A BOUNCING OCEAN STATE JOBLESS RATE

The Providence Journal Editorial Page, August, 1997

In just two years, Rhode Island saw its unemployment rate fall from over 7 percent to 4.7 percent this February, moving it below the national rate. The most recently-released data, which received virtually no media coverage in this state, indicated that Rhode Island's seasonally-adjusted unemployment rate for June rose all the way back to 5.9 percent, a full 1.2 percentage points above its February level and well above the national rate. And, if that wasn't bad enough, June marked the fourth consecutive month during which Rhode Island's unemployment rate rose. What caused such a dramatic reversal of the previous declines in our unemployment rate? During the Watergate era, we heard the phrase: "Follow the money." To understand the recent behavior of our unemployment rate we need to "follow the labor force." Literally.

For years, Rhode Island's labor force was declining. While that was bad news, it had the ironic side-effect of allowing our unemployment rate to decline, as persons either left the state or dropped out of the labor force as they stopped actively seeking employment. Then, last year, our labor force began to rise once again. Lured by the greater likelihood of finding employment, Rhode Islanders began to re-enter the labor force in large numbers. As just about everyone knows by now, the employment prospects that induced these persons to re-enter the labor force were, for the most part, located in Connecticut and Massachusetts. For 1996, the number of jobs with Rhode Island firms (payroll employment) rose by a scant 0.4 percent, while resident employment, the number of Rhode Islanders employed, increased by an impressive 3.5 percent.

But this wasn't all bad. Fortunately for us, when these newly-employed persons returned to Rhode Island after work, they brought their income with them. This fueled yet another record for existing home sales in 1996 and retail sales growth far above the national rate, especially during the Christmas season. That was the good news. The bad news was that Rhode Island added yet another risk factor to the prerequisites for sustaining its economic momentum: the rate of economic growth in Massachusetts.

The relevance of this last factor in determining our current fortunes becomes apparent when we examine Rhode Island's economic performance in 1997. According to the June labor market report, Rhode Island firms added a whopping 200 jobs compared to the same month last year. That's a growth rate of 0.04 percent! For persons unfamiliar with statistics, this is referred to as "noise." In other words, because this estimate of job change is so small, we cannot rule out the possibility that actual employment was either unchanged in June or that it actually fell slightly. The recent trend in this statistic is disheartening as well: on a seasonally adjusted basis, Rhode Island's payroll employment has now fallen for three consecutive months. Not by terribly large amounts. But it has declined nonetheless.

What could possibly be worse? In addition to this painfully slow rate of internal job creation, out-of-state employment gains have slowed dramatically from their levels last year. Add to this our resident labor force that continues to grow at a very healthy rate of around 1.2 percent, and we have a problem. Since many of the persons who re-enter the labor force are unemployed, diminished job prospects either here or in neighboring states result in unemployment rate increases such as those we have witnessed in the past few months. As hard as it is to believe, Rhode Island's unemployment rate has now become a reasonably accurate gauge of its overall economic performance.

I don't believe that the most recent trend in payroll employment is signaling that a recession is imminent. But, contrary to the common perception, Rhode Island's economy has not performed terribly well of late. Clearly, it slowed during the second quarter, a fact confirmed by my Current Conditions Index. What Rhode Island finds itself grappling with is something it has become unaccustomed to - a rising labor force. Recent events have illustrated a lesson we learned years ago but had apparently forgotten: when a state's labor force is rising, it becomes increasingly difficult to overlook sluggish job creation.

by Leonard Lardaro