Study: Mass.'s high costs erode workforce

Businesses based in Massachusetts are at a significant disadvantage, compared to those in some other states, primarily because of the high costs of property and labor, according to a new study.

"Massachusetts' high land and housing costs are driving the state's workforce away," the market-oriented Pioneer Institute for Public Policy Research, which commissioned the study, said in a statement to be released today, along with the findings.

Nine specific industries in the Bay State have costs of doing business that are 20 to 30 percent higher than for their counterparts in New Hampshire, North Carolina, and Texas, concluded the report, "Measuring up? The Cost of Doing Business in Massachusetts."

The primary reasons for the higher costs here are the higher wages paid; higher land, rent, and development costs; and the expense of unemployment insurance.

Global Insight Inc., an economic research firm, conducted the study, comparing 10 areas of cost for nine industries. Business costs in Massachusetts were compared with those in six other states.

They were two neighboring ones (Rhode Island and New Hampshire), two that are large regional competitors (New York and New Jersey), and two with which Massachusetts competes nationally (North Carolina and Texas).

Massachusetts often competes with Southern states like North Carolina in seeking manufacturers. It is in competition with other Northeastern states, including New York, for office-using employers, such as financial services.

Massachusetts' main advantage is its skilled, educated workforce, the study said. But high land costs not only discourage businesses from coming here or staying, they also make it difficult for workers to afford homes.

With the state losing population -- 19,000 people over the past two years, according to US Census figures -- "prohibitive land costs may be costing Massachusetts its most valuable asset," the study concluded.

In particular, the study found, a typical financial services firm would find profits 80 percent higher if it moved to New Hampshire, and doubled if it were doing business in North Carolina or Texas, instead of in Massachusetts.

"For biotech manufacturing, it's more expensive than anywhere except New York," said Jim Stergios, executive director of the Pioneer Institute.

"For financial services, New Hampshire is 25 percent of the cost of Boston," he said. "Downtown Manhattan is less expensive -- this should really surprise us."

Global Insight researchers used a "representative firm" method, taking a "base case" hypothetical company in Massachusetts in each industry and testing how that company would be affected by the laws and economic conditions in comparable regions in the six other states.

Though each industry is different -- and some would fare better in one other state outside Massachusetts, but not in another -- the only states that in general did not offer a better, more profitable climate were New York and New Jersey, where costs were even higher than in Massachusetts.

Six of the nine industries surveyed -- aerospace and defense, biotech, semiconductor equipment, software, medical devices, and search and navigation instruments -- had lower costs in all of the other states except New York and New Jersey.

The cost of energy was one factor among the 10 making costs in Massachusetts higher than elsewhere, and little can be done about that in the short term. But a number of the other nine are subject to reduction through policy changes, the report suggests.

They include unemployment insurance, higher here than in four other states; municipal property taxes, where in biotech and finance sectors they were lower in three states; and corporate income taxes, where Massachusetts was the highest of all.

Although the other states have corporate tax rates lower than Massachusetts' rate, they could receive more in taxes from companies, because the firms in those other states could do better financially and have more profits to tax, the report said.

Stergios said Massachusetts businesses' high costs can be controlled. An efficient procedure for siting a liquefied natural gas facility would even lower energy prices in the long run, he said.

And some things are easier. "There is a lot we can do to provide localities with incentives to build a sufficient amount of housing," Stergios said.

Massachusetts has some competitive advantages, the study found. Perhaps surprisingly, healthcare costs per employee in manufacturing were higher in most other states.

And the state, which undertook a major reform of workers' compensation in the 1990s, has significantly lower costs in that area than all of the other six states, despite having generally higher wages and still-high costs for unemployment insurance.

While reducing costs of energy and taxes would help, the study said, "those are all secondary to the major factor: land prices."

The study compared average home prices and cost of living in several cities, finding even Worcester home prices 21 percent higher than the US median, and the cost of living in Boston more than 30 percent over the national average.

Dave Iaia, senior principal at Global Insight Inc. and author of the study, said executives gave two reasons for staying in Massachusetts: the pool of skilled and educated workers, and simple inertia.

"It's one ace in the hole, this pool of workers," Iaia said. "If we start driving them away, that's going to be a problem."

Thomas C. Palmer Jr. can be reached at tpalmer@globe.com.