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Statistics suggest coming LA job, tax revenue boom

As good economic news has flowed around Louisiana over the past few years – low unemployment, job creation, and announcements of new jobs coming online – some policy-makers have wondered why these seem only partially reflected in state tax collections. Others say this level of success has constrained the labor market to the point that it might hamper major expansions seen on the horizon. The process to reconcile the notions that a healthy labor market on the verge of a squeeze, but one not well translated into economic growth that brings increased tax revenues, begins with an interesting report from the Legislative Fiscal Office.

The LFO has taken to putting out, between legislative sessions, a monthly newsletter investigating fiscal topics of its choosing, and in this past month among other items looked at Louisiana’s job growth relative to the south and the country as a whole. Choosing Feb. 2010 as a baseline, due to the judgment that this was the nadir of the 2008 recession, since then (through Aug. 2014 preliminary figures) overall employment growth has lagged the south and country. This is because while private sector job growth has been about the same for all three, there has been substantial retraction in government employment in Louisiana. This could explain why sales and income tax receipt increases have been tepid.

But to focus on this alone, if not reductionist, stops way short of fully understanding the dynamics. In March, for the first time ever the state cracked the 2 million employed number, and while receding slightly from its April high mark since is still above that benchmark. And the August preliminary number showed the most people in the active workforce ever for the state, at about 2.13 million. As a result of these numerical perambulations, the state’s unemployment rate fell from its 6.9 percent rate in Feb. 2010 to the preliminary 5.8 this August – which is up considerably from the early spring number of 4.5 percent, as a result of about 30,000 more people in the labor force in that six months but only about 1,000 more jobs over that period. By contrast, government jobs have fallen 10 percent from that Feb. 2010 baseline, or about 34,000, and over 2,000 alone since the spring – leaving the fewest government jobs in Louisiana since 1991.

Also worth noting is that in recent years Louisiana consistently has outperformed the rest of the country in terms of unemployment, both in measures of the proportion of the active labor force employed (the “U-3” measure) and in workforce utilization, which excludes not only the unemployed but the underemployed as counting as fully employed (the “U-6” measure). However, these have been converging as of late, as the U.S. unemployment has been coming down faster and Louisiana’s underemployed has been increasing. Finally, in terms of labor force participation rates (that is, the proportion of the entire working age population at work), Louisiana historically has been below the national average but in recent years has declined more slowly as the country has fallen to its lowest rate in over 35 years, while state’s rate of a year ago of 59.2 is its lowest since 1992.

A few conclusions may be drawn from these numbers. First, had not so many government jobs been cut – and most would come as a result of state policy decisions that also affected local governments, while few would be attributable to federal government actions – likely the state would have lagged not just in terms of private job growth creation, but also lagged worse in overall rate of job expansion. While some of these jobs disappeared in the sense that they were lowly productive and made marginal, if not negative contributions to output, many were transferred into the private sector. Freeing resources from unproductive jobs enabled the state to transfer them to ones more needed, and formerly state jobs became more productive in the non-government sector (such as with the privatization of operations of most state hospitals). The former allowed tax dollars to be stretched further, while the latter created more tax revenues.

Second, the transformation away from a disproportionately large public sector – in 2011 Louisiana was 11th highest for state and local government spending per capita among the 50 state and the District of Columbia, and the highest in the south and southwest by far with only New Mexico even close – is a process that will cause labor force dislocations that will take years to translate into improved job creation. As indicated by the converging unemployment rates, unleashing into the workforce a number of individuals who believed they had a job for life and had minimal incentives to try to position themselves to compete for hiring outside of government in a competitive market creates an environment where it will take time for them to get up to speed or to choose to move out of state.

Or, thirdly, who wish to participate in the labor force at all. With the generous pension and health benefits for retirees offered by the state and local governments, a disproportionate number of these laid-off individuals will choose retirement. For years they will constitute a small but significant drag on labor force participation, and disproportionately receive state transfer payments (and pay less in income taxes, with the tax breaks given to retirees drawing state pensions). They will join the historically proportionally larger group in Louisiana than in other states that relies upon other kinds of transfer payments rather than working, given a state political culture that has overemphasized government redistribution of wealth and underemphasized provision of a quality education, reflected in the lower rate of labor force participation relative to the country.

Therefore, and fourth, given lower unemployment, lower participation, average private sector job growth, and retrenchment in government employment, the right-sizing of government has started a process of transformation that both temporarily inflates unemployment and will eat into the disengaged working-age population. With government doing as much as it was for less, this allows resources that otherwise would have been consumed additionally by bloated government to be kept in the private sector to allow for job creation. This elevating or work benefits compared to not working, or that actual availability of new jobs, can entice the disengaged into the workforce, which because they now are looking at first will show up as a rising unemployment rate – perhaps the opening phase of that having shown up in the last few months – but then be reduced as jobs become created because of the deployment of more private capital.

This may take awhile, but surely in time for the anticipated job growth courtesy of the several recently-announced business locations and expansions. Two other things also lend optimism here: that, for the first time in two decades Louisiana’s population is expanding at least close to the national rate (slightly behind it as of 2010-13 data, but much more closely than the 1990-2010 period), thereby expanding the labor pool more, and that the state has a disproportionately younger population, where the younger are more amenable to relevant job training.

Thus, revenues for the state have not grown that much, because of relatively smaller job growth caused by shedding government jobs. But because already there exists a historically higher overhang of unengaged adults, the increase in that group from this dislocation has been relatively smaller than experienced in the rest of the country as not all states are cutting as much public sector jobs as the Pres. Barack Obama Administration drives federal government expansion ever higher, and that they had less slack in their workforces to begin with. Further, this has freed both human and financial resources to be deployed in more productive ways, with the former beginning to show up as the unemployed seeking work.

The transformation will not work overnight. But as state government policy sets up the conditions for greater economic growth – even with national policy providing headwinds with the most anemic economic recovery in history still sputtering along – in the next couple of years Louisiana should see significantly better private sector job growth, with an increase in tax revenues to match. In the best case scenario, that begins to increase the participation rate disproportionately. However, being early along in the process, this is why we observe what we do concerning these fiscal and labor metrics.

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