Editor’s note: Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. North Carolina’s latest unemployment data is scheduled for release today.
RALEIGH, N.C. – Prior to the recession, North Carolina had an unemployment rate near 4.5 percent. At the worst point in the recession, the state’s jobless rate soared to 11.4 percent, tied for seventh highest in the nation. The big question is, why?
At first glance, there doesn’t seem to be a logical answer. Since World War II, North Carolina’s economy has grown faster than the national economy. Business organizations consistently rate North Carolina as one of the best places for work, and more households are moving to the state than are leaving.
The state has also substantially re-made itself, using technology, health care, food processing and finance to pick up the slack from the downsizing of traditional sectors like tobacco, textiles and furniture.
When presented with an important question like this, economists put on their thinking caps and gather relevant data for analysis. Indeed, this is exactly what I did. I collected information for all states on the increase in their unemployment rates during the recession.
I then looked for potential explanations for changes in these rates and measures of the alternative explanations. Next, I put the data for the possible explanations together with the information on unemployment changes to – I hope – solve the mystery of our state’s high jobless rate!
Before I give you the results (every good mystery has to have some suspense leading to the solution), let me talk about the alternative reasons behind North Carolina’s high unemployment rate.
At the top of the list is economic structure. States differ in the industries they have to employ workers and create revenues and incomes. And industries aren’t all equally impacted by recessions. Some are hurt more by downturns in the economy. So if a state has a greater reliance on the kinds of economic sectors that are typically clobbered by recessions, then that state will see a bigger jump in unemployment when recessions hit.
One industry very susceptible to recessions is manufacturing. Why? Simple, businesses and households can often postpone purchasing manufactured products when hard times arrive. So AAA Plumbing will delay upgrading their IT equipment during a recession, and the Smith family will put off buying a new dining room table and chairs until the economic skies brighten.
Clearly, a big factor in this recession has been the decline in housing prices. Not only has this affected the building industry and put many construction workers out of a job, but the declines have also reduced the wealth of homeowners and caused them to reduce their spending. Therefore, states with bigger drops in home prices should have suffered more job losses.
Although people moving to a state is a good sign, can this lead to a state importing unemployment during a recession? It certainly can, so another factor to consider in analyzing unemployment rates is the movement of households between states.
I put these ideas and information into the statistical hopper and — thankfully — out popped reasonable results. States with a greater reliance on manufacturing, states with larger plunges in housing prices and states with higher in-migration rates of households from other states had significantly bigger hikes in unemployment during the recession.
So how do these answers help us understand North Carolina’s unemployment rate? First, the results for housing prices do not contribute to our state’s higher jobless rate because the price drop in North Carolina was actually less than in the nation.
But the other two factors do go a long way in solving our mystery. Manufacturing is still much more important to North Carolina’s economy than it is for the average state. Almost 22 percent of our state’s economy (measured by the output of businesses) is based on manufacturing, compared to the national average of 13 percent. So clearly, one reason our job market took a big hit during the recession is because of what the downturn did to the manufacturing sector.
It also appears North Carolina has imported some unemployment. Between 2008 and 2010, the net movement of households to North Carolina from other states was five times higher than the average for all states. Some of these new residents likely did not find jobs and therefore boosted our unemployment rolls.
So how much difference did these two factors — our heavier dependence on manufacturing and our greater attraction of moving households — make to the state’s jobless rate? My estimates show North Carolina’s peak rate (11.4 percent) would have been 9.1 percent if our measures on these two factors had been the same as the average for all states.
Does this mean manufacturing and newly arrived households are negatives for North Carolina? Certainly not, because as economic growth returns they can fuel a faster recovery; indeed, we saw a stronger North Carolina economic rebound in the mid-2000s. But — you may decide – these factors can have downsides on the backside of the business cycle!