The Journal Gazette
Wednesday, December 02, 2015 11:36 pm

Economy's sweet spot beckons

Sherry Slater | The Journal Gazette

A significant barrier was broken last month. For the first time since early in the Great Recession, unemployment in Indiana fell below 5 percent.

June’s 4.8 percent jobless rate reported last week was a fraction of what it was during those awful times that began in December 2007, a two- or three-year period when unemployment in parts of northwest Indiana soared to about 20 percent.

A 15 percentage point decrease in unemployment is impressive. But looked at another way, as a 75 percent decrease from 20 to 5, it’s even more impressive.

It might be tempting to think that the perfect economy is just 4.8 percentage points away from where we are now. Actually, the optimal economy is a lot closer than that.

Everyone knows that high unemployment is a big problem. But zero percent unemployment isn’t healthy for the economy either. Growth is strangled in that environment because employers can’t fill job openings created by business expansion.

We need to hit a sweet spot where all people who want to work full time can and employers can find multiple qualified applicants for each job opening.

Economic experts have varied ideas about what will indicate we’ve reached that ideal economy, sometimes referred to as full employment. One thing’s for sure: It’s more complicated than measuring any one statistic.

Artificially low rates

The unemployment rate is an important measure of the economy’s health, but it doesn’t tell the whole story.

The number of people receiving unemployment insurance benefits doesn’t equal all the people who are out of work and want jobs. Some people are so discouraged that they’ve stopped trying to find jobs, dropping out of the workforce.

They’re not included in unemployment counts, making jobless rates artificially low. But they aren’t the only ones who throw off the data’s accuracy.

Some people are stuck in part-time jobs or working for temp agencies when they really want and need full-time, permanent work with health insurance, paid vacation and sick leave.

As far as government statistics are concerned, those underemployed workers count the same as professionals who take home 20 times as much money each year with benefits to boot.

Kurt Rankin, an economist in Pittsburgh for PNC Financial Services Group, said a lot of the three-county area’s labor force is still on the sidelines, a group often referred to as discouraged workers.

Rankin follows economic data for numerous areas across the upper Midwest, including the Fort Wayne Metropolitan Statistical Area. Fort Wayne’s MSA comprises Allen, Wells and Whitley counties.

Northeast Indiana has experienced strong job growth in recent months. As job creation continues, more people will be lured back into the workforce, Rankin said.

That influx of additional workers likely will offset the number of new jobs being created, keeping the local MSA’s unemployment rate steady at 4 percent to 4.5 percent, he said. Rankin doesn’t expect the national jobless rate to dip much below 5 percent, however.

Natural changes in people’s lives will keep some people jobless at any given time.

Some degree of job turnover or churn is actually good for the economy, he said. It reflects workers moving up the ladder, trading one job for another with better pay or potential for advancement.

Worker movement

That steady stream of unemployed workers reflects frictional unemployment, one of three kinds of unemployment. The others are cyclical and structural.

As its name indicates, frictional unemployment reflects movement in the prospective workforce. These are people out of work as they move from school to full-time jobs. They could be temporarily jobless as they follow a spouse to a new city. Or they could be parents returning to work after raising children.

Cyclical unemployment occurs when job losses are tied to periodic downturns in the economy. The term looks at larger, more sustained fluctuations than those created by the ups and downs of seasonal employment, such as when lifeguards lose jobs at the end of the summer when outdoor pools close.

Structural unemployment happens when jobs are available but the people who are out of work don’t have the necessary skills to do those jobs.

The region’s manufacturers have numerous openings for CNC operators, for example, but not enough qualified people who know how to operate computer numerical controlled machinery. They are tackling the structural unemployment problem by mentoring some existing workers and paying to train some promising job applicants.

The unemployment percentage is also propped up by unskilled workers, who can be among the last to dive back into the workforce, said Ellen Cutter, director of the Community Research Institute at IPFW.

Think of it like being on a diet. If you’re 50 pounds overweight, the first 10 pounds is a lot easier to take off than the last 10. A similar phenomenon happens when it comes to getting people back to work.

When unemployment rates are high, the pool typically includes some skilled, highly desirable employees who were pushed out of the labor market by factory closings or other economy-driven decisions beyond their control. As the economy heats back up, those work-ready people typically get hired first, Cutter said.

Unemployed workers who have substance-abuse problems, lack good communication skills or have other issues take longer to land jobs, she said. They can be in that persistent percentage of people unemployed.

Wage growth

Tracking the number of jobs being created and how many people are working – or not working – isn’t enough to get a real feel for how the region’s economy is doing.

"Whenever there’s a discussion about job growth, I think there should be a discussion about the quality of the jobs being created," Cutter said.

If most new jobs pay minimum wage, for example, an area won’t thrive.

For people who study numbers, the best indication of new job quality is found by tracking fluctuations in average annual pay. When enough high-paying jobs are created, the region’s average wage increases.

Wage growth in northeast Indiana has been slow, but it’s picking up, Rankin said.

That’s an indication that employers must offer more money to attract qualified job candidates, a side effect of a low unemployment rate, he said.

"Traditional economic theory tells us that a tighter labor market will push up wages," he said.

The average annual wage in northeast Indiana increased to $39,073 last year, or 2.85 percent more than in 2013, Cutter said.

During the same period, the annual wage in the state increased by 2.14 percent to $42,552.

Even though the region’s average wage was lower last year than the statewide average, Cutter sees the glass as half full because northeast Indiana’s average wage is growing at a faster rate than the state’s.

Cutter identified several positive trends in northeast Indiana’s economy, including a job creation rate that is outpacing the state’s rate of job growth.

"It seems," she said, "we’re at a relative sweet spot right now."

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