Growth of the 'third sector' and what it means

By PAUL ERICSON - 7/29/2011

This week's RBJ Daily Report Snap Poll question asked, "In your view, which of the following is the most important part of Rochester's private-sector economy?" The possible answers were private companies, public companies and non-profit organizations.
One reader responded: "I certainly hope that non-profits are not the most important part of the economy! If so, what's next? A community organizer for a president? :-)"
As a rule, we don't publish unsigned comments, but I'll make an exception for that bit of sharp-edged humor. It got a laugh out of me, I'll admit, but I think it also reflects something evident in other respondents' comments: a concern about the expanding presence of non-profits in the Rochester-area economy.
The poll-whose results are published on the facing page-was inspired by the data behind the RBJ 75, our annual report on the area's leading public, private and non-profit businesses. The numbers speak for themselves: The 25 largest non-profit organizations employ 60,475 people, while the 50 public and private companies combined employ 50,537.
We asked Mark Clement, the top executive at Rochester General Health System and our choice for this year's RBJ 75 CEO interview, what he thought about the growth of non-profits and the fact that this "third sector" is the only one that has posted consistent employment growth in recent years. Clement, whose organization now ranks as the area's third-largest employer, replied: "Well, I'm not an economist. Although I've taken lots of economics courses, I won't opine on the economic implications of that."
I, too, am hesitant to say whether this trend over the long run is good or bad for the local economy. But I think it's important to recognize the dramatic shift in our economy and to explore what it means.
The Rochester Business Journal has been taking stock of the region's leading businesses annually for more than two decades. Back in 1988, Eastman Kodak Co. employed 44,000 people in Rochester. Xerox Corp. ranked second with nearly 13,000 local staffers, followed by Wegmans Food Markets Inc. with 8,800 (including Chase-Pitkin Home Centers) and the University of Rochester with roughly 8,400.
Today, UR has nearly 20,000 employees and Wegmans has grown to roughly 14,300 local staffers. But Kodak has fallen to 7,100, only slightly ahead of Xerox's 6,672.
To be sure, the downsizing at Kodak and Xerox alone explains a big portion of the loss of public-company jobs here. Similarly, UR's growth has been a major force in the expansion of the non-profit sector, though if you factor it out, the top 25 non-profits still would employ roughly as many people as the 50 private and public firms in the RBJ 75.
As we noted in the introduction to this week's poll, employment is only one measure of economic importance. The average wages for particular jobs also is a key metric. So, too, the amount of wealth created by dollars brought into the community. Economists talk about the traded and non-traded sectors in a regional economy to distinguish between goods and services sold externally-and thus bringing money into the region-and those produced for local consumers, which circulate income within the region.
Typically, manufacturers belong to the traded sector, whereas a health care provider does not. But the lines are not necessarily so clearly drawn. As Clement notes in the RBJ 75 interview, more than 20 percent of RGHS' $900 million revenue base comes from outside Monroe County. That number-which is growing-includes research dollars and private grants, but also money generated from non-local patients drawn to its nationally recognized heart institute and other high-quality care programs. The same is true at the University of Rochester Medical Center.
As for wages, it's often said that non-profit employment may be growing but the sector's wages generally are low. I don't have aggregate data, but I think many manufacturing workers would be glad to be paid as well as college professors, doctors and researchers.
Yes, there are drawbacks to the rise of non-profits. They take properties off the tax rolls, for one. And tax-exempt organizations have an obvious advantage when competing with for-profit businesses, especially small firms.
But knowledge creation and the ability to innovate are vitally important in today's economy-and a number of non-profits are powerhouses in these areas. I think the question today is not whether we were better off with an economy dominated by manufacturers; it's whether we are going to capitalize fully on the assets we possess.

7/29/11 (c) 2011 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail