West Virginia’s Shrinking Labor Force

The Bureau of Business and Economic Research at WVU recently released population projections for West Virginia over the next 15 years. According to their projections, West Virginia’s population will grow by 39,811 from 2010 to 2015, an increase of 2.1 percent.

While the projected total population changes are minor, the changes in demographics are drastic. The following chart shows the projected changes by age group for West Virginia’s working age population.
 
 
While West Virginia’s population below the age of 64 is projected to decline across the board, the population over the age of 65 is set to explode. In fact the population over the age of 75 is projected to nearly double by 2035.
 
So what does the changing demographics of West Virginia’s population mean for the state’s labor force. Take a look at the state’s 2010 labor force participation rates by age from the ACS.
 

The labor force particpation rates in the older age groups in which West Virginia is gaining population are much lower than in the age groups in which the state is projected to lose population.  This means that even as the population grows larger, the labor force should shrink, as labor force particpation declines with age. The table below demonstrates this, by applying the 2010 labor force participation rates to the population projections.

 
West Virginia’s labor force could decline by 7%, even as its population grows, because its population is aging. West Virginia is shrinking in the core working age groups, and growing in the older, retirment age groups. While the population over the age of 75 grows by 120,000, only 4,400 would be added to the labor force from that age group.

This shift also hurts West Virginia’s overall labor force particpation rate. Again, as the older age groups with lower particpation rates grow, they are not being replaced by younger workers. As a result, West Virginia’s total labor force particpation rate could fall to 48 percent by 2035, meaning less than half of the state’s working age population would be in the workforce. 

 
This could spell trouble for the state’s future. An older population is an expensive population, particularly with higher medical costs and other demands on public services. Combined with a smaller labor force, and therefore a smaller tax base, and West Virginia’s budget won’t stay balanced for long.

Declining Public Sector has Hurt Recovery

Our recent Jobs Count report showed that the economy has added zero net jobs since June and the unemployment rate remains above 8 percent. As a previous post had noted, the momentum the economy seemed to have been building during the recover has been lost over the past few months. However, one sector of the economy has been performing much worse than the rest, and its poor performance has been a drag on the recovery.

West Virginia’s public sector employment, particularly state and local government workers, has dropped off during West Virginia’s recovery. Since February 2010, when West Virginia’s employment bottomed out, state and local government employment has declined by 2,100 jobs, or -1.6%, while total employment has grown by 13,100 jobs, or an increase of 1.8%.
 
So not only has a declining public sector held down employment, its decline has accelerated. The chart below compares average monthly growth rates for the 18 months before the beginning of the recession in West Virginia, the past 18 months since employment bottomed out, and the past three months for which there has been no net job growth.
 
Source: Bureau of Labor Statistics
 
While private sector employment has grown at twice the monthly rate it did in the 18 months before the recession, state and local government employment been on the decline. And that decline has accelerated recently, while the private sector has limped along, unable to make up the difference. As a result, the recovery has stalled.
 
Maybe a proposal to prevent further decline in public employment isn’t so absurd.

Reason, rationality, are in short political supply these days…

A little humor for the day via Krugman Blog..

 

West Virginia’s Severance Tax Below Other Energy-Intensive States

One idea we’ve championed in the past is the creation of a trust fund for economic development and diversification funded through an increase in West Virginia’s severance tax levied on coal and natural gas extraction. But would raising the severance tax make it too expensive to mine coal or drill for natural gas in West Virginia, and hurt the state’s economy? Let’s look at how West Virginia compares to other states.

First we’ll look at which states rely on severance taxes. As the table below shows, it’s not surprise that the top severance tax states all are rich in coal, oil, gas, or all three. Alaska tops the list, with over 66% of state tax revenue coming from severance taxes. West Virginia comes in with over 7% of state tax revenue coming from its severance tax.
 
State Tax Revenue, 2007 (thousands)
Source: U.S. Census Bureau
 
So while West Virginia relies on the severance tax, it doesn’t do so to the extent of some other energy and natural resource intensive states. But which state actually taxes coal, oil, and gas the heaviest, and how does West Virginia compare? Instead of comparing the statutory rate for each state, a more accurate way to compare is to calculate an effective rate for each state. 
 
One way that can be done is by using data from the 2007 Economic Census (the most recent year available). One data item from the economic census is the total value for shipments, and receipts for services for every industry, which, for the mining industry, would basically be the total value of all the coal, gas, and oil sold by the industry. By dividing total severance tax revenue by that number, you can come up with an effective severance tax rate for the mining industry.
 
Effective Severance Tax Rates, 2007
 
Using this method, West Virginia has an effective severance tax rate of 3.2%, well below the average of 5.2% for the top ten states. Alaska had the highest effective rate at 11.2%. Of the ten state’s most reliant on the severance tax, West Virginia ranked 7th for effective rate. West Virginia also had a lower effective rate than neighboring energy producer Kentucky, and a lower rate than the western states whose production is growing more competitive with West Virginia every year.

With West Virginia’s effective severance tax rate lower than several other highly productive energy resource states, it seems unlikely that a small increase in West Virginia’s severance tax rate would hurt production nor cause any economic harm. Further, most analysts believe that severance taxes are highly exportable, meaning that the tax burden falls mostly on out of state utility customers and shareholders. This is just one more reason why the state needs to create a WV Trust Fund with a modest increase in the severance tax. Without it, there is no guarantee that the state will benefit from natural resource production in the long-run.

 

Does (Government) Size Matter?

I’ve talked before about the relationship (or lack thereof) between the level of business taxation and economic growth in the states, concluding that things like quality public services, access to markets and inputs, and a quality workforce all matter more to economic growth and prosperity than taxes. 

But there is another argument out there that is closely related to the business tax argument – the size of government. Proponents argue that the size of government matters to economic growth; states with large governments see their economies struggle under the stifling weight of government, while states with smaller governments see their economies flourish without the heavy burden of government, and that their is a direct relationship between the size of government and economic growth.
 
So, how much of a connection is there? First you need to measure the size of government. Using data from the Bureau of Economic Analysis, one simple way is to measure the share of state and local government GDP as a percent of total GDP. I did this (using real GDP) for each state from 1997 to 2009 (the dates available from the BEA) and came up with an average for the time period for each state.
 
West Virginia’s average was 12.7%, meaning that on average, between 1997 and 2009, state and local government made up 12.7% of West Virginia’s economy. West Virginia’s score was high, the national rate was 9.0%, and only 1 state, New Mexico, had a higher rate than West Virginia.
 
So how was the size of government related to economic growth? I measured economic growth as the average annual growth rate of private GDP in each state from 1997 to 2009, and then compared it to my measure for the size of government. And this is what it looked like.
 
 
The results showed no direct connection between the size of government in a state and that state’s economic growth. The two had a correlation coefficient of 0.06, again suggesting no connection.
 
But what about another question – government growth. Does government grow at the expense of the rest of the economy? To examine that question, I used the same data, only this time, instead of using the average share of GDP that state and local government had in each state, I used the average annual growth rate of state and local government, comparing it to the average annual growth rate for private GDP. And this is what that look like.
 
 
This time there is a more direct relationship, and a correlation coefficient of 0.60. But instead of government growth stunting economic growth, the two moved together. States with low levels of growth in government, also had low levels of economic growth, and states with high levels of government growth also had high economic growth. Perhaps as economies grow, so do demands for new roads, schools, and other public services.
 
Like tax levels, focusing on the size of government misses out on what really matters for economic growth. And as states grow their economies, they also grow their demands for public services. Trying to shrink government in the face of these new demands is only going to hurt in the future.

Is the Recovery Losing Steam?

Friday morning’s news that there was no job growth in the month of August sent disappointment throughout the country, and stoked fears that another recession may be around the corner. The meager 17,000 private sector jobs added were offset by an equal loss of public sector workers, as state and local governments continued to make cutbacks. 

A closer look at the CES data from the BLS shows that the recovery is indeed losing momentum, both nationally and in West Virginia. First let’s look at the national picture.
 
 
The above chart shows U.S. nonfarm employment (seasonally adjusted) from January 2007 to July 2011. The red lines indicate the highest and lowest points for employment in that time period, and serve as a useful indicator of the start of the recession and the beginning of the recovery.
 
Employment in the U.S. peaked in January 2008. In the 12 months prior, employment grew at an average monthly rate of 0.05%. After the peak, employment finally bottomed out in February of 2010. During that time, employment fell at an average monthly rate of -0.26%.
 
Since bottoming out, U.S. employment has grown at an average monthly rate of 0.09% (from Feb 2010 to July 2011), a higher rate than in the 12 months before the recession.  And in the first part of 2011, that growth seemed to be building momentum. Between January and April of 2011, the average monthly rate of growth pick up steam, reaching 0.16%. 
 
Unfortunately, that momentum has been lost, as the average monthly rate of growth slowed to 0.05% from April to July. And as the latest report shows, it won’t be pretty for August.
 
It’s a similar tale for West Virginia as well. Again, the below chart shows WV nonfarm employment (seasonally adjusted) from January 2007 to July 2011, with the red lines indicating the highest and lowest points for employment in that time period.
 

West Virginia’s employment peaked in February of 2008, and reached its bottom in February of 2010. In the year leading up to the recession, West Virginia’s employment grew at an average monthly rate of 0.08%, and during the decline fell at an average monthly rate of -0.14%.

Since employment bottomed out in February 2010, employment in West Virginia has grown at a monthly rate of 0.09%; like the U.S., better growth than the 12 months before the recession. And like the U.S., growth in West Virginia began to speed up in the beginning of 2011, as the average monthly growth rate increased to 0.26% between January and April.

However, just like the national picture, that momentum has been quickly lost, as the average monthly rate of growth turned negative between April and July, at -0.16%.

At this point it is pretty clear that the recovery has stalled. Perhaps instead of a super-committee in Congress focused on budget cuts (which as we can see across the country, kills jobs), we can get one that focuses on job creation.  

The When and the Where of the Recession

While economists point to December 2007 as the official beginning of the national recession, and to June 2009 as the official end, that doesn’t mean that each state was impacted by the recession only during that stretch of time. In fact, when it comes to jobs, when each state began to feel the affects of the recession and how long the pain lasted varies greatly state to state. 

The following chart demonstrates this. Each horizontal line on the chart represents the amount of time between each state’s peak employment and when employment finally bottomed out between January 2007 and July 2011. For example, for the U.S. as a whole, employment peaked at 137,996,000 in January 2008, and bottomed out at 129,246,000 in February of 2010, with the decline from top to bottom lasting 25 months.
 
 
 
Again, the chart shows that not only was there a great deal of variation of when each state started to lose jobs, but also in how long the job loss lasted. 
 
Rhode Island was the early bird when it came to job losses, with employment peaking in January 2007, nearly a full year before the national recession began. At the other extreme, Alaska didn’t see employment peak until December of 2008, nearly a year after the recession began.
 
Together, Alaska and North Dakota had the shortest downturns, both at 5 months before reaching bottom. They both also had the smallest drop in employment during their downturn, with employment falling less than 2 percent during their downturns, compared to the national average of a 6.5 percent decline during the slide.
 
Nevada had the longest downturn, with employment peaking in May of 2007 and not hitting bottom until September of 2010, a length of 40 months. Nevada also had the largest reduction in employment during its slide, as employment fell 14.6 percent.
 
Both Kansas and Missouri were the latest states to pull out of their slides, reaching their employment bottoms in February of 2011, although Missouri’s downturn lasted 23 months while Kansas’s lasted 34.
 
Finally, West Virginia presents an interesting case. It took us 24 months to get from peak to trough, just under the national average of 25 months. But during that time, our employment declined by only 3.4 percent, compared to the national average of 6.5 percent. So when it comes to jobs, the length of the recession was about average in West Virginia, but its strength could have been much worse.

Straight from the Horse’s Mouth: What Matters for Businesses

The West Virginia Department of Commerce recently posted a “success story” featuring Paul Lambert, president of STaSIS Engineering, an auto service company that moved from California to West Virginia in 2009, and is planning to expand.

So why did Mr. Lambert move his company to West Virginia? Isn’t our business personal property tax a job killer? Aren’t we out of step with other states when it comes to taxes? Mr. Lambert could have located in Pennsylvania or Ohio, and paid no business personal property tax, or any of the 44 states where the total business tax burden is lower than in West Virginia.
 
At the risk of repeating myself, factors like access to markets and inputs, quality public services, a highly trained workforce, and a high quality of life all matter more to successful businesses than taxes. And that taxes themselves are only a small part of the cost of doing business. Did these factors influence Mr. Lambert and STaSIS Engineering? I’ll let him speak for himself.
 
“It’s been a very strong move for us. We’re within four hours of about 40 million people, and yet we’re in West Virginia. We have a nice, good quality of life, fairly low-cost ability to run a business and we’re still within proximity of major metropolitan areas and consumers.

“We’re very pleased in West Virginia. We were impressed with the openness of state government…

“There is a strong workforce through this Mid-Atlantic, Northeastern corridor…You’ve got good trades people and you have good engineering professionals. That’s the mix we need.”

And as for why STaSIS left California, it wasn’t just the threat of tax increases in order the close California’s budget deficit (even though according to COST WV’s business tax burden is greater than CA’s), it was the threat of cuts to public services and the corresponding quality of life that Mr. Lambert cited, saying, 
 
“Here (California) we are looking at class sizes going from 20 to 30 kids,” said Lambert, who has two girls, ages 3 and 5. “But there I just enrolled by daughter in a class of 13.”

Quality public services, access to markets and inputs, and a quality workforce. Those are what makes the difference.