Friday, March 23, 2012

A Bird's Eye View of Why RI Has Such a High Unemployment Rate

In the last several posts I analyzed the historical behavior of the number of jobs in Rhode Island, payroll employment, and the number of Rhode Island residents who are employed, resident employment. As I noted, there are significant differences between these two data series, especially since they are obtained from two separate labor market surveys.

In this post, I will provide only one chart, but that chart will allow you to understand very readily why Rhode Island's unemployment is so high and why it hasn't been falling as one would expect during a recovery. Of course, as I was writing that last sentence, I realized that there is a distinct possibility that Rhode Island is no longer in a recovery, which I discussed in the last two posts. For now, I still haven't concluded that Rhode Island has actually entered a double-dip recession, so as far as I can tell, Rhode Island is clinging to its two-year old recovery by its finger nails. I guess this makes it fortunate that we didn't raise the sales tax on finger nail establishment services last year!

I want to focus on the employment rate for Rhode Island: the ratio of resident employment to the resident working-age population. Both of these series are derived from the household survey. Ideally, this ratio should rise during recoveries, as the number of employed residents rises as a proportion of the working-age population, and fall during recessions, as employed residents become a smaller proportion of the population. But this is Rhode Island -- we don't do things like everyone else!

The chart below shows the historical behavior of the employment rate for Rhode Island since January of 2000 (click to enlarge).

When Rhode Island's payroll employment peaked all the way back in December of 2006 (a full year before the US peak), our state's employment rate reached its maximum at just below 66 percent (0.66 in the chart). It has literally been all downhill since then.

Clearly, the serious recession we experienced brought about continuous large reductions in the proportion of our state's population that is employed. However, consistent with the charts from the previous two posts, Rhode Island's employment rate has been declining throughout this entire recovery! At the end of the last recession, around late 2009 into very early 2010, the employment rate actually recovered a bit, moving back to 60 percent. Ironically, since our current (?) recovery began in February of 2010, we have seen a clear downtrend in this ratio.

The inevitable consequence of the fact that an ever-smaller proportion of Rhode Island's population remains employed (our declining employment rate) has been a high unemployment rate that seems incapable of falling below 11 percent over any prolonged period of time.

There are several ironic elements in all of this. Recall that resident employment is not restricted to jobs in Rhode Island. It includes Rhode Island residents who work either in Rhode Island or in other places. That is significant at the present time since Massachusetts is doing so much better than Rhode Island is, as its jobless rate is one we can only fantasize about here. Also, resident employment includes self-employed persons, an element that often escapes from the other labor market survey. Positive out-of-state and self-employment should have been able to at least moderate if not reverse our declining employment rate by this point. Yet it hasn't.

To conclude, let me briefly cite the math that underlies a declining ratio. The fact that the employment rate, the ratio of resident employment to our working-age population, is falling through time means that in percentage terms, resident employment has been falling relative to our state's working-age population. It doesn't take much to figure out that this has played a central element in our state's high unemployment rate.

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