MY PESSIMISM ABOUT THEIR OPTIMISM

The Providence Journal Editorial Page, September, 1997

The transformation of Rhode Islanders' historic pessimism about their state's economic performance into pervasive optimism has been truly striking. Ask almost anyone about Rhode Island's economy today and you will hear how strong it is, how rapidly it has been growing, and how it is expected to continue at or above its current pace for years to come. As proof of this you need look no farther than our shopping malls. Retail sales here have bested the national rate since the 1996 Christmas season. Their phenomenal growth has continued throughout 1997. And, let's not forget that homes throughout this state continue to sell like hotcakes. Not only did we set another record for existing home sales in 1996, we remain ahead of that pace in 1997.

Implicit in this wave of optimism is the assumption that the rate of job creation in Rhode Island has grown dramatically. I will venture a guess that people here are increasingly comfortable with the notion that Rhode Island's employment growth is finally catching up to that of the nation as well. And, as everyone here knows, we have thousands of financial service jobs on our horizon. So, it should be only a matter of time before our employment growth surpasses that of the nation. The validity of these conjectures can be summarized very succinctly by a quote often uttered by my teenage children: "NOT!"

It is no secret that payroll employment growth for Rhode Island was very painfully slow last year, rising by only 0.4 percent. According to the most recent labor market data, job gains this year have improved only marginally. If we compare seasonally adjusted employment for January-July of 1997 with the same months for 1996, we find a national job growth of 2.2 percent, versus only one-percent for Rhode Island. If the current labor market data are to be believed, then, even with the improved economy, Rhode Island is providing jobs at less than half the national rate!

I, for one, don't believe the current employment data for Rhode Island. This is not a criticism of the Department of Labor and Training. Instead, my skepticism is directed at the labor market methodology used for all fifty states, which is geared too much toward manufacturing, and the increasing importance of new and small firms in this state, which makes the task of accurately tracking employment increasingly difficult. In addition to this, the behavior of some key non-survey data that I follow, most notably state income tax withholding, continue to be highly inconsistent with the very slow employment growth implied by the current employment data.

I recently subjected my skepticism (i.e., hypothesis) to an econometric test. I simulated what payroll employment for Rhode Island should be if the historical relationship between employment and state income tax withholding were maintained, while controlling for labor shortages that can legitimately lower job gains. The results of this simulation were somewhat encouraging. Instead of the one-percent job growth for the first seven months of 1997, projected employment growth was 1.4 percent, a difference of 2,000 jobs. I said "somewhat encouraging" because I next performed a "what if" scenario to paint my simulated employment picture in as positive a light as I could imagine. In this scenario, I assume that the 2,000 jobs Fleet has stated it will ultimately add in Rhode Island were added in the first seven months of this year along with the originally-intended 2,500 jobs for Fidelity Investments. This is where things get discouraging. Even with this incredibly bright scenario, my upward revision to payroll employment and 4,500 jobs in financial services, Rhode Island employment growth would have only risen to 2.45 percent, barely above the national rate for this period!

A business reporter for the Journal recently asked me what would be needed for Rhode Island to have employment growth comparable to the national rate. As my empirical exercise shows, large one-time employment gains in an area such as financial services is one possibility. But it is not terribly realistic to expect Rhode Island to routinely generate such large job gains with its present economic climate. Make not mistake about it, Rhode Island has made substantial progress in enhancing its economic climate over the past few years. But substantial further improvement is still needed. People here have been so busy giving each other "high fives" because business and government were finally able to collaborate in passing pro-business legislation, they overlooked the fact that the states we compete with have been doing this for more than a decade! As I pointed out to this reporter, the recently-enacted tax credits for investment and research and development have improved Rhode Island's economic climate. But to show what really matters, I referred him to a story HE did about a month ago, in which someone from a national firm that provides consulting services for business location decisions stated: "The most important factor today is available labor with appropriate skills ... it is the biggest driver of the decision-making process ... Tax credits abound in the marketplace ... tax credits are not a strong driver of the location decision-making process. A lot of companies can't use them and a lot can't take full advantage of them."

Next month marks Rhode Island's the tenth anniversary as a service and information-based economy. As ongoing problems with the educational attainment of primary and secondary school students in this state continue to cast a long shadow over our prospects for attaining rates of employment growth comparable to the nation, both the Economic Development Corporation and the Economic Policy Council persist in overlooking the explicit linkage between educational excellence and Rhode Island's future economic performance. Unless they finally "see the light" soon, we should probably get a small cake to celebrate.

by Leonard Lardaro