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The Providence Journal, Editorial Page, June, 1998


The dramatically improved economy Rhode Island is enjoying at the present time is almost entirely the result of an improved national economy. Yet persons here, both private citizens and government alike, have begun to presume that these happy days are here to stay, a behavior that is typical when moving toward a cyclical peak. I mentioned in the first part of this series how complacency fueled by budget surpluses has visited Rhode Island. For many persons, especially those in government who should know better, Rhode Island’s economic future has come to be summarized as: "Up, up, and away."

Well, one out of three isn’t bad. These persons have historically gotten the "away" correct. It’s the "up, up" part that is the problem. Yes, Rhode Island is doing better than it has at any time in this recovery. But, does this mean Rhode Island is doing well? I’m not so sure. The time has come for us to stop comparing our current performance exclusively to what it has been in the past. In the early part of this decade, that might have been a valid approach, since the banking crisis here certainly qualified as a "mitigating circumstance." But that crisis has all but ended, except for the payment of the remaining DEPCO bonds. We need to acknowledge several less than flattering, yet accurate facts about the historical and current performance of the Rhode Island economy:

Rhode Island’s employment growth tends to lag the nation
From 1992-1996, Rhode Island’s job growth ranked 48th out of 50. Even our best year of this recovery, 1997, saw only a 1.7% growth rate in employment, about 65% of the national average. Don’t forget, the 1997 value followed a year whose growth rate was only 0.3%. Average those and see what you get – stuck at around 1.0 percent!

The rate of employment growth here is more volatile than that of the nation
While employment growth hasn’t fluctuated over that wide a range during this recovery, as our past recessions illustrate all too vividly, there is no symmetry when negative growth is considered. Volatility here is greater in the downward direction. So, combining positive with negative growth, Rhode Island finds itself with employment growth volatility that far exceeds the national average, using the standard statistical measure for this.

Employment growth in Rhode Island is far too dependent on national growth
Statistically, 80% of changes in Rhode Island’s rate of job growth can be explained by changes in the national rate of growth. Couple this with our sub-par job growth and the historical volatility with respect to negative employment growth and it becomes apparent that Rhode Island can experience a recession before the nation. That is hardly a salute to all of the economic development efforts that have occurred over the past few decades – they show up in the other 20% of the total!

Rhode Island’s top five industry groups in terms of overall 1996 employment are:

Health Services (50,160)
Eating and Drinking Establishments (28,552)
Business Services (25,156)
Miscellaneous Manufacturing (18,179)
Food Stores (15,317)
(Source: RI Economic Development Corp.)

Consider the following: combine the food categories into, say, "Food and Dining," which has employment of 43,869, then two of the top four industry groups for Rhode Island are "Food and Dining" and Miscellaneous Manufacturing (i.e., Jewelry, Silverware, and Toys), which, by the way, is a major job-loss category at the present time. Speaking of "Food Stores," how do you spell "Rolaids"?

The cost of doing business here, using conventional measures, is above the national average
When the usual cost measures such as wages and electricity costs are considered, then Rhode Island’s business costs are about 7-8 percent above the national average. We have made major inroads into controlling Workers’ Comp costs. With electricity deregulation, business costs should decline further. But Unemployment Insurance costs remain fairly high. Many of our manufacturing employers are seeing these surpass Workers’ Comp costs for the first time ever. And, Rhode Island has left virtually no revenue "stone" unturned, be it for taxes or fees. These too, are not reflected all that heavily in the traditional cost measures. If you can successfully run a business here, with Workers’ and Unemployment Comp, all the taxes, fees, and red tape, you can succeed anywhere!

If business costs are measured in a non-conventional manner, Rhode Island is a high-cost state
The conventional cost measures count the relatively low manufacturing wages here as a "plus," implicitly assuming that they reflect low labor costs. But productivity must also enter into this calculation, which is bad news for Rhode Island. We have a number of highly successful firms that will be here for a long time to come. We also have many firms for whom relatively low manufacturing wages reflect low productivity, the result of their failing to modernize production or management methods. This should not be all that surprising since many of Rhode Island’s manufacturing firms tend to be small, concentrated in low value added or slow growth industries, and our state has failed in its responsibility to provide a sufficient general human capital base to firms. Unlike the ideal combination of "low" wages and "high" productivity, which does indicate inexpensive labor, at the present time, Rhode Island finds itself with both "low" wages and productivity (in the aggregate).

Manufacturing Employment in Rhode Island has decreased every year since 1984
True, productivity has been rising over this period, which, by itself, contributes to layoffs. And, let’s not forget defense-related job cuts. Defense cuts have ended, as job increases are now occurring in the defense industry. Our major problem is the concentration of too much of our manufacturing base in slow-growth or low value added industries. But shouldn’t Rhode Island’s low manufacturing wages make manufacturing here highly competitive? As stated earlier, the relatively low productivity for many industries and firms here precludes low wages from translating into low unit labor costs. And, it will be quite a while before the cost-lowering effects on training of an improved educational performance K-12 arises, since the recently enacted Article 31 lacks both specific sanctions to deal with underachievement and a funding mechanism.

These are the cards we have been dealt and that we have chosen to hold. None of these stylized facts are new. We have lived with these for some time now. Now that we have just begun our eleventh year as a service and information-based economy, the time has come for us to take the actions that will allow us to be the masters of our own fate and to finally define ourselves in the information age.

by Leonard Lardaro


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