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Daily Journal

Worse Than It Appears

Aug. 3rd, 2012
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RALEIGH — North Carolina’s unemployment rate has been 9.4 percent for the past three months. That statistic certainly helps to identify our labor market as one of the weakest in the country. Only four states (Nevada, California, New Jersey, and Rhode Island) have higher jobless rates. South Carolina’s rate is the same.

Unfortunately, North Carolina’s situation is even worse than it appears.

That 9.4 percent rate is the one computed every month by the Bureau of Labor Statistics and reportedly widely as “the” unemployment rate. Technically, it is known as U-3. It reflects the number of unemployed people actively looking for work divided by the total civilian workforce ( the number of people who are either employed or actively looking for work).

As I have noted before, the U-3 rate doesn’t fully capture the workings of the labor market. It doesn’t include people who have lost their old jobs, looked for new jobs for a while, and then given up in discouragement. It also doesn’t include people who have lost their old jobs and then exited the labor market for a time to, say, pursue more education or take care of a relative. Nor does it include people currently in part-time jobs who would like to work full-time but can’t find any full-time work.

If you want a statistic that captures of all these scenarios, you need to look at BLS’s U-6 rate. That’s the broadest measure of labor-market activity. And it happens to make North Carolina’s economic performance look worse in comparison to the rest of the country.

BLS doesn’t compute U-6 every month. Instead, it maintains an annual rolling average of U-6 rates for every state and some localities. The averages are updated each quarter. So, for example, the most recent U-6 measurement includes the last six months of 2011 and the first six months of 2012. For North Carolina, the rate is 17.5 percent, essentially unchanged from this time last year

Only Nevada (22.1 percent) and California (20.3 percent) have higher underemployment rates. Moreover, North Carolina has one of the largest gaps between its U-3 and U-6 rates – 7.7 percentage points. The national average is 6.8 percentage points. In other words, North Carolina has more discouraged workers than do most of its peers.

Why has our labor market stayed so weak for so long? Analysts have offered a variety of explanations. They observe that because North Carolina’s population has continued to growth during the Great Recession and subsequently weak recovery, we have essentially been importing unemployment and underemployment. That would could well explain some of what has been going on, though many of those new arrivals are children or retirees who wouldn’t be in the labor market, anyway.

Another theory rests on the fact that manufacturing employment has long been a larger component of North Carolina’s labor market than in most other states. Because manufacturing jobs tend to be more cyclical than most, such a dynamic will naturally lead our unemployment rate to swing down more than most during recessionary periods and swing up more than most during expansionary periods. Again, I buy this as a partial explanation, but it doesn’t fully explain the trend. Some states with large manufacturing sectors are doing much better than we are at job creation. Keep in mind that “manufacturing” is a very broad term.

I think the available evidence suggests another reason North Carolina has lagged the rest of the region and the nation in job creation is that our economy is not sufficiently attractive to small-business owners and entrepreneurs. They are responsible for most net job creation in any modern economy.

Our current policy mix doesn’t suit them well. Some are choosing to build new businesses in other states or countries, instead. As you may have heard, I have some ideas about how to address the problem.

Hood is president of the John Locke Foundation and author of Our Best Foot Forward: An Investment Plan for North Carolina’s Economic Recovery.