and quality of life. (Measurements presented in the table are of specific items; measurement aggregation is kept to a minimum.)

Labor

Almost every study shows that concerns about labor loom large in business location decisions although the specific considerations will vary depending on the industry. A plentiful supply of low cost labor may be essential for highly competitive industries while ample technical and managerial talent may be critical in new high technology businesses. For new industries, the corporate decisions for plant location are particularly influenced by the quality, attitude and flexibility of the workforce. Employers who seek low cost labor and flexible work rules will naturally select locations where unions are weak and right-to-work laws prevail. Newer industries also generally avoid putting facilities in large central cities. This aversion to unionization may be caused as much by ideological fervor as by exact cost calculations or direct experience with labor unions, but such ideology exists and influences the choice of plant sites.

The comparisons used here to determine Illinois' attractiveness on labor issues include average wage rates for skilled and unskilled labor, costs of unemployment insurance and workers' compensation, and the extent to which a state's labor force is unionized.

Wage rates for manufacturing in Illinois are slightly above average in the country as a whole, but very competitive within the Midwest. The basis for the comparisons shown in the table is the U.S. Bureau of Labor Statistics' annual Area Wage Survey, which reports wage levels for skilled and unskilled occupational groups (not necessarily production workers) in the largest metropolitan areas in each state.

Unemployment insurance costs are very high in Illinois by whatever measure is used. In 1983 Illinois employers paid an average of $417 per employee in state and federal unemployment insurance taxes — $117 more than the typical U.S. employer. Only Michigan with its high wage and recession-prone automobile industry has higher unemployment insurance costs in the Midwest. Nationally, all but a handful of states have lower costs. From a business climate perspective, Illinois' high unemployment insurance taxes constitute its biggest drawback for attracting new business investment.

The fluctuation of unemployment costs from year to year may also influence the perception of a state's business climate. When a firm buys into a state by building a plant it may be willing to accept certain high costs, but not unpredictable ones. The effective unemployment tax rate on total wages in Illinois went from 0.41 percent in 1975 to 1.2 percent in 1981, a 200 percent increase, and by 1983 it rose further to about 1.5 percent. In 1981, Illinois manufacturers paid $146 more per employee than if the effective rate had remained at the 1975 level.

This aversion to unionization may be caused as much by ideological fervor as by exact cost calculations . . .

The high unemployment insurance costs stem from past borrowings from the federal trust fund largely caused by the high unemployment of past recessions. Based on 1983 tax liabilities Illinois employers will pay an additional $175 million in unemployment tax penalties to help repay federal funds borrowed in previous years by the Illinois Unemployment Insurance Trust Fund. Net borrowing by Illinois stood at over $2.4 billion at the end of 1983 and must be repaid. Two major recessions have bankrupted the Illinois Unemployment Insurance Trust Fund and have caused the high unemployment tax rates that are still well above the national average. Illinois employers are paying high unemployment insurance taxes necessary to pay for the greater volume of unemployment benefits and to build up surpluses to pay off the outstanding loan — which bears about a 10 percent interest rate for all loans after April 1, 1982.

For years the business community has blamed the state's high unemployment insurance costs on overly generous benefits, but the statistics for recent years do not support this position. In 1981, basic maximum weekly unemployment benefits as a percentage of the average weekly wage in covered employment was 44 percent in Illinois, lower than in 30 industrial and nonindustrial states. This percentage should now have decreased somewhat because of the 1983 reductions in benefits, which will stay in effect until 1986.

One of the most revealing findings to come to light recently is the fact that workers' compensation costs in Illinois are below the national average. Data recently calculated by Professor John F. Burton Jr. for the Workers' Compensation Coalition were used to measure workers' compensation costs. Professor Burton was chairman of the National Commission on State Workmens' Compensation Laws and presently is professor of industrial and labor relations at Cornell University. He is generally recognized as the country's leading authority on state workers' compensation costs. (His data control for employee earnings, occupational composition, actual loss experience as well as various provisions in workers' compensation laws in different states.) Illinois employers (manufacturing and nonmanufacturing) paid an average of $3.41 per worker per week in 1983 which is $0.76 below the national average. Among mid western states Illinois falls in the middle. When states are compared by increases in worker's compensation costs from 1975 to 1983, Illinois' increase of 77 percent is favorable, measured against the national rise of 133 percent. These results from Professor Burton's research are in striking contradiction to the conventional wisdom of the Illinois business community, which blames the 1975 changes in Illinois workers' compensation laws for producing out-of-line compensation costs in Illinois. Illinois' increases are less than in other states.

As suggested earlier, many industries, including high technology firms, have an ideological aversion to unions. In 1980, with 31 percent of Illinois' workers unionized, Illinois was higher than the national average but similar to most midwestern states in percentage of workforce that is unionized. In the midwestern group, only Iowa, with the lowest level of unionization, is a right-to-work state.

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Right-to-work, however, is not a necessary condition for attacting high technology jobs, given the experience of Minnesota. From 1972 to 1981, Minnesota's manfacturing employment increased by over 70,000, with a significant portion in high technology industries.

Energy costs

Since the early 1970s energy costs have been a significant element in many business location decisions. Unfortunately for Illinois' business image, energy costs in Illinois are high. For natural gas, Illinois industry paid $4.26 per 1,000 cubic feet in 1982, which is higher than the $3.87 national average. Among midwestern states, Illinois' costs are about average, but again, prices in Indiana ($3.76) and Iowa ($3.74) are significantly lower.

Electricity rates for industry are difficult to compare. For illustrative purposes, a firm using 1,000 kilowatts of peakload at one time and a total of 200,000 kilowatts during a month, had

The high electricity costs in Illinois have been a factor in business location decisions

average monthly costs in 1982 in Illinois of nearly $15,000. This is slightly less than the U.S. average for the same usage, but much higher than other midwestern states. In Indiana monthly costs for the same consumption averaged $9,500, the lowest of the midwestern states. Excluding Illinois, the un-weighted average of midwestern states' monthly electricity charge to industrial users was $11,618, about $3,400 or 30 percent less than for a user in Illinois. The high electricity costs in Illinois have been a factor in business location decisions. Pricing practices for industrial users in Illinois appear to be changing, which should make Illinois more competitive within the region. Illinois' electric energy has another longterm advantage: With heavy reliance on nuclear power, Illinois' electricity is cleaner than, say, Indiana's, which is produced largely by burning coal. Harsher regulations to prevent acid rain may raise future energy costs in Indiana more than in Illinois.

More ominous for Illinois' future is the overcapacity in electricity generations, which will push Illinois electricity costs up significantly in the future, especially when the high costs of Illinois' extensive nuclear utility construction program are included as costs to be recovered through rates charged consumers. Only a very robust surge in both manufacturing activity and electricity demand could turn this disadvantage to an advantage. The decision of a decade ago to increase electrical generating capacity in Illinois was based on predicted high growth in usage that has not materialized.

Environmental regulations

Government regulations, particularly on environmental quality control, are not a major concern for all industries. According to Schmenner, a firm subject to heavy regulation may decide to expand an existing plant because it is easier to get the necessary permits there than to start over with a new plant on a new site in a different state. For high technology firms, according to the study of the Joint Economic Committee, the consideration of regulation costs is as significant as energy costs. In that study about 50 percent of respondents said the regulatory environment was a significant factor in deciding which region was best for locating a high technology firm, and they favored the South and Southwest because of their weak regulatory environment.

On a state-by-state comparison, the regulatory environment is hard to quantify, and we are forced to use an imperfect measure of a states' commitment to environmental regulations: per capita direct expenditures on environmental quality control. In fiscal 1980, Illinois' expenditure was more than $2 below the $4.94 average across the U.S. and in the middle among midwestern states. (The unusually high per capita expenditure for Ohio of $34 is due mainly to large amounts of pollution abatement bonds issued in fiscal 1980).

Just as the concern for air and water pollution led to tightened regulations in the 1960s and 1970s, the concern for hazardous waste management appears to be leading toward tougher regulations in the 1980s, particularly in the Midwest and Northeast. Major packages of legislation have been introduced in the Illinois General Assembly to improve hazardous waste management, and hearings and debate on this legislation are certain to center on effects upon Illinois' business climate. No one has come up with a way of calculating what the trade-off should be between the health of a state's business climate and the health of its residents.

Taxes

Whether taxes are a major influence on business location decisions has been much disputed. Of the recent business location research using either econometrics or survey techniques, only the Joint Economic Committee's staff study of high technology firms gives high priority to taxes as a business location factor, and there personal taxes were emphasized over business taxes.

The studies by Schmenner and Carlton do not find business giving a high priority to taxes in making location decisions. But Schmenner does point out that if a state has higher taxes than its neighbors, it may gain the reputation of having a poor business climate. Further, if competition for a plant site comes down to two or three states, taxes may be a deciding factor in the final choice.

These studies agree that tax abatements, reductions and special cost incentives are not deemed important or generally used. Similarly, state economic development plans that emphasize abatements or "tax free zones" will not be very successful in attracting new manufacturing businesses to a state.

In the 1980s, business taxes have been in a state of flux in the Midwest. Many states increased overall taxes to help balance their budgets, but in 1984 it is very likely that states may roll back

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their increases as budget surpluses accumulate. Given the state of change in state tax climates, we attempt to answer a simple but important question: In the recent past have Illinois business tax levels been competitive with other states?

The data recently made available by Andrew Reschovsky, et al., in State Tax Policy: Evaluating the Issues (1983) provides some help toward answering this question. This study uses methodology developed by the Advisory Commission on Intergovernmental Relations to calculate state and local taxes affecting business during fiscal 1980. We adjusted these data to better reflect the personal property tax replacement in Illinois; state business income was calculated by apportioning U.S. 1980 corporate profits and proprietor income in the same proportion as 1980 personal income. Tax rates on business, exclusive of unemployment insurance taxes and severance taxes, were calculated using these data. These effective tax rates shown in the table are crude estimates and are developed only for comparisons among states.

In this comparison, Illinois' effective tax rate in fiscal 1980 on business income was approximately 20 percent, the same as the national average for the 48 contiguous states. This is somewhat higher than most of the other midwestern states where rates range from 15 percent in Iowa to 18 percent in Minnesota but is fairly competitive within the region.

Where does the business tax burden come from? Taxes stem from the levies of both state and local governments, and preliminary evidence indicates that the state government share of Illinois' tax revenue is smaller than the U.S. average. In 1982, 54 percent of all Illinois state and local tax revenue went to the state compared to 61 percent nationally. For 1982, property tax collections by local government in Illinois constituted 36 percent of all tax revenue raised in the state, while nationally they contributed only 31 percent.

Quality of life

High technology firms and other industries that depend on keeping a critical, skilled workforce happy give emphasis to the quality of life in an area. High technology firms with corporate headquarters in Illinois, such as Gould and Motorola, justify building manufacturing plants in Arizona and Florida instead of in Illinois by the "quality of life" preferences of engineers and managers.

What constitutes quality of life? Certainly mild temperatures and access to recreation are important, and Illinois may not be able to compete very well on this front. Interviews in Illinois and the studies by the Joint Economic Committee and Schmenner indicate that the quality of life characteristics important to managers and professionals include personal tax burdens, good schools and the cost of single family suburban homes. Along these dimensions, how attractive is Illinois' quality of life?

The Advisory Commission on Intergovernmental Relations estimates that in 1982 a Chicago family of four earning $50,000 paid 6 percent of their gross income in state and local taxes, about equal to the national average, but considerably lower than for large cities in most other midwestern states. Tax rates in Illinois for those with higher income are even lower.

Expenditures per pupil in Illinois in 1981 were $2,441, which is above the national average and higher than in three other midwestern states, but Illinois' support for public school education has gone down relative to the national average in the past few years. In 1977, Illinois ranked 6th nationally in per pupil support; in 1981, it ranked 22nd. It is interesting that contrary to the Grant survey, which views all government expenditures as undesirable to business, the Joint Economic Committee study shows high technology businesses seek states that strongly support education on all levels.

Average housing prices in Illinois are much higher than the midwestern and national averages. In 1980, the average (median) valuation for homes in Illinois suburban areas was $64,000, about $7,000 over the national average. The only other midwestern state to exceed the national average is Minnesota, but in Illinois what is saved in personal taxes is more than consumed by the higher price of housing.

An examination of personal and business taxes on the one hand and school expenditures on the other suggests that business and their workers get what they pay for. Indiana and Missouri have low business and personal taxes but they also give less support to public education than other midwestern states.

High technology talent

The more critical technical expertise is to a firm, the more important it is to be near the supply of this expert workforce, especially for new companies. The geographical clustering of high technology firms in the Silicon Valley and the garment industry in New York is partly a reflection of this.

The study on high technology location decisions by the Joint Economic Committee staff found that abundant supply of special labor skills was the most important determinant for locating a new facility. This study also found that these firms gave much emphasis to the quality of academic institutions in a region, and this factor placed third in importance after labor characteristics and personal tax levels in their survey.

Because of the importance placed on high technology activities in state industrial development programs, we compared Illinois to other states on the size of its pool of highly trained engineers and the effectiveness of its engineering schools. The former is measured by the number of engineers with doctorate degrees in a state and the latter by the number of engineers graduated with doctorates by universities in each state from 1960-1981. Civil engineers were excluded since they are less likely to be needed by high technology firms.

Illinois ranked second in the Midwest with 1,925 engineering doctorates; Ohio was first with 2,480. Other states with more doctorate engineers are California (8,345), New York (4,384), New Jersey (3,396), Texas (3,106), Pennsylvania (2,579) and Massachusetts (2,471). These numbers partly reflect the faculty of the engineering schools in a state. In 1980 Illinois had 1,025 full-time engineers employed in its colleges and universities, though not all had doctorates. At a minimum, Illinois has 900 doctorate engineers employed outside educational institutions.

Engineering schools in Illinois have been the most productive in the Midwest, producing 3,340 doctorates from

1960 through 1981 (exclusive of civil engineers), but Illinois exports much of this engineering talent to the rest of the country: Illinois produced 6.4 percent of all engineering doctorates from 1960 to 1981, but only 3.4 percent of the current U.S. pool of doctorate engineers works in Illinois.

Minnesota is best known in the Midwest for fostering high technology manufacturing growth with Control Data, Honeywell and the 3M Company among its major employers. With only one major engineering school and a far lower pool of doctorate engineers than states like Illinois and Ohio, Minnesota may find it difficult to retain its share of manufacturing activity created by its high technology companies. Taking into account all their North American manufacturing facilities, only nine of Control Data's 34 plants, 19 of Honeywell's 90 and 18 of the 3M Company's 110 plants are in Minnesota. One winter in Minneapolis will clarify why it is difficult to retain engineers in Minnesota. Still, Minnesota's success in developing high technology companies shows that the formula for creating this type of activity involves more than just the supply of engineers.

Other factors

Not every factor important in location decisions can be quantified easily and explored in an article of this scope, but there are several other factors worthy of mention. Access to markets and supplies is a consideration for opening any new facility or expanding an old one. Price-conscious industries must be close to their customers to cut costs. Others must be close to their customers in order to keep them. In a similar manner, many companies must be close to their supplies in order to be cost competitive. This is particularly true of manufacturers of bulk, commodity-like items such as steel or flour and other agricultural by-products.

Market and supply factors are difficult to measure other than on an industry-by-industry basis. On a rather generalized level, market potential can be measured by growth in population and industrial activity. Regional shifts in some nondurable goods industries, such as processed foods and paper products, seem to follow regional shifts in population, but a state-by-state evaluation of market and supply potential is not attempted here.

Another factor of importance to business may be transportation facilities for moving key personnel to and from their headquarters. In interviews with Illinois high technology officials we asked why they chose to keep their corporate headquarters in Illinois when their manufacturing activity was largely in the Sun Belt. Invariably, it was the centrality of location and the ease of getting key personnel in and out of O'Hare Airport (the international terminal being an exception). In short, O'Hare must maintain its position as an airport hub in the face of competition from newer mega-airports in Atlanta and Dallas if northeastern Illinois is to remain attractive as a corporate headquarters site.

The Sun Belt

For each of the important location factors described above, one can find Sun Belt states more competitive than Illinois. For the sake of comparisons, five Sun Belt states with the fastest growing manufacturing employment are singled out.

When it comes to labor costs, North Carolina is an obvious choice for employers who give highest priority to low labor costs and low unionization potential. Energy costs are generally low throughout the South. Though tax rates appear similar for Frost Belt and Sun Belt states, the latter gain additional revenue from property and severance taxes on oil, gas and mining industries, which export energy and minerals to users in other states. Severance taxes which are not included in the tax rates shown in the table bring in considerable tax revenue to these states. Its severance and property taxes on oil and gas properties allow Texas to get by without a corporate income tax.

Engineering education is excellent in California and Texas. These states can compete with any state in terms of both their pools of engineers and engineering schools. Sunshine makes a difference. The selected Sun Belt states, except North Carolina, have attracted more doctorate engineers than their universities produced in the previous 20 years. High technology firms opening facilities in the Sun Belt states have little problem attracting or retaining the engineers, scientists and managers who shun cold temperatures in the Frost Belt.

But the problems of the North are beginning to appear in the Sun Belt states. In California housing prices are the highest in the country, workers' compensation costs are the highest in the continental 48, and energy costs are higher than all states except those on the East Coast.

Texas has problems with its unemployment insurance system and also with its public school system. In 1983, Texas employers had the lowest unemployment compensation costs in the country, paying only 0.3 percent of total wages in state unemployment taxes. But unemployment struck there also. By the end of March 1984, Texas had borrowed $811 million from the federal government to pay for unemployment benefits, the fifth highest debt in the country. Additional borrowing in the hundreds of millions will be necessary unless Texas raises unemployment taxes sharply.

Already proposed in Texas is $1 billion in new taxes to save the public school system. In April, following a report that the public schools were rapidly deteriorating, Gov. Mark White called a special session of the legislature to raise $1 billion in taxes. One justification was the need to attract more high technology jobs through a better school system since jobs are apparently no longer being added by the stagnant petroleum industry. In terms of taxes, Texas is beginning to resemble the North Central states.

Implications for Illinois

The macro factors analyzed in this business climate study show that Illinois has one major liability — unemployment insurance — and one major asset — the quality and effectiveness of its universities and a pool of top technical engineering talent. To a business

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wishing to avoid a pro-union environment, the relatively high level of unionization of the Illinois labor force may also be considered a liability, but not as serious as the high and uncertain unemployment insurance costs. All other measured factors add up to either slightly positive or slightly negative depending on the industry searching for it plant site.

Unemployment insurance will have to be reduced to make Illinois reasonably competitive in attracting more industry. The 1983 legislative rescue plan will cut into the enormous unemployment insurance debt and reduce some future costs, but its success depends on a reasonable level of prosperity. The plan terminates in July 1986 when the additional taxes on business and the limitations on benefits will end.

The 1983 rescue plan represents a compromise between strongly held management and labor views and may be the best that could have been accomplished. It can be argued, however, that since new business contributed nothing to the state's high unemployment rates and debt, it should bear less of the costs of refinancing than the smokestack industries in Illinois that cut employment.

Such a public policy makes sense on two counts. Unemployment taxes on new business would be cut while those for employers responsible for heavy layoffs would go up. New businesses would have greater incentives to locate or start up here. Those who contributed the most in creating the state's unemployment would bear additional costs for paying benefits and refinancing the Unemployment Insurance Trust Fund. This would require restructuring of the state's unemployment insurance tax system, but it would demonstrate that Illinois is serious about improving its business climate.

If Illinois has top engineers and engineering schools at its universities, why doesn't it have a high technology industry? To some extent it does. The area west of Chicago from Rolling Meadows to Naperville contains the corporate headquarters and some of the research facilities of Gould and Motorola, two leading high technology firms. The area also has two federal research laboratories, Fermi and Argonne, and major research facilities of Amoco, Bell Laboratories, Tandem and other companies.

Illinois has not been able to translate its high technology assets into manufacturing activities because of the strong competition from other states in both the Frost Belt and the Sun Belt. These states have adequate or outstanding supplies of engineering talent and fine engineering schools but are not burdened by some of the costs and labor force characteristics found in Illinois. Illinois once had a flourishing consumer electronics manufacturing industry that has largely disappeared, both overseas and to other states. This high technology industry is very price competitive and thus sensitive to labor costs.

For certain high technology frontier products like microprocessors and integrated chips, skilled workers and technical personnel are critical in initial development. But as the production process becomes routinized, as it has for consumer electronics and many types of computers, highly skilled workers and research development specialists become less important to manufacturing the final product. The location of research can be separated from the location of manufacturing, and the likeliest development for Illinois may be continued growth as a high technology research center. Less likely, given Illinois' present environment for business costs, will be growth in high technology manufacturing.

Stan Diamond is research director of the Illinois Commission on Intergovernmental Cooperation. He wishes to thank John F. Burton Jr. and the Workers Compensation Coalition, Laurden Associates and Andrew Reschovsky, et al., and the Joint Center for Urban Studies (Cambridge, Mass.) for permission to use their data. He also wishes to acknowledge the assistance of staff at the Illinois State Library and colleagues in other agencies who provided immeasurable support and assistance. The author is responsible for all opinions and errors.

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