GOOD NEIGHBOR POLICY: MORE RHODE ISLANDERS ARE WORKING

The Providence Journal Editorial Page, March, 1997

I heard a joke the other day. "What is the most rapidly growing sector of the Rhode Island economy?" The answer is: "The state of Massachusetts." When I first heard this joke, I reluctantly agreed, noting that soon the newly "rebenchmarked" labor market data would give us a definitive answer. I hoped that the new data would prove the assertion that underlies this joke incorrect. Well, the data have now been released. The bad news is that this joke is essentially correct.

In 1996, Rhode Islanders finally discovered that we are actually in a recovery. Now, when persons refer to our state’s economy, they no longer use the words "recession" or "stagnant." Of course, we have been in a recovery since 1992. But for a state whose population is so badly misinformed about its economy, perceptions will probably always lag reality over such lengthy stretches.

A number of important economic trends occurred in 1996. Some of these were positive, others were negative. The strangest thing about last year, though, is the combination of "good" and "bad" that we witnessed. First, the good news. After a string of consecutive years where Rhode Island’s labor force declined, as did the number of Rhode Islanders who were employed, 1996 showed solid gains in both of these statistics. And, the trend of a falling unemployment rate continued. For the first time in quite a while, our unemployment rate declined while our labor force was growing. This was a momentous event, as it signaled an end to the previous trend of declining unemployment resulting from persons either dropping out of the labor force or leaving this state. Thus, our labor force participation rate rose, as a large number of persons who, in the past, had stopped actively seeking employment, were lured by improving job prospects to re-enter the labor force. Our labor force grew by a solid 1.5 percent last year, reversing 1995’s decline of 2.5 percent. Consider the magnitude of this turnaround: going from -2.5 percent to +1.5 percent is a 4 percent change! Along with this, our unemployment rate fell by almost two percentage points, from 7.0 to 5.1 percent.

The bad news concerns how the unemployment rate fell. Since the labor force rose and the unemployment rate declined, employment had to rise. And indeed it did. But the reversal of trend here is very disturbing. For years, resident employment, the number of Rhode Islanders working, had been declining while payroll employment, the number of jobs created by Rhode Island firms, had been rising. In 1995, for example, resident employment fell by 2.4 percent while payroll employment rose by 1.4 percent. Job gains within this state were thus more substantial than those obtainable in neighboring states. Payroll employment rose again in 1996, but with rebenchmarking, it was revised downward from horrible (+0.8%) to pathetic (+0.4%). Obviously this is not what lowered our unemployment rate. It was the "huge" (for us) growth in resident employment of 3.5 percent that allowed our unemployment rate to fall so sharply last year.

This is the basis for the joke. The number of Rhode Islanders who were employed last year rose by 16,100 while the number of jobs in this state increased by only 1,700, a ratio of almost ten to one! Thus, the improving economies of Massachusetts and Connecticut fueled the decline in unemployment we saw last year. The unemployed Rhode Islanders who re-entered the labor force did so largely in spite of how this state’s economy was improving. The improving job prospects that lured them back into the labor force were, for the most part, located elsewhere.

I can’t think of a more vivid example of why the unemployment rate is not an accurate gauge of how well Rhode Island’s economy is performing. The spectacular improvement in our unemployment rate came about as the result of something that, while tolerable in the short-term, points to real problems in the long-run. As always, when it comes to the Rhode Island economy, behind every silver lining lies a gray cloud!

This strange economic climate also causes me to rethink how I should respond to persons who ask me how well the Rhode Island economy is performing. Normally I state: "It’s doing well." But, in spite of all the economic development and legislative efforts over the past decade that were intended to make Rhode Island less dependent on other states for our economic vitality, we are probably more dependent than at any time in the recent past on our neighboring states for the economic gains we are experiencing. In the future, when I am asked how well the Rhode Island economy is performing, I will have to explicitly account for the role of our neighboring states and respond: "They’re doing well."

by Leonard Lardaro