YOU DECIDE: What explains N.C. economic paradox?

Date posted: December 23, 2011

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

Most people judge the economy by the job market, and certainly the job news in North Carolina during the last few years has been challenging. For 34 straight months beginning in January 2009, our state has had an unemployment rate (seasonally adjusted) above 9 percent, and in 23 of those months the rate was over 10 percent. Today there are more than 300,000 fewer jobs than there were in early 2008, and although there’s been job growth since 2010, the growth rate has been quite low, at 0.6 percent.

And what’s more worrisome to many is that the state’s job situation has underperformed the national numbers. In the last three years, North Carolina’s unemployment rate has been higher than the national rate in all but one month. Also, since the beginning of 2010, the nation has added jobs at a rate three times faster than North Carolina (1.8 percent versus 0.6 percent), and even the national growth is sluggish.

So this isn’t a very positive picture for North Carolina. But what if I told you another broad measure of the economy actually shows North Carolina performing much better and even better than the nation for two straight years? This would give us some hope.

The good news is that such a measure does exist, and it gives a much more upbeat view of our state’s economy. The measure is “gross domestic product,” usually shortened to GDP. It calibrates the value of what is produced in an economy, and the measure is available for the nation as well as all states. Unfortunately, we don’t yet have 2011 GDP information available, so my comparisons are based on 2009 and 2010 data.

The worst of the recession occurred in 2009, so it shouldn’t be a surprise that GDP fell in both the nation and in North Carolina during that year. But GDP fell less (2 percent) in our state compared to the national drop (2.5 percent). Fortunately, 2010 was a growth year for GDP, and once again North Carolina did better, with our state GDP rising one-third faster than national GDP.

These results create an economic paradox. While North Carolina has performed better than the nation in the past two years by a broad measure of production (GDP), the state’s job market has lagged national trends. Why?

There are several possible answers. Usually it takes time — especially when the economy is coming out of a recession — for increases in output to translate into increases in jobs. One reason is that businesses must be convinced the economic improvement is permanent, so they will hold off on hiring until they are certain the recovery is for real.

Yet there’s no requirement that the time between output improvements and hiring is the same in North Carolina as in the nation. In fact, traditionally the time span between output improvements and jobs has been longer in North Carolina. For example, in the economic expansion of the 2000s (2002-07), employment growth was faster in North Carolina than in the nation over the entire period, but it was slower in the first three years.

Job growth in North Carolina could also be lagging due to the continued downsizing in some of the state’s traditional industries. Tobacco, textiles and furniture, which dominated the North Carolina economy for almost a century, have been cutting output and jobs during the last 30 years. These changes have occurred in both expansionary and recessionary periods.

However, trends since early 2010 don’t suggest this downsizing has been a big factor in the state’s job market. Since then, cuts in tobacco and textile (including apparel) jobs have been relatively small, accounting for only 0.1 percent of all state jobs. The furniture industry has actually added some jobs in the last two years.

This brings us to an explanation for the North Carolina economic paradox that can be a short-run negative but a long-run plus: worker productivity. During and immediately after recessions, businesses strive to use their workers smarter and more efficiently; that is, to improve output per worker. This can be done by improving production techniques, using better technology and upgrading equipment and machinery. Indeed, spending on technology, machinery and equipment has been a strong factor in the recent economy.

North Carolina is one of the leading states in worker productivity. In 2010 (latest year available), the state ranked 11th among all states in a broad measure of worker productivity. Also, from 2009 to 2010, North Carolina’s worker productivity improved twice as fast as the national rate.

Obviously, if two people can do the work that three used to accomplish, job gains will be slower in the short run. This could be what has been happening in North Carolina and may be one reason for the state’s economic paradox.

Yet there can be a silver lining. Businesses like to locate where worker productivity is high. So the payoff for the state may be a burst of jobs down the road. I know many people are waiting, and I’m hopeful it will happen, but you decide!

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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. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/

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