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The Providence Journal , Money and Business Section
October 200

Discussions by Rhode Islanders about our state’s labor market always seem to begin by focusing on our unemployment rate. More often than not, these discussions attempt to predict of our state’s future economic performance using this statistic. This is unfortunate for two reasons. First, and foremost, the unemployment rate is a lagging indicator. The method by which this statistic is calculated has a few “quirks,” so that not everyone who you might think is counted in the monthly value is actually included. To be included in the labor force and counted among the “official” unemployed, you must be both physically able to work and actively seeking employment. The latter criterion is where the lagging status emerges from. When an economy has been weak for some time, increasing numbers of unemployed persons begin to lose faith in their job search efforts and stop actively seeking employment. Once this occurs, they have failed to meet the “actively seeking work” requirement, and are no longer included as being in either the labor force or among the unemployed. So, in weak times, as this occurs with increasing frequency, the unemployment rate statistic becomes lower than it would otherwise be were these persons included. Similarly, when an economy improves, some of these persons begin searching for work again. What happens to the unemployment rate? You guessed it – it actually rises (along with the labor force). So a rising unemployment rate is not necessarily problematic. It sometimes reflects an improving economy! So, using a lagging indicator such as the unemployment rate to predict the future course of economic activity here is like driving your car and looking only in the rear view mirror. Very soon you can expect to have an accident (i.e., inaccurate forecast).  

The second reason why reliance on our unemployment rate is unfortunate is that at present, Rhode Island’s unemployment is well above the national jobless rate. While the national rate in August was 4.7 percent, for Rhode Island, the rate was almost a full percentage point higher, 5.6 percent. And, Rhode Island’s jobless rate has been consistently above the national rate since September of last year.

Since the jobless rate is a lagging indicator, what is a preferable labor market measure? The answer is Rhode Island’s payroll employment, which measures the number of jobs in existence for Rhode Island firms. According to the media, Rhode Island has been doing particularly poorly in this area. For August, we were told that Rhode Island added only 1,300 jobs, an increase of only 0.3 percent from last August. The good news is that this interpretation, which we see every month, is patently false. In a post-manufacturing economy like ours, both job gains and job losses occur each month. In August, for example, Rhode Island had job gains of 5,900. Where, then, does the 1,300 figure come from? In August, Rhode Island also lost 4,600 jobs. So, the correct interpretation of this static, which the media defines as jobs added, is that 1,300 more jobs were added than lost in August, or that employment rose by 1,300. Viewed the correct way, Rhode Island is clearly adding jobs, and has been doing so for quite a while now. The problem at present is that the number of jobs being added is slowing at the same time the number of jobs lost is rising.

So, counter to the prevailing “wisdom,” Rhode Island’s labor market is not stagnant in terms of its ability to add jobs. Unfortunately, fifty-state comparisons only focus on the net change figure, which placed Rhode Island a depressing #48 for August (compared to one year ago).

by Leonard Lardaro

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