RHODE ISLAND'S ECONOMY IS MORE COMPLICATED TODAY

The Providence Business News,
1997 Book of Lists, January, 1997

What a difference a year makes. Just one year ago, we were told that Rhode Island was in a recession - one that would not end in 1996. But, contrary to these predictions, Rhode Island finds itself in unfamiliar territory: as 1996 comes to a close, it remains close to full employment. Some of what we have witnessed in 1996 has been almost surreal: our state’s unemployment rate has fallen from over 7 percent last year, well above the national average, to 4.6 percent at one point this year. At the present time, monthly unemployment rates are running a full two percentage points below their levels a year ago! Income growth over the past two years has also been surprising. Last year, Rhode Island led the nation in per-capita personal income growth. While we will not match that feat in 1996, our income growth will continue to exceed inflation.

Yet in spite of such surprising strength, one pattern has remained: Rhode Island’s manufacturing job base continues to decline. Some have interpreted this as evidence that manufacturing in this state is dead. I disagree. Consider three facts. First, today’s economic climate is more complicated than it was just a few years ago. Declining manufacturing employment does not necessarily indicate, as is so often presumed, that either output itself is falling or that it is declining at the same rate as employment. The manufacturing sector finds itself in the midst of a period of rapid technological change. Adopting technological advances is a necessity, since survival in today’s manufacturing climate requires firms to constantly find newer and better ways of organizing production. Much of the new technology is labor saving in nature, resulting in ongoing layoffs. So, what is best for individual firms, increasing output with fewer workers, causes a number of problems at the macroeconomic level, not the least of which is long-term unemployment. Second, is Rhode Island’s capability to manufacture actually falling as the employment numbers seem to indicate? The current employment categories, or SIC codes, restrict manufacturing to the production of goods. If we add "Business Services" to manufacturing, employment in the production of goods and services has actually been rising for several years. And, don’t forget that the temp agency employees placed in manufacturing jobs are classified as working in business services as well. So, we don’t even know how many jobs there are in manufacturing anyway. Finally, much of our recent manufacturing declines have resulted from defense cutbacks, something beyond our control.

In our globally-competitive world, manufacturing is, and will remain, challenged never to remain the same. Like the technology that has redefined it, the one constant for manufacturing will be change. Surviving firms will always need to redefine the niches for their products and to constantly find ways of reducing costs. For Rhode Island and every other state, maintaining a stable manufacturing employment base will forever be more complicated, since layoffs have become a permanent fixture of the manufacturing climate. Thus, sustaining a constant or slowly growing number of manufacturing firms in Rhode Island, once a "satisfactory" situation, will today result in declining manufacturing employment unless these firms continually expand the scope of their operations here.

Because of this, attracting new firms has become increasingly important to the future of manufacturing in Rhode Island. In this environment, the business climate of a state and the cost of doing business there are absolutely critical since they influence location decisions. The bad news for Rhode Island is that in spite of numerous improvements in its business climate over the years, we are still an above-average cost state. In the near term, diverting our attention to attracting specific types of firms such as those in Financial Services, while not developing a comprehensive plan for redefining our business climate has quite possibly hurt more than helped. A recent article in Forbes magazine (10/21/96) singled Rhode Island out as an example of what not to do. The article states:

" … in cutting special deals, Rhode Island may be cutting its own throat. It hasn’t improved its climate to nurture startups, and young companies have provided most of the job growth in the past five years … by leaving a heavy tax burden on existing businesses, the state encourages them to move elsewhere."

While one can argue with the article’s methodology, it is now imperative for Rhode Island to carefully define its economic niche instead of allowing others to define it for us. We can’t afford to wait any longer before instituting comprehensive changes in our business climate. Hopefully, competitive business costs, education, training and re-training will be the centerpieces of whatever plan emerges.

by Leonard Lardaro