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. The state has substantially “remade” 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.
Yet states are clearly not all the same when it comes to the economy. Some of the characteristics of individual states may make them more prone to job losses during recessions than others.
At the top of the list of these features 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 its IT equipment during a recession, and the Smith family will put off buying a new dining room table and chairs until the 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 generally considered a positive 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 used these factors – and some others – to analyze changes in state unemployment rates during the recent recession. Here’s what I found.
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. Other factors – such as the state’s unionization rate and the combined state and local tax burden – did not appear to be related to unemployment rate changes among states.
So how do these findings 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 – using Federal Housing Finance Agency data – the home price drop in North Carolina has actually been less than in the nation.
But the other two factors do go a long way in explaining our state’s high jobless rate.
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 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 here 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 on the backside of the business cycle, they can give us a bigger jolt.
Michael L. Walden is a William Neal Reynolds distinguished professor at North Carolina State University and author of “North Carolina in the Connected Age.”
By the numbers