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At Globe Manufacturing in Pittsfield, N.H., workers stitch protective clothing for firefighters. (AP)

States Worry About the Downside of Low Unemployment

Is the strong job market hiding a growing skills gap?
by | April 2019

New Hampshire is in an enviable economic position. Companies are fleeing the high costs of doing business in and around nearby Boston and setting up shop in New Hampshire’s towns and cities instead. Along the state’s southern border with Massachusetts and close to the highways leading to New Hampshire’s major city of Manchester, pharmaceutical companies, financial firms and tech startups are opening offices and manufacturing facilities. Farther north, other businesses are bringing new life to old New Hampshire mill towns, with operations that make things such as tents, sleeping bags and truck-mounted log loaders.

That’s been great news, of course, for the state’s workers. New Hampshire’s unemployment rate has been under 3 percent for more than three years. It dipped below that threshold in December 2015 and, as of this writing, has held steadily at 2.5 percent, the second-lowest rate in the country -- tied with Hawaii and a tad higher than Iowa. 

But that low unemployment rate has caused its own set of problems. The big issue is a labor shortage. Companies are having a hard time finding new employees, even if they offer higher wages and benefits. In New Hampshire, the shortage is the result of an aging population, slow migration, and mismatches between the skills companies are looking for and those job applicants possess. “With population growth at a near standstill in comparison to earlier decades, the pipeline of young people entering the labor [market] in large enough numbers to replace those leaving the labor force is unlikely,” state officials warned in a workforce analysis last year. “More innovative and creative ways of attracting labor will be needed for the foreseeable future.”

New Hampshire isn’t the only state where short-term booms have raised uncomfortable questions about the long-term health of the economy. In 2018, 10 states simultaneously had unemployment rates lower than 3 percent, a phenomenon not matched since the final days of the dot-com bubble in 2000. But in almost every one of those states’ capitols, officials are fretting about the health of their economy and the problems that need to be solved, whether it’s expanding their workforce, attracting more affordable housing or moving away from the boom-and-bust cycles of oil markets or agricultural industries.

The low levels of unemployment that the country is experiencing right now are extremely rare. As of January, the U.S. unemployment rate stood at 4 percent. Last year, it dipped to 3.7 percent, the lowest it’s been since 1969. 

Among economists, there’s a long-held convention that says that low unemployment rates trigger inflation. The assumption is that, as workers get harder to find, employers will start offering higher wages, and inflation will rise. It’s an important theory, known as the Phillips curve, and it has long helped guide the action of Federal Reserve governors and other central bankers as they use interest rates and money supplies to keep economies humming. It also helps explain why long periods of low unemployment are so uncommon.

But low unemployment doesn’t seem to be causing high inflation these days, perhaps because many employers have not been increasing pay for their workers as much as economists would expect. Whatever the reason for this, it’s created an unusual situation for a handful of well-positioned states. “It’s not unnatural for some of these states to have 2 percent unemployment rates,” says Adam Kamins, a regional economist for Moody’s Analytics. “It’s what full employment looks like in some of these places.”

Kamins says states with such low jobless rates share one or more features that set them apart from the rest of the country. States with economies that depend heavily on commodities are faring well. That includes Iowa and Nebraska, which are greatly reliant on agriculture, as well as North Dakota, where oil from the Bakken region is fueling the economy. For New England states, including New Hampshire and Vermont, the low unemployment rate is being pushed by a strong regional economy that crosses state lines but has not led to big growth in labor forces. Booming industries are lifting other states, Kamins says, pointing to tourism in Hawaii, health care in Minnesota, and technology in Idaho and Virginia.

The tight labor markets have driven officials in each of those states to take on persistent problems that contribute to limited workforce growth. In Iowa, Gov. Kim Reynolds has emphasized workforce training, so that workers have the skills they need for jobs as they become open. Iowa already has one of the highest rates of high school graduates of any state in the country, but now it is pursuing a goal of making sure 70 percent of its workforce has education or training beyond high school by 2025. 

Early this year, Reynolds highlighted another potential obstacle for attracting workers: a lack of affordable housing in rural communities. “Businesses in rural Iowa are growing and hiring,” she told lawmakers in her Condition of the State address, “but the employees they need won’t make the move if there’s no place for their family to call home.” The governor petitioned legislators to double the amount of workforce housing tax credits that are set aside for rural communities, raising the total to $10 million.

While Reynolds touted incentives, a few Iowa lawmakers and business leaders backed disincentives for people who collected unemployment insurance. By making it harder to collect unemployment benefits, they hoped, the state could encourage recipients to find a job instead. Their ideas included instituting a one-week waiting period before applicants could receive benefits, narrowing the eligibility for unemployment compensation and penalizing recipients who applied for jobs they did not qualify for in order to keep their benefits. “We’ve got numerous jobs that are not being filled,” state Sen. Jake Chapman, a Republican, told The Des Moines Register. “So the question as a policymaker is, are these openings due to a lack of a skilled workforce or a lack of desire to fill those jobs?”

In North Dakota, a commission formed by Gov. Doug Burgum came up with specific actions the state could take to expand its workforce. One called for the state to increase the capacity of its nursing programs, so that there would be more nurses to serve rural areas. Another suggested that the state should make it easier for former prisoners to get jobs. The commission also looked to people attached to the armed forces -- spouses and retirees. The state could become more “military friendly” by making it easier for military spouses to get occupational licenses, and it could attract and keep military personnel and their families in the state by eliminating state income taxes for current and retired military members. 

In Hawaii, the high price of housing became a major issue in last year’s race for governor and continues to be a hot topic among state lawmakers. The housing shortage appears to be a main reason that, even though Hawaii has the lowest unemployment rate in the country, its population dropped for each of the last two years, the first back-to-back declines since Hawaii became a state in 1959. The biggest reason for the decline has been people leaving for the mainland. “For many in Hawaii, homeownership has always seemed like a far-fetched dream,” Gov. David Ige, a Democrat, told state legislators. “The high cost of land will always be a significant barrier to making more homes affordable. And on an island with little capacity to expand, demand will always outpace our limited supply. It seems like a no-win situation. Perhaps until now.” Ige wants to allow condo buildings to be built on state-owned property to help alleviate the housing shortage. 

 

Kim Rueben, a senior fellow in the Urban-Brookings Tax Policy Center, says that how states respond to their labor shortages will depend on the nature of their economy and their demographics. But the good economic conditions also give state officials a rare chance to reconsider their economic strategy. “As unemployment is low, states can think about how they’re trying to grow their economy. They can think about what their incentives are and where they’re trying to go.” States, she says, should take a hard look at the kinds of jobs they’re trying to attract and what they want their economy to be based on. For New Hampshire, that could mean reevaluating whether the state’s long-held strategy of relying on low taxes and a low cost of living to attract businesses will be enough to keep its advantage in the years to come. 

When Taylor Caswell, the commissioner of New Hampshire’s Department of Business and Economic Affairs, pitches his state to companies looking to expand, he emphasizes that the state’s workforce extends beyond its political borders. The southern part of the state, in particular, is closely tied to the greater Boston region. New Hampshire offers potential companies and workers easy access to the city, but with cheaper real estate than the Boston area, less traffic and no personal income tax.

But the exchange goes both ways. When Caswell drives past the Fidelity Investment offices near the New Hampshire town of Merrimack, “the highway is full of red, white and blue license plates,” he says. “Massachusetts plates.” Caswell points out that there are roughly 80,000 residents from other states working in New Hampshire. At the same time, on any given workday there are 115,000 New Hampshire residents that work in another state. The workforce that crosses back and forth is one companies find attractive, he says. Workers have high education levels and, unlike in some other areas of the country, more men and women who live there are participating in the workforce. 

The situation is different farther north in New Hampshire. The economy isn’t quite as robust as in the southern part of the state, but there are encouraging developments. Caswell says officials from Quebec are embarking on a trade mission to New Hampshire, to check out possibilities for expansion into the U.S. market. In fact, one Canadian company, the heavy equipment maker Rotobec, is opening a second New Hampshire location because it can’t fill all of its orders for logging, railroad and construction equipment with its existing facilities.

Rotobec is preparing to fill 25 new spots in its new facility in Groveton, a small town in northern New Hampshire. But Dan Gray, the operations manager for its existing Littleton location, says the company isn’t having a hard time finding qualified applicants, despite the low unemployment rates in the region. Rotobec offers wages that are $1 or $2 per hour more than other companies in the area, and many of the workers in the area are in jobs that don’t take advantage of their full skill set. “In this area, people are underemployed,” Gray says. “They are still struggling. There aren’t as many jobs here as there once was, and the ones that are here are low-paying. A lot of people are hunting for something better.”

Caswell  says New Hampshire is trying to use its good fortunes to build an economy that will be able to make it through the next slowdown. “Everybody has concerns about the tight labor market,” he says. “Our goal right now is to use these times when we have high growth and sustained growth … to build that sustainability into our economy.” 

Brian Gottlob, a New Hampshire economist with the firm PolEcon Research, says creating a more durable economy for the state could force its leaders to rethink some of their core assumptions. “We compete with Massachusetts,” he says, noting that, on balance, more people from New Hampshire still work in Massachusetts than vice versa. “So one thing companies can do is offer better wages. There’s been a belief in New Hampshire for several decades that the cost of living here is so much lower [than in Massachusetts] that they don’t have to pay higher wages. But the cost of living advantage has eroded. It’s not as big as people believe. Wages have to reflect that.”

At the state level, Gottlob says, officials might have to consider spending more money for job training programs, even if it means adding recurring expenses to the state budget or even raising new revenue. “I hear all the time from companies, ‘Am I going to be able to get the people I need?’” says Gottlob, who advises businesses. He says executives like the fact that there’s no income or sales tax in the state, “but there’s one resource that most businesses can’t live without, and that’s labor. Brains are the most valuable resource of the 21st century.”

That tension surfaced at the Capitol in Concord recently. State Sen. Kevin Cavanaugh, a Democrat, pushed a measure through the upper chamber earlier this year that would triple the state’s spending on job training initiatives, using money set aside in the state’s unemployment trust fund. His bill would also slightly cut the rate of the unemployment insurance tax that businesses pay into the trust fund, which is used to pay out unemployment benefits. It passed on a party-line vote.

Cavanaugh says the new money would be available for a wide variety of activities, including safety training, professional certification and English-as-a-second-language classes. The training could help expand New Hampshire’s workforce, he says. It could help people struggling with recovery from opioid addiction get a job and avoid relapses, or it could help retired factory or mill workers find a new way to make money. “Just because you’re retired,” he says, “doesn’t mean you can’t drive a truck.” The senator also argues that the job training measure would help the state in times of both low unemployment and high unemployment.

But the plan runs counter to some of the stances the state’s Republican governor, Chris Sununu, took during his January inauguration speech. “In New Hampshire, we have made a choice,” the governor said. “We don’t want businesses making more investment into government. We ask businesses to invest in their employees. And they do.”

As he sees it, lowering the cost of doing business through tax relief has allowed businesses to reinvest in their workforce. “That is a key factor in New Hampshire seeing significant wage growth,” Sununu says, “because when a business can retain more of its revenue, it is able to increase pay for employees. Tax relief is a reason why more people are working in New Hampshire than ever before.”

For now, New Hampshire officials have been able to avoid a confrontation over the best way to keep the economy growing. Low taxes and low regulation are a core part of the New Hampshire identity. The state motto, after all, is “Live free or die.” But the state has been able to invest in workforce development even while keeping taxes low during the current uptick in the economy because existing revenues covered the cost. The real test will come when there’s a downturn, and tax revenues start to slow. 

All of which, Gottlob says, means that state officials need to adjust their outlook. “Legislators,” he says, “need to change their perspective from attracting businesses to attracting individuals.”

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