Right-to-Work and pandemic jobs recovery

Summary:  The Allegheny Institute has been a long- time advocate for the adoption of Right-to-Work in Pennsylvania. Our research has demonstrated that the presence of Right-to-Work is associated with stronger economic growth in those states compared to the commonwealth. And while the pandemic has wreaked havoc on state economies across the nation, Right-to-Work states have fared better during the pandemic and are recovering faster than states without Right-to-Work. 

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Background

For two decades the Allegheny Institute has reported on the employment growth differences between Right-to-Work (RTW) states and non-Right-to-Work (NRTW) states. Indeed, the presence of RTW has long been a generally strong proxy for the degree to which free market economic policies are in place.

Several states that had for decades resisted RTW provisions as provided in the Taft Hartley Act have in recent years adopted RTW. The impact in those states has not yet had time to be felt fully as many other changes in the regulatory environment must be enacted to complement the RTW. And, predictably, much resistance to RTW still exists in the states that recently adopted it.

Unfortunately, there is a move in Congress sponsored by the Office of the President to remove the Right-to-Work provision completely. That would be a disaster for the nation’s economic future. 

States with RTW typically have a friendlier business climate overall, with far less unionization of their public-sector employees and they generally have faster growth.  Of course, there are exceptions for both RTW and NRTW states as special growth-enhancing or-constraining factors can, to some degree, offset the RTW effect.  For example, the high-tech sector in Silicon Valley and around Seattle. But the engineering and research jobs typically are not unionized and the manufacturing of many of the final products (Apple for example) are frequently offshored.

In recent years, many firms have begun relocating facilities and operations to Texas and other RTW states because of taxes and regulatory impediments.

Data sets

This Policy Brief looks at the jobs lost and then regained in 10 states during the worst of the COVID pandemic and the opening up that has been underway since the second half of 2020, to varying degrees across the country.  Five of the states are RTW with conservative-leaning governors and five are NRTW with more liberal governors. The states selected, both the RTW and NRTW, include a variety of sizes and are from very small to very large states spread geographically across the country.

The RTW states are South Carolina, Florida, Tennessee, Utah and Idaho. The NRTW states include Connecticut, New York, Pennsylvania, Illinois and New Mexico. Obviously, there is a great variety in each sample in terms of makeup of state economies and population size. Recent RTW-adopting states such as Michigan and Wisconsin were not selected. All employment data are taken from the U.S. Bureau of Labor Statistics.

Analysis

The analysis looks at: (1) the jobs lost from 2019 to 2020, (2) jobs lost for the worst month comparing April 2019 to April 2020 and (3) the job change from April 2019 to April 2021 as a more accurate measure of the degree of recovery from the worst of the pandemic. Employment growth from to 2011 to 2019 is included as an indication of the robustness of the states’ economies over a longer period following the severe 2008-2010 downturn. Jobs used for the comparisons are total private jobs since public jobs were much less affected by the pandemic closures. All comparative gauges are the unweighted percentage changes for the five states in each group.  

First, it is important to note the very large difference in the eight-year employment growth (2011 to 2019) for the RTW and NRTW states.  The RTW states averaged 26 percent growth for the period. NRTW employment climbed 9.8 percent. Thus, the RTW states grew jobs 2.65 times faster than the NRTW pace.

Over the eight years Pennsylvania’s private employment level rose just 8.6 percent, slower than the average of the NRTW states and only a third as fast as the average of the five RTW states.  And this period included the tremendous surge in shale gas drilling and production.  Connecticut was the weakest of the group with only a meager 5.3 percent gain over the eight-year period.  

Second, how did the states fare for the worst COVID impact year, 2020, compared to the 2019 level?  Here again there is a large difference in jobs performance.  RTW states in 2020 for the year as a whole averaged a loss of 3.5 percent of employment from the 2019 12-month average.  On the other hand, the NRTW states suffered an average 8.6 percent drop in employment in 2020 as a whole compared to 2019, or a 2.5 times bigger loss than the RTW states.

Pennsylvania had a loss of 8.2 percent for 2020, about the average for the five NRTW states. New York was hardest hit with a drop of 11.6 percent.  Owing to a very sharp bounce back after April and May, Idaho saw a loss of only 0.4 percent for the year compared to 2019.

Third, how did the two groups compare for job declines from April 2019 to April 2020, the hardest hit month for most states? Here the difference in losses is not as stark as the first two comparisons.  But it remains substantial.  For the NRTW group of states, the April-to-April drop average was 18 percent and for the RTW group 11.8 percent. Both groups were heavily impacted by federal guidelines and the initial frightening nature of the potential health problems posed by the virus.

Pennsylvania suffered a very large 20 percent decline in private jobs from April 2019 to April 2020, the first lockdown month. Of the 10 states reviewed in this analysis, only New York posted a worse figure, with a drop of 22.6 percent.

Fourth, a comparison is made of how well the groups have moved toward recovering job losses incurred during the pandemic. This is done by looking at the April 2019 data and the April 2021 numbers, the most recent currently available.  Here the comparative performance is truly startling:  The five RTW states’ average employment change is a very small loss of 0.3 percent. Granted, some states were better than others but all were significantly better than any state in the NRTW group where the average loss in April 2021 compared to April 2019 was 7.6 percent.

Pennsylvania’s private jobs had recovered in April 2021 to a loss of 6.9 percent from April 2019. This is slightly better than the NRTW group as a whole and significantly better than New York where jobs were 10.3 percent below April 2019.

Conclusion

What are the reasons for the group average performances being so different?  For one, gubernatorial actions and restrictions were far less draconian in the RTW states. This reflects the fundamental mind set differences between RTW red states and NRTW blue states.

For one thing, NRTW blue states are far more likely to have very large and powerful public sector unions whose jobs were largely protected so closing down the private economy would not have much effect on public sector employees continuing to collect paychecks and benefits. Second, governors in the red RTW states eased restrictions much sooner and allowed business activity to resume more quickly.

This all reflects the importance of the differences in the fundamentals of attitudes toward business and personal freedom and responsibility and setting limits to government power. There can be little doubt that RTW is a key component of the success in those states in bouncing back from the COVID pandemic.

State’s lackluster job performance needs help, not hindrances

Summary: As the pandemic loosens its grip and lockdowns begin to ease in Pennsylvania, the economy appears to be strengthening.  However, job growth remains a concern despite a small pickup in employment from February to March. Indeed, the latest statewide employment report for March shows there is still a long way to go and that it is incumbent upon commonwealth lawmakers not to throw more growth-stifling regulations at beleaguered business owners that will stymie a return to solid gains.

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Employment levels

According to the U.S. Department of Labor data for establishment payrolls, there were 5.625 million nonfarm jobs across Pennsylvania in March 2021, the lowest March reading since 2010 and 375,000 (6.3 percent) fewer than the 6.0 million posted 12 months earlier. Keep in mind that March 2020 was the start of the lockdowns that caused many businesses to either close or severely restrict operations and production in many industries.  Thus, the posted March 2020 tally is not the most useful measure to evaluate the current year jobs count.

Note that both January and February of 2020 showed moderate job gains compared to year-earlier totals (0.80 percent and 0.78 percent respectively).  It is very likely that, absent the pandemic and lockdowns, March 2020 job gains would have continued that trend and nonfarm employment would have reached 6.057 million.   That would have been the largest March jobs total ever recorded and would have represented a decade gain of 516,000 jobs.

Using this no-pandemic estimate for March 2020 puts the year-over-year decline in March 2021 at 432,000 or 7.1 percent, which is a better measurement of the pandemic effect.  Looking at a longer-term comparison, the jobs total in March 2021 was only 84,000 ahead of the March 2010 level compared to a 468,000 rise between March 2010 and March 2019. Thus, the state had 384,000 fewer jobs last month than it had two years earlier.

Overall, jobs can be divided into two super sectors—goods-producing and service-providing.  There are three goods-producing sectors, mining and logging, construction and manufacturing. They account for about 14 percent of the total nonfarm jobs in Pennsylvania.  From 2016 to 2019 there was monthly year-over-year growth in the goods producing super sector for nearly every month (except January 2017) until September 2019 after which the monthly year-over-year job numbers began to decline and continue to do so. 

In March 2021 there were 797,200 goods-producing jobs, a decline of 5.1 percent from the previous March (839,700).  But when compared to the last pandemic-free March (2019), the drop was greater at 6.0 percent (848,300).  The March 2021 reading is the lowest number since the great recession year of 2010. 

Within the goods-producing super sector all three sectors had year-over-year losses in March 2021, the mining and logging sector lost the largest percentage at 16.6 percent.  When compared to March 2019 the losses are even greater at 28.5 percent. 

The service-providing super sector had 4.8 million jobs in March 2021, about 85.6 percent of jobs in the commonwealth.  The sectors in this category include trade, transportation and utilities; information; financial activities; professional and business services; education and health services; leisure and hospitality; government and other services. 

While all service-providing sectors experienced job losses on a year-over-year basis, the hardest hit continues to be the leisure and hospitality sector.  For March 2021 there were 420,800 leisure and hospitality jobs across the commonwealth—a drop of 21.5 percent over last March.  But compared to the pre-pandemic March 2019 count of 554,700, which was the highest job total for any March this century, the job count in March 2021 was 24 percent lower. The March 2021 figure is the lowest March amount since at least 2000 when there were just 442,400 jobs.  This sector had been steadily growing for at least two decades until the lockdowns were ordered at the start of the pandemic.  This sector is still under capacity restrictions, more than a year later. 

Given that the number of total nonfarm jobs in Pennsylvania has declined every month (on a year-over-year basis) for 13 straight months, how long will it be before the jobs count climbs to levels reached in the pre-pandemic months? Obviously, as the number of vaccinations continues to increase and consumer demand rises, because of enormous federal stimulus checks, unemployment subsidies and propping up of state and local government spending there should be a significant pickup in job totals.  Although as has been discovered, the unemployment supplements are suppressing the return of workers to the job market. Some sectors, such as leisure and hospitality, will take longer than others to rebound fully. 

In that regard, the recent spring business climate survey from the Lincoln Institute shows that optimism for the immediate future among business executives is muted.

Business climate survey

The Lincoln Institute’s Spring 2021 Business Climate Survey recorded the responses of 199 owners/executives/managers of businesses from across the commonwealth to various questions about the state of Pennsylvania’s economy.  The responses reflect the employment data—sluggish growth that is unlikely to rebound quickly as businesses across the state try to recover from the pandemic lockdowns. 

The most general question asked was if they thought “Pennsylvania’s economy is on the right track or wrong track?”  While 31 percent of the respondents replied that the state is on the right track, the majority (61 percent) indicated that the economy is on the wrong track (8 percent offered no opinion).  

Another question asked if their business has recovered from the pandemic lockdowns. Of those responding to the survey, 47 percent indicated they had partially recovered while 21 percent claim to not have recovered at all.  Only 10 percent said they had fully recovered.   

Regarding future employment levels at their company, 58 percent of respondents say employee counts are expected to remain the same six months in the future while 25 percent plan to increase those levels.  About 9 percent foresee reducing employment levels.  

The next question asked about the optimism of these decision makers over the next six months.  Optimism is muted with just 35 percent of respondents believing that business conditions will be better than this spring while 43 percent indicated it will remain the same.  Seventeen percent think business conditions will be worse. 

There were some concerns regarding some of the governor’s plans that include; raising the personal income tax, joining the Regional Greenhouse Gas Initiative (RGGI) and raising the minimum wage to $15 per hour.  On each of these three gubernatorial initiatives, high percentages of respondents expressed somewhat or strong opposition—78 percent for the increase to the personal income tax, 67 percent for the RGGI and 70 percent for the increase to the minimum wage. 

There was a follow-up question regarding the minimum wage.  The respondents were asked if they had taken steps to reduce reliance on minimum-wage employees.  Of the 196 respondents to this question, 105 noted that they didn’t have minimum-wage workers.  Of the remaining 91 survey takers, 49, or 53.8 percent, indicated that they had taken steps to reduce reliance on minimum-wage workers.

That’s an important point.  Low-skilled and entry level workers rely on that first step of the career ladder to gain the skills and experience necessary to be successful and move up in the workforce.  Proponents of increasing the minimum wage don’t see the unexpected consequences of a forced hike—such as businesses substituting away from minimum-wage labor most likely with technological advances such as self-serve kiosks or even a reduction in hours worked. 

An increase in the personal income tax could have two consequences.  First, it would reduce the disposable income of customers and, secondly, these business executives would also pay the increase, thus reducing their own disposable income.  Joining the RGGI and increasing the minimum wage will increase the cost of doing business and increase costs at a time when most businesses are still struggling with the pandemic and the continued business restrictions. 

Earnings growth in Pennsylvania

The U.S. Bureau of Labor Statistics provides data on average hourly earnings for total private employees, employees in both the goods-producing and private service-providing super sectors as well as a few other sub-sectors beginning in 2007. 

Statewide, the annual average hourly wage for total private employees in 2010 was $21.21.  By 2020 that had risen by 28.7 percent to $27.30.  For employees in the goods-producing super sector that wage was $22.90 in 2010 and rose by 26.7 percent to reach $29.02 in 2020.  For employees in the private service-providing sectors, the wage was a somewhat lower ($20.81) but increased at a faster rate (29.3 percent) to reach $26.90 in 2020. 

Minimum-wage earners are most likely to be found in the private service-providing sectors such as retail and in the leisure and hospitality sectors.  For the trade, transportation and utilities sector, which includes the sub-sector retail, the average annual hourly wage came in at $18.89 in 2010 and climbed to $24.14 in 2020—an increase of nearly 28 percent over the decade.  For the leisure and hospitality sector, which includes hotels, restaurants and those that work at entertainment venues, the average annual wage was $12.41 in 2010 and rose 25 percent to $15.53 in 2020. 

And, of course, a statewide mandate ignores the different cost of living in each metro area.  Furthermore, rates will differ by county and municipality in the metro area as well.  For example, in Philadelphia (Pennsylvania metro division) where the cost of living is highest in the state, the 2020 average annual hourly wage for total private jobs is $30.79.  But in Pittsburgh it’s a bit lower at $27.01.  In the northwest corner of the state, the Erie metro’s rate is $21.68 while the Altoona metro area has an average annual hourly rate of $20.34. 

Wage mandates that require higher-than-market rates interfere in the labor market by artificially increasing the cost of labor to business and thereby lowering the demand for labor unless costs can be fully passed on to the customers. Indeed, minimum-wage supporters argue business will pass the cost onto the consumer in the form of higher prices or take smaller profits.  But what if the business is constrained by competition?  They may seek to substitute capital (machines and technology) for low-skilled labor or begin to reduce the hours, thereby making low-skilled labor possibly worse off.

And in a workplace with a several wage tiers based on experience and job responsibilities and which have some workers at or near the current minimum, raising the minimum wage will create enormous pressure to raise the wages of other employees in order to maintain an appropriate differential for skill and responsibility. Businesses offering non-wage benefits could be forced to cut them back.

Entry level, low skill jobs are not family supporting jobs. Trying artificially to make them family supporting is never going to work as long as there is any freedom left in the competitive marketplace.  Businesses will not thrive and eventually tax bases get eroded.

Pennsylvania’s job losses in 2020

Summary: The coronavirus pandemic hammered Pennsylvania’s economy in 2020.  With recently released state employer payroll data for December, the extent of the damage can clearly be seen.  Thousands of Pennsylvanians lost jobs in nearly every sector, pushing employment to decade-ago levels.

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Total non-farm jobs

For quite some time Institute Policy Briefs have documented the sub-par growth in Pennsylvania’s non-farm jobs. For example, during the previous couple of years (2018 and 2019) the strongest monthly gain from the year-earlier reading occurred in January 2019, when non-farm jobs were 1.30 percent above January 2018.  March 2018 posted a similar gain (1.29 percent) over March 2017.  The changes in jobs as measured from the same month a year earlier during the two years ranged from a high of 1.30 percent to a low of 0.58 percent (December 2019). 

By comparison, the national monthly year-over-year increases during these two years ranged from a high of 1.70 percent (January 2019) to a low of 1.21 percent (June 2019).  Pennsylvania’s job gains from 12 months earlier lagged national performance every month from January 2018 to December 2019.  National growth ran ahead of Pennsylvania because of much stronger gains in several states such as Texas with an average monthly growth rate of over 2.25 percent during those two years.  Other states exceeding the national growth rate include Florida, Georgia and North Carolina.   

In 2020, the relatively sluggish monthly year-over-year gains in Pennsylvania continued in the two months prior to the massive coronavirus impact with January posting a rise of 0.71 percent and February at 1.02 percent. Note that national gains were far stronger at 1.54 percent in January and 1.61 percent in February.  After massive job losses in April and May, there was some recovery as the lockdown eased somewhat. Nonetheless, for 2020 as a whole, the average monthly non-farm jobs count in the state was 5.617 million, a huge decline of 7.36 percent from 2019’s average of 6.064 million and the lowest count since 2009 when the monthly average was 5.616 million. 

Nationally, the slide, while quite large, was not as dramatic.  The average monthly number of jobs nationwide in 2020 was 142.22 million, down 5.75 percent from 2019 (150.94 million) and the lowest annual number since 2015 (141.83 million). 

Total private jobs, which exclude public-sector jobs, recorded a bigger drop than non-farm jobs.  The monthly average number of private jobs in Pennsylvania in 2020 came in at 4.93 million—8.0 percent lower than 2019’s average monthly count of 5.36 million.  The 2020 count was the lowest since the 4.85 million jobs in the Great Recession year of 2010.

Goods-producing

Goods-producing sectors include mining and logging, construction and manufacturing. Typical of most sectors, the goods-producing sectors posted slight employment gains in January (0.30 percent) and February (0.73 percent) before the steep decline began in March (-0.72 percent).  April had the largest year-over-year decline (-21.47 percent), which lessened as the year progressed.  The average monthly goods-producing jobs in 2020 was 810,600, 6.30 percent lower than in 2019 (865,100).   

The mining and logging sector took the hardest hit in percentage terms with double-digit year-over-year losses each month from April through December ranging from -18.92 percent (June) to -13.07 percent (September).  However, this sector had been shedding jobs on a monthly, year-over-year basis going back to August 2019. 

The job losses in this sector could continue or possibly worsen if the governor follows through on the threat to impose an additional extraction tax on the natural gas industry or forces Pennsylvania into the Regional Greenhouse Gas Initiative. 

Service-providing industries

Service-providing industries suffered even greater losses than the goods sector during the   lockdown.  However, the public-service sector (government) employment declines were far smaller than private-service sector losses.

Government

Note that the government sector, including federal, state and local levels, added jobs on a year-over-year basis, in the first quarter of 2020—January (0.66 percent), February (0.68 percent) and March (0.36 percent).  The job losses began in April but were not very severe compared to the private sector.  The annual monthly average of government employment in 2020 was just 2.25 percent lower than in 2019, reflecting an increase in federal jobs of 3.3 percent.

For the commonwealth, state level losses were minimal in 2020.  After adding jobs over the first four months, the losses followed each month for the remainder of the year.  Overall, the average monthly number of state jobs dropped only 2.28 percent from the monthly average in 2019. 

Losses at the local level were more severe.  After adding jobs during the first two months, the losses set in.  They began in March (-0.17 percent) and lasted for each remaining month of 2020.  Local government jobs in 2020 were 6.11 percent lower than in 2019.  Much of the decline occurred in public k-12 education which accounted for over 70 percent of the total loss of local government jobs by year’s end. While public schools did not lay off any teachers as they moved to remote learning, it is more likely that support staff were laid off as buildings were closed. 

Without a doubt leisure and hospitality employment suffered the biggest losses in 2020. After being one of the most reliable job growing sectors, the lockdown specifically targeted this sector and the resulting job losses were horrendous.  In April 2020, the employment level in this sector dropped by 59 percent.  May’s year-over-year loss was 50.50 percent.  While the losses improved slightly as the lockdown was lifted, they remained the largest of any sector.  In the second lockdown, which was aimed predominantly at bars and restaurants during the normally busy holiday season, losses reached nearly 30 percent in December compared to December 2019.   

Every major component of the leisure and hospitality industry (eating places, hotels, recreational facilities, etc.) recorded lower job counts in December 2020 than in December 2019. 

Education and health services has historically also been a strong job growth sector and added jobs from January 2018 through December 2019. Relatively strong gains continued into January and February 2020.  However, losses began in March as the gubernatorial lockdown was put in place. Still, the loss of jobs from 2019 to 2020 was less than 5 percent. 

It is interesting to note that the health care sector was not immune to job losses as the Covid-19 crisis took hold. Hospital employment was a relatively weak performer posting monthly year-over-year growth under 1 percent from March 2018 until the pandemic began in March 2020. It started shedding jobs in April and through the end of the year recorded an annual loss of 2.63 percent from 2019. 

Educational services, which are comprised of colleges, universities, private k-12 and training centers, also suffered a large drop in the monthly year-over-year employment count once the pandemic began.  For the year, which includes the growth months of January and February, the 2020 average monthly number of jobs fell 9.75 percent below the average monthly reading in 2019.

Another sector sharing the same fate is the trade, transportation and utilities sector which had a fall in the average monthly level of employment of 6.55 percent from 2019 to 2020.  In this sector, retail was hit particularly hard.  For the year, the average monthly jobs in the retail sector came in 8.5 percent lower in 2020 than in 2019.  This large decline occurred even though grocery stores and general-purpose stores were permitted to operate during the lockdowns. 

What to do?

What does Pennsylvania need to do going forward to begin repairing the damage?  The one thing that should not be done is to raise the minimum wage at a time when many businesses are foundering and in danger of closing.  But that’s exactly what the governor has proposed in his budget for fiscal 2022.  The proposed personal income tax hike is also a very bad idea.

The leisure and hospitality industry, along with retail, provides many new labor force entrants   their first job and would be hardest hit by a higher minimum wage. A higher wage floor would increase the cost of doing business at a time when revenues are still well below normal as restaurants in the commonwealth are still restricted to 50 percent capacity and many arts and recreational facilities are still closed or are limiting patrons to comply with social distancing requirements. 

Raising the minimum wage is a tone-deaf measure that will only exacerbate the job losses for this and other sectors that offer low-skilled labor the all-important entry into the workplace.

The best way to reverse these job losses would be to help these industries, not place more impediments in their way.  As more vaccinations are carried out customer occupancy levels should be increased.  As we have been advocating for many years, the state must facilitate a business climate that is conducive to growth, such as by reducing regulations and lowering tax levels on these companies, which will encourage them to grow and prosper.

PA’s employment situation improved in June but has far to go

Summary: On July 17, the state Department of Labor and Industry released the June report on the state’s labor market conditions.  Overall, the June results show that significant progress was made since April’s unprecedented collapse of the economy.

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Household employment and unemployment

The household survey data that measure the size of the labor force, the number of people working and the unemployment rate found that both seasonally-adjusted labor force and number of people working had fallen from the May readings. However, the drop in labor force was larger by 50,000 than the slide in people working causing the unemployment rate to fall slightly from 13.4 to 13 percent. The state’s decline in both labor force and number of people working was very different from the national report for June that saw the unemployment rate drop from 13.4 to 11.1 percent with the number of people working climbing 4.9 million and labor force climbing 1.7 million.

Although June’s 13 percent unemployment rate was down from the horrendous 16.1 percent posting in April, the latest Pennsylvania rate still exceeds any seasonally-adjusted unemployment rate experienced in several decades including the 12.7 percent rate of January 1983 when the national economy was in a deep recession and far surpasses the 8.8 percent high set in March 2010 during the severe 2009-2010 recession. 

Payroll Employment

Meanwhile, in the June report for Pennsylvania, the survey of employers found a fairly sizable 231,000 seasonally-adjusted increase in employees from May to June that contrasts sharply with the decline in number of people working as reported in the household survey. The rise in payroll jobs was accounted for entirely by the private sector where employment was devastated by the virus related mandates and declines in demand in many sectors that shoved jobs down by a million in April compared to the April 2019 figure.

Note that comparisons to the year-ago month provides an indication from month-to-month in the recovery of how far employment has to go to get back to pre-virus levels.

Bear in mind too, that the loss in jobs in April’s report reflects the sharp downturn that began and accelerated in the second half of March as the lockdown was put in place. Much of the March survey of employers had already occurred so the devastated labor market was not revealed in official numbers until the April survey was completed. However, the gigantic and unprecedented increase in unemployment claims in late March pointed to the awful job counts that would be shown in the April employment report.

In May and June, private payroll employment increased a combined 440,000, reducing June’s year-over-year loss compared to April’s massive decline, although it remained a staggering 595,000 below the reading posted for June 2019. Meanwhile, all-government employment (federal, state and local) in June 2020 was down 25,500 compared to a year earlier with local government and school districts accounting for almost 90 percent of the all-government decline. Federal jobs were up slightly.

In short, the state’s private-sector jobs in April fell almost 20 percent below the 12-month earlier level; in May the reading was 15.6 percent below the previous May and in June it was still down 11 percent compared to June last year.  It is important to keep in mind that over the previous three years (2017-2019), annual private employment growth measured by month-over-year-ago-month averaged 59,000 despite slowing to 50,500 in 2019.  Conservatively, the expected monthly year-over-year gains in the April, May and June period, absent the coronavirus, would have averaged around 40,000 jobs or about 3,500 net new additional jobs each month. Thus, not only did the virus lockdown and shrinkage of demand wipe out hundreds of thousands of existing jobs it also prevented the private sector employment gains that could have occurred in a moderately expanding economy.

Employment by Sector

Private employment is divided into goods-producing and service-producing. In 2019, service-producing employment accounted for 83 percent of private-sector jobs.

April employment sustained the biggest loss compared to the 12-month earlier reading since the virus hit. Goods-producing jobs fell an enormous 21.4 percent from 865,000 to 679,000 (-186,000) while service-producing employment plunged 19.2 percent from 4.49 million to 3.63 million (-0.86 million). After posting solid rebounding gains in May and June, goods-producing jobs remained 56,000 (6.4 percent) lower than June 2019 while service-producing jobs were still down 535,000 (11.8 percent).

It is important to note that the April and May 2020 losses in private employment compared to 12-month earlier readings dwarf the largest such declines in modern history.  Prior to 2020, the biggest month-over-the-same-month a year earlier decline going back in recent decades occurred in August of 2009 in the deep recession of 2009-2010 when private employment fell 235,000 (12.2 percent) below the level of August 2008, which is far short of the April 2020 percent decline. And bear in mind that the August 2009 level was the combined result of falling employment over several months preceding.

Goods Employment  

Inthegoods-producing sector, the huge 21.4 percent decline in April was created by a 104,000 (40 percent) decline in construction jobs from the April 2019 posting. Manufacturing in April saw a drop year-over-year of 76,700 jobs (13.3 percent). Mining lost 4,400 jobs (17 percent) from the previous April reading. Thanks to sizable job gains in both manufacturing and construction in May and June, the huge goods sector losses in April were trimmed significantly.  Combined construction gains of 88,000 in the two months along with an added 45,000 manufacturing increase and a small loss in mining lowered the goods sector 12-month loss to 56,000 (6.4 percent).

Despite the sizable rebound in May and June, the employment level in the goods-producing sectors remains in a recession level zone.

Service Employment by Category

As noted above, private-services employment was hammered in April losing 859,000 jobs (19.2 percent) compared to April 2019. And despite regaining about 300,000 jobs in May and June, the sector was still down 535,000 jobs from the previous June (11.8 percent). For comparison, the biggest year-to-year loss in the recession of 2009-2010 occurred in August 2009 when services employment fell 116,700 (2.8 percent) from the August 2008 count. In short, the recent services employment decline is unprecedented in the available, official data going back to 1939.

To be sure, there are enormous differences in losses both in counts and percentages among the large number of service groups and subgroups. 

Among the broad groupings, the leisure and hospitality sector has suffered the biggest decline in jobs, in number and percentage. In April, the group’s employment plummeted by 338,000 (59 percent) from the April 2019 level. Gains in jobs in May and June reduced the percentage loss to 37 percent from June 2019 with losses still well over 200,000, still a depression level shortfall.

Within the leisure and hospitality group, every major category (arts, recreation and entertainment, accommodations and food services) was brutally slammed with unparalleled job losses in April and remains very depressed despite the return of some jobs in most subgroups. 

Retail sales employment fell by 127,000 jobs (21 percent) in April from the year before reading of just over 600,000.  By June the sector had added back over 50,000 jobs but still remained 74,000 (12 percent) below the previous June. Furniture, clothing, sporting goods and auto dealers took large percentage loss hits in April while grocery stores, general merchandise and building materials also fared much better than retail as a whole.

Professional and business services employment suffered a loss of 81,000 jobs (10 percent) in April from the 815,000 level a year earlier. A combined gain of 24,000 in May and June has lowered the year-over-year shortfall to 7 percent. Almost every category in this broad sector lost some jobs on the order of 10 percent or less including architecture, engineering, computer systems and management of companies. However, the administrative support and waste management group was hit hard, accounting for 60 percent of the losses in the professional and business services sector.

Education and health services employment is the largest in the service sector group averaging nearly 1.3 million employees per month in 2019. In April 2020, employment fell 161,000 (12.3 percent) below the previous April level. By June, the return of jobs in most subgroupings reduced the year-over-year shortfall to 76,000 (6.0 percent). April’s loss in this large sector was led by sharp declines in ambulatory health care, childcare and social assistance.  Physicians’ offices and colleges saw 10 percent drops in April. Fortunately, most of these groups had job gains through May and June, but none had recovered to their June 2019 readings.

Financial services did not lose many jobs compared to a year-over-year basis (less than one percent) in the April to June period although the year-over-year gains of the January through March period did not continue. 

The information sector, in a departure from the rest of the economic groupings, saw job losses increase between April and June. In June, losses stood 14,300 (16 percent) below the previous June following April’s 8,700 (10 percent) decline from a year earlier.    

Finally, a look at “other services”. This sector is comprised of three subgroupings; repair and maintenance, personal services and religious, civic, grant making and professional organizations. In April other services suffered a loss of 85,500 jobs (33 percent of its April 2019 count). The year-over-year loss was reduced to 54,900 (21 percent below a year earlier) in June by a two-month gain in excess of 30,000 jobs.

Conclusion Overall, the June employment situation showed that significant strides toward improvement have been made since the unprecedented collapse of jobs in April. But, the situation in many sectors is still in deep recession and some in serious depression levels. Notwithstanding a significant upturn in jobs since April’s calamitous drop, employment in full-service restaurants, hotels and the arts, recreation and entertainment groups along with personal services remain mired at depression levels, and further improvement will be difficult with all the restrictions in place.

The state of Pa.’s business climate

Summary: Business optimism in Pennsylvania continued in late 2019 and only slightly diminished from a year-earlier reading, according to the findings of the Fall 2019 Keystone Business Climate Survey by the Lincoln Institute of Public Opinion Research. 

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Survey respondents indicated the most significant problem facing their businesses was a lack of qualified workers with 38 percent highlighting this problem. The tight labor market poses serious difficulties as 75 percent of respondents noted they were having trouble hiring qualified employees.

This situation mirrors the latest National Federation of Independent Businesses (NFIB) survey results. “Finding qualified workers remained the top issue for owners in December, with 23 percent reporting it as their No.1 problem,” the NFIB data said. “Fifty-three percent reported hiring or trying to hire, but 94 percent of those owners reported few or no qualified applicants for the positions they were trying to fill.” 

In short, the very low unemployment rate nationwide is creating difficulties for businesses.

So, why are businesses struggling to hire qualified employees? Pennsylvania survey respondents listed three crucial factors with 58 percent indicating a lack of essential skills, 31 percent noted a lack of applicants and 17 percent pointed to the failure of applicants to pass drug tests. 

Lincoln Institute survey respondents also pointed to other problems affecting their business.  Eighteen percent indicated excessive regulations and 13 percent mentioned high taxes as obstacles to their businesses. These findings strongly suggest a need for the state to act on tax reform and improving the regulatory environment.  

On a more positive note, sales in Pennsylvania are relatively strong: Thirty-eight percent of respondents reported their sales had increased during the previous six months, 41 percent indicated sales held steady while only 15 percent claimed sales decreased during the prior six months. It’s another sign of strength in Pennsylvania’s economy.

While the fall 2019 survey conveyed continued business optimism, there was a drop off from the fall 2018 results. In the 2019 survey, 23 percent of respondents said business conditions were better than six months earlier, 52 percent reported they were the same and 22 percent believed they were worse. In the fall 2018 survey, the response was 39 percent better than six months earlier, 51 percent the same and only 7 percent worse.

Last year’s Policy Brief (Vol. 19, No. 1) detailed the Lincoln Institute’s fall 2018 Keystone Business Climate Survey in which business leaders attributed their business confidence to federal policies such as the 2017 tax cuts and regulatory reforms. The influence these tax cuts have on bolstering the economy are seen when survey results from fall 2019 and fall 2015 are compared. Both years represent the year leading up to the presidential election.  But the difference between responses from 2019 and 2015 further underscore the positive effects tax cuts and decreased regulation have on business conditions.

When asked the question about how they foresee business conditions over the next six months, 19 percent of respondents in the fall 2019 survey thought it would be better, 50 percent the same and 26 percent worse.  (The remainder had no opinion.) In the fall 2015 survey, business leaders, responding to the same question, indicated only 6 percent thought it would better, 42 percent the same and 49 percent worse.

Phrased another way, business leaders had little optimism in the fall 2015 survey with nearly half indicating business conditions would be worse in the coming six months.

Outlook for employment also contrasted sharply between the fall 2019 and fall 2015 survey. Of the respondents in the fall 2019 survey, 25 percent look to increase jobs over the next six months while 64 percent will hold at current levels.  A mere 6 percent expect to make cuts.

By contrast in the fall 2015 only 14 percent of survey respondents planned to increase employment, 67 percent would hold steady and 16 percent would reduce jobs. 

Thus, in 2019, 10 percent more firms expected to add employees in the next six months compared to the 2015 survey. And in 2019, 10 percent fewer firms planned to make cuts than the 2015 survey found.

While there is always uncertainty regarding upcoming elections, business leaders now are still displaying significant confidence, largely due to a more pro-business climate resulting from federal economic policies.

The majority of business leaders—60 percent—replied the current federal administration has the national economy on the right track. Pennsylvania’s business leaders note approval of the federal administration because, as discussed in a previous Policy Brief (Vol. 19 No. 1), they attributed their optimism to the federal tax cuts and regulatory reform measures in 2017.

Meanwhile respondents to the fall 2019 survey expressed disapproval with the state Senate (27 percent approved while 42 percent disapproved) and the state House (21 percent positive and 49 percent negative). The governor also was viewed negatively, 55 percent to 32 percent—further illustrating disappointment with state government on economic matters.

While the continued confident responses from business leaders in the fall 2019 survey are encouraging, the state’s business optimism is largely a response to federal tax cuts and regulatory reform. Tax cuts and regulatory reform at the state level along the lines of the federal policies would be of enormous help to the commonwealth’s economy.  One need only look around the country at fast-growing states to see the benefits of more pro-business and pro free-market policies.

Pennsylvania’s general fund revenues improve while job growth lags

Summary: The state Legislature will be debating the fiscal 2020 budget soon.  It is helpful to look at how general fund revenues, specifically the large tax revenue components, have fared thus far in fiscal 2019 and compare them to the last few fiscal years.  This Brief also looks at Pennsylvania’s performance in adding jobs and how it compares to the nation as a whole.

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Pennsylvania’s fiscal year runs from July 1 to June 30.  Data for fiscal 2019 is available only through April or 10 months into the fiscal year.  For these 10 months general fund revenues have reached $29.16 billion.  This amount is one-half of a percent higher than the first 10 months of the previous fiscal year.  However, it was 2.9 percent higher than was anticipated.

The state was anticipating a drop in non-tax revenues and, thus, estimated lower total general fund revenues to be collected in fiscal 2019.  This was due to a budget-expected drop in miscellaneous non-tax revenues as a result of the 2018 sale of revenue bonds of $1.5 billion backed by future payments from the tobacco settlement and an additional $300 million for a one-time lease of the farm show complex and various special fund transfers (Independent Fiscal Office: Official Revenue Estimate of Fiscal Year 2018-2019).  Combined, it was a temporary one-year hike of about $1.8 billion in non-tax revenue for fiscal 2018.

The largest recent annual bump to general fund revenues occurred from the 2017 fiscal year to the 2018 fiscal year when the amount collected through April rose from $25.82 billion to $29.03 billion—a jump of 12.4 percent.  In three prior fiscal years, 2015, 2016 and 2017, collections barely changed, going from $25.72 billion in fiscal 2015 to the above-mentioned $25.82 billion—an increase of just 0.4 percent over these years.

Keep in mind that the one-time jump in miscellaneous non-tax revenues of about $1.8 billion tends to skew the amount a bit and overstates the increase from fiscal 2017 to fiscal 2018 and understates the rise from fiscal 2018 to 2019.

The general fund revenue stream is comprised of tax revenues and non-tax revenues.  Due to the uncertainty in the non-tax revenue stream, this Brief will focus on the tax revenues of which there are many taxes that generate general fund revenue such as corporate taxes, including corporate net income, consumption taxes, including the sales and use tax, and the category of “other taxes”, which includes the personal income tax.

The largest source of general fund revenue is the personal income tax.  Through April of fiscal 2019, this tax produced $11.93 billion.  While the total was up 5.5 percent from the same time in fiscal 2018, it is 0.3 percent below projected year-to-date levels.  The fiscal 2018 total of $11.31 billion represented a 7.4 percent rise over fiscal 2017’s value of $10.53 billion.  From fiscal 2015 through fiscal 2017, revenue rose from $10.17 billion to $10.53 billion—an increase of 3.5 percent over three years.  Personal income collections picked up substantially after fiscal 2017.

The second largest category is the sales and use tax which has brought in $9.19 billion through the first 10 months of the current fiscal year—an increase of 7.6 percent over the same time in fiscal 2018 and 3.1 percent higher than the projected levels, year-to-date.

An increase in sales and use tax collections points to a willingness of consumers to spend based on their perception of the economy.  For example, in fiscal 2015 the 10-month collections were $7.82 billion and had risen to $8.19 billion through fiscal 2017—an increase of 4.7 percent or $369.1 million.  However, the one-year increase from fiscal 2017 to 2018 was $352.6 million or 4.3 percent and then another $645.4 million or 7.6 percent from fiscal 2018 to 2019.  The two-year increase of nearly $1 billion, or 12.2 percent, since fiscal 2017 shows that consumers are reacting to a strong economy as well as having more income to spend.

The final general fund revenue source examined is the corporate net income tax.  This revenue source had the largest rise from the first 10 months of fiscal 2019 over the same time period in fiscal 2018, surging from $2.05 billion to $2.51 billion (22.4 percent).  In fiscal 2015 the corporate income tax collections stood at $2.26 billion over the first 10 months before falling to $1.97 billion in fiscal 2017—a drop of 12.6 percent over those three fiscal years. The rebound in fiscal 2019 can be viewed as firms in Pennsylvania experiencing hefty profit gains reflecting the stronger U.S. economy.

Looking at the three major tax-revenue components, the April year-to-date combined increase of $1.72 billion is more than offset by the reduction in the miscellaneous non-tax revenue decrease of $1.8 billion.  Still, in light of these tax revenue gains, fiscal 2019 can be viewed as a positive for Pennsylvania’s general fund.

But do the tax revenue gains reflect corresponding employment growth?

In April 2019 the number of total nonfarm jobs (from the employer payroll survey) in Pennsylvania reached 6.062 million which is the fourth-highest monthly total since 2000 behind October (6.087 million), November (6.085 million) and December (6.075 million) of 2018.  However, it represents only a 0.89 percent growth rate over the April 2018 reading (6.008 million).  By contrast the growth at the national level was nearly double at 1.7 percent.

A big reason the national growth in total nonfarm jobs is so much better than the commonwealth’s can be seen in the manufacturing sector’s employee count.  In April 2000 the number of manufacturing jobs in Pennsylvania was 862,100 before bottoming out at 557,200 in April 2010—the recession’s low point.  By April 2019 that number managed to reach only 564,100—growth of just 1.2 percent over nine years.  More worrisome, the April 2019 level was 0.35 percent lower than the April 2018 count of 566,100.

On the other hand, manufacturing jobs growth nationally has been quite strong of late. In April 2000 there were 17.25 million manufacturing jobs before plunging to 11.43 million in April 2010.  By April 2019 that number has risen to 12.78 million—11.9 percent above the trough in the recession of 2010 and 1.6 percent higher than April 2018.

A supersector where Pennsylvania has typically fared well, education and health services, can be broken into its two industry sectors—educational services (all colleges and private schools) and health care and social assistance.

Since 2000, jobs in the educational services have increased across Pennsylvania with only a couple of interruptions.  Since 2010—the recession low point—education jobs rose 4.9 percent through April 2019.  However, there have been two setbacks.  There was a loss of 2,200 jobs from April 2012 to April 2013 (0.9 percent) and another loss of 4,500 jobs (4.7 percent) from April 2018 to April 2019.  This compares unfavorably to the national growth which lifted educational services employment 20 percent since 2010—four times the state’s growth.

Meanwhile, health care and social assistance employment has shown strength, rising 18.2 percent from April 2010 to April 2019 and with 2.7 percent over the last year.  Nationally the growth was a bit stronger.  From April 2010 to 2019 the national growth in health care and social assistance jobs climbed 21.3 percent with a 2.7 percent rise over the last year, the same as the commonwealth.

Social assistance jobs have shown a dramatic rise.  From April 2010 through April 2019 these jobs surged by 42.2 percent, significantly faster than the nation’s 32 percent.  While growth in any job sector is welcome these are typically not high-paying jobs that are likely to prop up the general fund revenues for any state.

Leisure and hospitality had enjoyed solid gains since 2010 moving 16.8 percent through April 2019.  Over the past year the sector added another 1.7 percent more jobs.  However, despite the good employment gains during the past decade, it still trailed the national jobs increase of 28.2 percent.  And its latest year-over-year gain was well behind the national rate of 2.7 percent.

And, of course, this is nothing new.  Previous Policy Briefs have been underscoring for years how the state’s economy and employment have not kept pace with the nation.  The only notable exception is with the recession years when the state’s economy bested the national largely because the state was not in the midst of the housing and real estate boom that was underway in many other states. A boom that collapsed when the subprime mortgage bubble burst leading to a serious national downturn.

The recent strong growth to tax revenues, corporate net income, personal income and sales and use taxes, shows that the Pennsylvania economy has picked up steam.  However, it is growth that is likely the result of a faster paced national economy. Pennsylvania is still bogged down by anti-business policies and regulations that keep it from reaching its potential.

The U.S. and Pennsylvania Economies from 1990 to 2016: Massive Growth Rate Shift

Summary: Reflecting many adverse factors including business-inhibiting policies, the trend in the pace of economic growth in the nation and Pennsylvania weakened significantly in the first seven years of the new century and even further after 2008.  During the 2008 to 2016 period longer term gains as measured by increases in the nation’s real GDP from 10 years earlier slowed to half the norm set during the period 1970 to 2000. Fortunately, it appears business-friendly policy changes in regulations and taxes made in 2017 have begun to reinvigorate the economy.

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To begin, it is important to note that in the 20-year period prior to 1990 (1970 to 1990), U.S. real GDP grew at an annual average rate of 3.2 percent.  In light of the downturns in the mid-1970s and two recessions in the early 1980s resulting primarily from inflation spikes and the need for monetary restraint the growth rate over the period seems quite remarkable.

Indeed, average annual growth remained strong through the 1990s climbing at a 3.5 percent rate between 1990 and 2000.  However, since 2000 the U.S. economy moved to a much slower growth path and averaged only a 1.8 percent growth rate over the 16 years through 2016. After slowing to a 2.4 percent average between 2000 to 2007, real GDP from 2007 (the pre-recession high point) and 2016 climbed at its slowest rate for a comparable time period in the modern era posting an annual average rate for the nine years of just 1.3 percent.  Even more concerning is in the six years after the recession ended in 2010 through 2016, annual gains averaged only 2 percent and were far weaker than in the six-year periods following recessions in the 1980s and 1990s when yearly gains for the six-year post-recession period averaged 3.7 percent and 4.4 percent, respectively.

Indeed, calculating the change in each year’s real GDP from the 10-year earlier level and smoothing the series with a moving average to remove effects of recessionary slowdowns and the fast gains during recoveries shows a slowing in 10-year growth beginning in 2008 to a pace barely half its historic norm.

Similar to the pattern in the U.S., growth in Pennsylvania’s real GDP slowed from 2.6 percent annually over the 1990 to 2000 period to a 1.8 percent per year average from 2000 to 2007 and then slipped further to just 1.3 percent in the 2007 to 2016 time frame. In the post-recession period between 2010 and 2016 the annual pace averaged 1.7 percent, a significantly slower pace than the 1990 to 2000 growth. And while the slowdown pattern is similar to the nation, it is important to note that the commonwealth lagged behind the pace of U.S. GDP gains in each period. What’s more, from 1990 to 2016, the nation saw real output expand by 84 percent while Pennsylvania grew only 63 percent making the national gain over the period 33 percent faster than the state’s.

As for the Pittsburgh seven county MSA, a comparable period of analysis of real GDP is not possible since those data were not produced until 2001. It is noteworthy however that from 2001 to 2008 real GDP in the Pittsburgh MSA was basically flat, rising only 0.1 percent during the seven years. Contrary to the national pattern, output actually grew 4 percent from 2008 to 2010 while the U.S. and Pennsylvania had no net growth over the two years.  And from 2010 to 2016, the MSA had output gains averaging 2 percent per year, the same as the nation and faster than the state’s 1.7 percent. One possible explanation could be the advent of the Marcellus Shale gas operations.

Still, this must be viewed in the context of the very slow 1.1 percent per year average growth since 2001. This is much slower than the national rate of 1.8 percent and below Pennsylvania’s 1.4 percent during the period.

To be sure, the shift to much weaker national gains posted in the 2007 to 2016 period can be attributed to many factors but a lack of fiscal and monetary stimulus were certainly not among them. Working through the financial crisis created by subprime mortgages, massive increases in healthcare regulations including mandates and costs on businesses and individuals along with tighter regulations on the environment, financial activities and labor relations all figured prominently in acting as a drag on business formation, expansion and hiring during the period.

But there is another factor that undoubtedly had a major impact on output and employment growth throughout the 2000s. In the late 1990s the U.S. trade deficit in goods and services rose from $96.4 billion in 1995 to $372.5 billion in 2000. During that period, the trade deficit on goods climbed from $174.2 billion to $446.8 billion. And that was just the beginning. The goods and services gap increased further to $705.2 billion in 2008 as the goods gap rose to $821.2 billion. During the 2009-2010 recession the goods deficit shrank considerably but started to rise again as the economy began to recover. By 2016 it was up to $751 billion, still below 2008’s record level.

Meanwhile, real GDP nationally slowed from the healthy 3.5 percent per year pace in the 1990 to 2000 period to just 2.4 percent in the 2000 to 2008 period.  Jobs growth also shifted to match the slower output gains. In the decade of the 1990s private sector employment grew at an average yearly pace of 2 percent. However, from 2000 to 2008 private jobs managed only 0.4 percent yearly growth.  And from 2007 to 2016 grew only 0.6 percent per year despite stronger gains after 2010 through restored losses during the recession.

In Pennsylvania, private jobs rose an average of 1.2 percent per year from 1990 to 2000 but slowed dramatically to 0.25 percent over the next seven years to 2007 and only 0.4 percent from 2007 to 2016. Meanwhile, MSA private employment climbed 1.1 percent annually or about half the national rate in the 1990s. Between 2000 and 2008 jobs managed a tiny annual gain of 0.03 percent far below the national pace. Employment gains picked up after 2010 rising 0.8 percent annually through 2016 but less than half of the national rate.

In light of the massive increase in the goods trade deficit it is not a surprise that manufacturing jobs suffered the greatest losses over the last 20 years. After recovering from the early 1990s downturn and rising to 17.56 million jobs in 1998, manufacturing employment fell every year through 2010 shedding 6.03 million workers, 34 percent of the employment posted in 1998. With the economy recovering and the goods deficit falling for a couple of years before picking back up and stabilizing to just under $800 billion, there was a modest job gain of 824,000 from 2010 to 2016. Still, that left manufacturing employment 5.2 million below the 1998 mark.

Moreover, from 1997, just before manufacturing employment reached the highest level of the last 20 years, manufacturing value-added as a percent of national GDP has dropped from 16.1 percent to 11.6 percent in the fourth quarter of 2016.  Manufacturing supports jobs in many other sectors through its multiplier effects. Thus, it is not surprising that big declines in manufacturing’s share of output have had a slowing effect on overall employment gains.

Pennsylvania’s manufacturing employment count also suffered a big loss during the 1998 to 2010 period falling by 313,700 jobs or 36 percent. This is close to the 34 percent decline in U.S. manufacturing jobs in that period.  Pittsburgh MSA manufacturing jobs were steady in the 1990s but fell sharply from 2000 through 2010 losing 3.9 percent annually. Since 2010 there has been no net gain in the MSA’s manufacturing employment.

In both Pennsylvania and the U.S. there was a slow and very modest recovery in manufacturing employment from 2010 through the middle of 2016 that left the jobs count well below the pre-recession levels of 2007. Then in mid-2016 manufacturing jobs started to weaken somewhat both nationally and in the commonwealth. Fortunately however, manufacturing job gains in Pennsylvania and the U.S. returned in the second half of 2017 and have continued through June 2018. The U.S. gains have been more robust than Pennsylvania with 362,000 jobs added since December 2016.  U.S. factory jobs in June 2018 stood at their highest level since December 2008. Meanwhile, Pennsylvania’s June count is the highest posted for the month since June 2008.

The abrupt slowing in the U.S. long-term growth rate—as  measured by growth over 10-year spans— that began in 2008 appears to be showing signs of being replaced by a return to more normal historical levels but it will take some time to make up for the prolonged weakness.  An upturn in new business formation and increased business investment in the country and in the state will be key factors in the process of restoring a long-term growth rate more in line with the norms of the 30 years prior to the weaker growth since 2007. The business friendlier regulatory and tax climate recently put in place should prove extremely beneficial in fostering a sustained strengthening in the economy.

Pennsylvania will need to do far more than it has been able to do in the past to keep up with U.S. trends in output and employment. Regulations, labor laws and taxation that inhibit business expansion must be addressed.

Pennsylvania Jobs Growth in Perspective

Summary: By almost every measure, 2017 was a good year for the national economy as evidenced by a big rise in the stock market and a sizable gain in employment, especially in manufacturing.  In fact, across the country, private jobs increased by nearly 2 percent over the 2016 level.  But how did Pennsylvania’s economy fare, especially in comparison to other states?

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This Brief compares Pennsylvania’s jobs performance in key sectors of the economy to national gains as well as to the performance of neighboring states Ohio and Maryland and two right-to-work states—North Carolina and Texas.  All data are from the Bureau of Labor Statistics’ current employment statistics survey.

Nationally private jobs total rose 1.8 percent from 2016 to 2017.  Pennsylvania’s 1.2 percent increase was well below the national gain and slower than Texas and North Carolina (1.9 percent each).  It did however, best neighboring Ohio (0.8 percent) and Maryland (1.05 percent).

Moreover, during the five years from 2012 to 2017, the commonwealth’s private jobs growth has been quite weak compared to the nation and the other states.  Over the period, annual average private jobs in the country climbed by 10.7 percent. North Carolina posted a 12.5 percent gain while Texas’ private jobs jumped by 13.2 percent.  Maryland’s increase was 6.8 percent and Ohio’s job count was up 7.1 percent.  Pennsylvania’s rise of 5 percent trails the nation badly and is far less robust than the stronger performing states.

As has been noted in earlier Briefs, manufacturing jobs in Pennsylvania were on a downward trend for quite some time. However, in a bit of a turnaround, 2017’s monthly average manufacturing job count registered a near one-half of a percent increase over the 2016 level.  This was smaller than the national increase of 0.73 percent, but not by much.  All of the other states in this comparison group also had gains of less than one percent with Maryland leading the pack at 0.85 percent and Ohio at 0.25 percent was the slowest and the only state in this group with growth slower than Pennsylvania’s.

Over the last five years, national manufacturing jobs were up 4.3 percent thanks largely to a muted recovery from the plunge that occurred during the severe 2008-2010 recession.  Most of the growth occurred in the 2011 to 2015 rebound period. After stumbling in the second half of 2016 manufacturing employment regained significant momentum and moved up briskly in the last three quarters of 2017. Nonetheless, despite recent strong gains employment remains below its 2007 level.

Two of the states reviewed beat the five-year national gain (North Carolina, 6.2 percent and Ohio, 4.6 percent) while the others posted losses (Pennsylvania, -1.0 percent, Maryland, -4.3 percent and Texas, -2.2 percent).  Manufacturing, a goods-producing sector, is prized for its higher wages and multiplier effect it has on the economy. Pennsylvania has been struggling with manufacturing job losses going back to the collapse of the steel industry.

Meanwhile, several service sectors in Pennsylvania have fared better than manufacturing in terms of jobs. This Brief reviews the sectors of trade, transportation and utilities; education and health; professional and business services; and leisure and hospitality.

Trade, transportation and utilities employment includes wholesale trade, retail trade, transportation and warehousing along with utilities. From 2016 to 2017 the annual average jobs count in this sector nationally rose 0.9 percent.  Both Pennsylvania and Maryland registered small declines in this sector (-0.07 percent and -0.17 percent respectively).  The other states in the sample posted gains with North Carolina highest at 1.5 percent and Ohio lowest with jobs up by only 0.2 percent.

Over the five years 2012 to 2017, jobs in this sector rose 7.9 percent nationally.   Pennsylvania’s modest uptick of 2.6 percent was the lowest of the states in the five-state group. The fastest growth was recorded in Texas at 13.2 percent. North Carolina was close behind (11.2 percent) followed by Ohio (5.3 percent) and Maryland (3.6 percent).

Pennsylvania has done fairly well over the last five years in the education and health sector.  From 2012 through 2017, this sector posted a 7.8 percent rise in average annual jobs. Even with this gain however, the commonwealth failed to keep pace with the national growth of 11.6 percent.  It did slightly outpace Ohio (7.5 percent) but trailed North Carolina (9.1 percent), Texas (15.2 percent) and Maryland (10.2 percent).  Interestingly, health and education job growth from 2016 to 2017 was in a tight range of 2.2 percent to 2.7 percent for all states in the group except Ohio where the gain was a much slower 1.2 percent. The national pickup was 2.4 percent.

Much is made of the state’s strength in “eds and meds” but the reality is that over the long term it has lagged the national rate and other states that are also strong in growing this sector.

The professional and business services sector is another area in which Pennsylvania typically does well.  Over the last five years jobs in this sector climbed 9.2 percent in the state.  This was faster than neighboring Ohio (6.9 percent) and Maryland (8.1 percent) but lags well behind North Carolina (16.4 percent) and Texas (17.8 percent).  National growth over the last five years was 14.1 percent.  Thus while Pennsylvania posted respectable growth, it still lagged well behind the national increase and even further behind the faster growing states in the comparison group.

Looking at the 2017-over-2016 results, Pennsylvania grew 0.9 percent besting Maryland (0.7 percent) and Ohio (-0.4 percent).  The national gain was 2.1 percent (same for North Carolina) with Texas leading at 2.2 percent.

Leisure and hospitality concludes the sector employment comparisons. Overall, this sector has grown the fastest of all the major sectors. During the 2012 to 2017 period, national growth was 16.6 percent (an average compound growth of 3.1 percent per year). Five-year growth for the comparison group ranges from a high of 21.9 percent in Texas to a low of 8.1 percent in Pennsylvania. North Carolina’s 18.4 percent also exceeded the national gain while Ohio (11.8 percent) and Maryland (13.7 percent) trailed.

On a year-over-year basis, Ohio had the smallest rise (1.5 percent) with Pennsylvania slightly ahead of that pace (1.7 percent).  National growth in this sector was 2.5 percent with both North Carolina and Texas (2.7 percent apiece) exceeding that gain.  To be sure, this sector represents something of a mixed bag. While the increase in jobs is welcome, most are not high-paying jobs and are unlikely to have a spin-off effect on other sectors of the economy.

Pennsylvania’s comparative jobs record over the last five years leaves a lot to be desired.  The state was neither able to keep up with growth in total private jobs nationally nor in the economic sectors examined.  In the group of states reviewed, Maryland and Ohio along with typically higher growth states North Carolina and Texas, it had the lowest growth in total private jobs.  It also finished last in this group of states in job expansion for the trade, transportation and utilities and the leisure and hospitality sectors and next to last in the education and health sector.

The reasons for this relatively poor performance are not difficult to find.  As we have written in previous Policy Briefs, Pennsylvania has an overall poor business climate, high business taxes and a business stifling regulatory climate. Its fealty to unions is evident in the absence of a right-to-work law, high rates of unionization of public sector employees and allowing teachers and transit workers to strike.  If Pennsylvania wants stronger economic growth, it needs to remove the glaring constraints it places on free market economics and it needs to address its shortsighted governance practices.

A Comparative Look at Pennsylvania’s Recent Economic Performance

Summary: After holding its own and even enjoying a handful of years with better than national economic performance during the last recession and early recovery from the deep downturn that began in late 2008, Pennsylvania’s economy has unfortunately returned to its long term pattern of lagging national growth.  Part of the relatively good performance from 2010 to 2012 can be attributed to the rapid expansion of Marcellus Shale gas drilling and production. Unfortunately, that boost has diminished somewhat with the slowdown in drilling and the big drop in the price of gas.

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PA Gross Product Growth Compared to the National Performance

Over the nine years ending in 2006, 41 states had faster real gross domestic product (GDP) growth than PA’s 18.6 percent. The nation posted a gain for the period of 32.4 percent. Eighteen states had growth above the national rate, with nine of those higher than 40 percent.  Except for Florida and South Dakota, all of the states with over forty percent increases were in the mountain west and Pacific coast

During the next ten years from 2006 through 2016, PA’s economy looked comparatively strong owing to the deep recession in many states that were hard hit by the subprime mortgage debacle and the devastating effects on construction, the financial sector and the overall economy created by a misguided policy disaster.  During the ten year period the U.S. grew 14 percent while PA posted a better than national increase of 15.9 percent. Over the ten years PA’s GDP performance was better than 36 states, with only twelve having stronger increases. One was about the same as PA. Some of the fastest growing states had horrendous declines in growth.

However, while PA performed slightly better than many states over the last ten years as a result of severe weakness in many states during the recession and early recovery period,  signs have started to appear that suggest most hard hit states have shaken off the worst of the recession and returned to a stronger growth path after 2013.  The recent pattern of jobs and jobs related data provide evidence that Pennsylvania’s relative standing compared to the nation is quickly slipping back into its long term pattern established before the last recession in which it typically trails the national performance.

PA and U.S. Private Employment and Earnings Gains Compared 

In the four years since 2013, the comparative economic performance picture has begun to look more like the old, longer term scenario wherein PA’s growth lagged well behind the country and most states.  This comparison of recent performance looks at private sector employment indicators.  For some reason the Bureau of Labor Statistics does not report data for government job related measures.  That is a serious shortcoming that deserves explanation.

Comparisons of PA and the nation are made for total private employment; total hours worked by all private sector employees, total real earnings for all private employees and real weekly earnings for all private employees.

The last month of available data is July 2017. All comparisons are made using non-seasonally adjusted July data from 2007 to 2017.

U.S. private employment fell by eight million workers between 2007 and 2010, a drop of 6.9 percent of all jobs. Most of the decline occurred from 2008 to 2009.  A slow recovery began in late 2010 but it took until 2014 to return employment to 2007 levels.  Since the low point reached in 2010, jobs have risen by 15 percent. Obviously, that includes the eight million jobs that were recovered since the trough. Private employment in the U.S. now stands 7.2 percent or 8.44 million jobs above the pre-recession reading of 2007. That means that for the ten year period, jobs grew at an annual average rate of 0.7 percent. That modest pace is 40 percent slower than the 1.13 percent per year growth posted in the ten year period ending in 2007.

Meanwhile, PA’s private employment traced a very different pattern. From 2007 the employment count fell by 232,000 to reach its low point of 4.855 million in 2009, a drop of 4.6 percent from the 2007 reading, a considerably smaller percentage decline than experienced in the U.S. where jobs continued to fall into 2010.  By 2010 PA employment had already started to rise but nonetheless took until 2014 to get back to the 2007 level. Since 2013 private employment is up by five percent bringing the 2017 level to 5.299 million, a total increase of 212,000 since 2007—a very slim 4.15 percent rise (0.4 percent per year) over the ten years, and a massive 44 percent plunge from the 7.5 percent increase in the ten years ending in 2007.  Thus, in both the 1997 to 2007 period and the 2007 to 2017 period, PA’s private employment growth rate lagged  behind the U.S. rate by around 40 percent, while national and PA growth are both down 40 percent from the earlier period.

Total hours worked by all private employees per week is also a revealing statistic. This statistic is obtained by multiplying private employment by average hours worked in the private sector for the U.S. and PA. Not surprisingly, this statistic tracks employment figures fairly closely but differences and variations in the work week also play an important part. Indeed, a very sharp contraction in the average hours worked nationally combined with the 6.7 percent decline in jobs from 2007 to 2009, caused the total hours worked for all employees to fall 9.4 percent in just two years. In PA, total hours worked by all employees dropped eight percent from 2007 to 2009. However, for the years 2008 through 2011, PA averaged 1.2 percent more total employee hours worked than the U.S. figure compared to the level they would have worked if the 2007 pace had been maintained.  Because output tracks fairly closely with hours worked, this finding could be a partial explanation of why PA GDP did not slow as much as the U.S in that period.

A companion measure to hours worked by all employees is total real weekly earnings of all employees.  Total real weekly earnings are a rough proxy for private sector output, bearing in mind productivity changes created by shifting industry mix, new technology and process improvements are also important. This statistic is calculated by multiplying real weekly pay by the number of employees. Real weekly earnings are available for employees at the national level. However, only nominal earnings data are provided for states and industries.

Real PA earnings were determined by using the national deflation factor to adjust the nominal to real earnings. Since the national deflator might be slightly different from a PA deflator—if one were available, which it is not—there might be some errors in the comparisons but it is unlikely they will be significant enough to be concerned about. Over the last ten years, total real weekly earnings of all private employees have risen 14.8 percent nationally and 10.1 percent in PA.

From 2008 to 2012 PA’s total real earnings held up better than in the nation. PA earnings fell a cumulative 22.6 percent compared to what they would have been if earnings each year through 2012 had held at the 2007 level. National earnings for the five years fell a cumulative 26.3 percent compared to the 2007 level, four percentage points more than in PA. As with hours worked, this measure suggests a more dramatic slowing in private sector output in the nation than in Pennsylvania during the 2008 to 2012 period.

However, in an enormous shift in performance since 2013, U.S. total real weekly earnings of all employees are up 16.2 percent while PA earnings rose only 9.5 percent over the period. Of particular concern is that since 2015, U.S. real earnings for all employees are up 8.1 percent compared to only a 3.6 percent pickup for PA.

Bear in mind too that average weekly earnings for private sector employees, not adjusted for inflation, stood at $917.37 nationally in 2017, up from $728.71 in 2007—a 25.8 percent rise. In PA weekly earnings in 2017 were placed at $848.64, up from $683.32 in 2007, a 24 percent increase.  When adjusted for inflation, adjusted weekly earnings nationally climbed 7.1 percent over the ten years (well below one percent per year) while the ten year gain in real weekly earnings in PA was a slower 5.7 percent. Thus the gap in real weekly pay widened still further over the ten years.

Trends in PA’s Service and Goods Producing Sectors

Finally, it is important to note the very different paths goods producing jobs and service producing jobs, as well as weekly pay and total pay for the two sectors, have taken in PA since 2007. Goods producing jobs in PA fell by 120,000 between 2007 and 2017 to stand at 842,000, a drop of almost 13 percent.  Meantime, service jobs climbed by 331,000 or eight percent over the period to stand at 4.457 million in 2017. Weekly pay for goods producing workers was $1,076.80 in 2017 compared to $803.93 for service producing jobs. Moreover, real weekly pay in the goods sector rose 9.4 percent from 2007, while service pay moved only 5.6 percent higher.

Nonetheless, total real weekly earnings for all service producing employees climbed 14.1 percent over the ten years thanks to the eight percent increase in jobs. Total real earnings in goods production fell 4.2 percent because of the large 13 percent decline in employment. This held the total real earnings gain for all employees to ten percent. Note that goods employment with its higher weekly pay fell from 19 percent of total private jobs to 15.9 percent between 2007 and 2017.

Interestingly, the sizable gap in real weekly pay between goods and service producing jobs is due primarily to the much lower average hours worked per week in services—32 hours compared to 40 hours in goods producing jobs. The hourly pay is fairly close, $24.51 in services and $26.92 in goods. It happens that some service industries’ jobs are well paid such as professional and business services, $32.22 per hour, up 30 percent since 2007, and finance at $33.42 per hour, 31 percent above the 2007 reading.

Of course some industries such as leisure and hospitality have both fewer hours worked per week (25) and much lower wages at $14 per hour. This sector has accounted for 88,000 of the total services employment gain of 331,000 since 2007. Jobs in the sector are up a sharp 50,000 since 2014 and account for over a fourth of the overall private sector gain since 2014.

Thus, there should be little or no surprise that the increase in total real private pay trails the national gains badly over the last couple of years.

Jobs and State Tax Revenue Still Tied Together

Summary: In a recent Policy Brief, we discussed the Lincoln Institute of Public Opinion’s spring business climate survey and noted how it struck a more optimistic tone compared to previous surveys.  But is this optimism based on actual performance or simply a better attitude?  There appears to be some pickup in employment but as of yet it is not strengthening appreciably.

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 The statewide employer payroll data, seasonally adjusted, indicates that March 2017’s level of total non-farm employment is about one percent better than one year ago.  In fact since September 2016 the non-farm employment levels are about one percent higher than the twelve month earlier levels for each month.  However, prior to that, from January 2015 to August 2016, the year over year increase was less than one percent each month with the exceptions of March and April 2015.  While the recent pickup in growth is not eye-popping, it does show slow acceleration over the past few months, perhaps reflecting business optimism.

Statewide employment levels in the goods producing industries (manufacturing, construction, mining and logging) appeared to be slowing their losses in the last several months.  For instance, the levels for January and March 2017 are less than one percent below what they were in 2016, with February’s level slightly better than February 2016 (up 0.10 percent).  The smaller losses in goods producing jobs can be traced to a leveling off in mining jobs following a sharp decline through the early part of 2016.  Construction continued to add jobs in March, tacking on an almost three percent gain. Unfortunately, manufacturing employment has yet to shift to a growth path.

On the other hand, service providing industries that are comprised of industries such as education and healthcare, professional and business services, leisure and hospitality, and trade, transportation, and utilities have continued to post gains. From March 2016 through March 2017 service industries added just over 60,000 workers to payrolls, a rise of 1.25 percent. After a slowdown in 2015, the service industries returned to the one percent growth range in 2016 and appear to have picked up the pace slightly in recent months.

However, retail has not fared well of late. In March 2017, the seasonally adjusted level of employment in the statewide retail sector was 0.85 percent below March 2016.  And the weak retail jobs numbers extend back for some time.  Indeed, the March 2017 posting is below the early 2011 level as recovery from the last recession got underway and is 35,000 jobs under the 1990 reading.

As we have been documenting during this fiscal year, revenue collections for the Commonwealth have not been keeping pace with their projected levels. And through March with three quarters of the fiscal year completed this pattern has not changed.  The year to date collection is 0.7 percent higher than the revenue for the first nine months of the last fiscal year. But the nine month total continues to trail the budget’s projected level. After the first quarter of this fiscal year, general fund revenues were below projections by over $218.5 million.  After three quarters, that gap has widened to more than $679.3 million or three percent below official estimates.

The corporate net income tax has the widest gap between what has actually been collected through three quarters and the projected level—$1.738 billion vs. $1.974 billion, a difference of twelve percent.  Indeed, this year’s nine months of collected revenue has fallen almost seven percent behind the $1.864 billion collected through the first three quarters of the previous fiscal year.

The personal income tax also lags its projected level by 1.62 percent so far in this fiscal year ($8.684 billion vs. $8.828 billion). On a year to date basis however, it is above the fiscal 2016 collections by just over one percent.  Keeping in mind that April is the biggest revenue month for this tax, revenue may rebound when April’s data becomes available.  But given the trend of not keeping up with its projected level, it is far from certain that will happen.

The sales and use tax is also trailing its projected level through three quarters of the fiscal year.  It was projected to collect $7.488 billion but the state has only actually collected $7.356 billion—a shortfall of 1.76 percent.  But, like the personal income tax, it is ahead of fiscal 2016’s year to date level by 1.5 percent.

The Pennsylvania economy, as measured by seasonally adjusted employment levels, has been plodding along with slow growth in non-farm jobs.  While recent growth has been slightly faster since September 2016, it is still struggling to shift to a higher sustained pace, especially with manufacturing weakness and mining still yet to launch a full recovery. While job growth of any kind is welcome, when much of it is lower wage employment, the effect on incomes and profits can be felt. This is being reflected in the amount of tax revenues being collected by the state.  The corporate net income tax is struggling to match last year’s pace let alone meet budget projections.

The improvement in business optimism and consumer optimism bodes well for the Pennsylvania economy. But hard realities must still be faced. Very high fuel taxes, the pension crisis facing the state, school districts and the two largest municipalities, labor legislation that is increasingly out of step with much of the nation where 28 states have now adopted right to work laws and many have significantly lower corporate taxes.  A stronger national economy will help Pennsylvania, but much more needs to be done to improve the regulatory and policy environment in the Commonwealth.