Archive for the ‘job growth’ category

Economic Growth is Solid, Just Not as Strong as You Think

May 7, 2019

In July, the current U.S. economic expansion will become the longest on record and there have been a record 103 consecutive months of uninterrupted job growth.  Not counting the distorting effects of the hiring (and then letting go) of over 411,000 temporary workers on the U.S. Census back in 2009-2010 it would have been 110 consecutive months of job growth.  A similar effect will occur in 2019 and 2020 as the Census Bureau begins hiring temporary Census workers this year and will lay off the workers later in 2020.  You can look forward to a lot of misinterpretation of the job growth numbers in the presidential election year of 2020.

The U.S. economy is strong, but as I argued in my previous post, not as strong as the first estimate of QI GDP growth (3.2%) suggests.  In that post I noted the one-off contributors (inventory builds, lower imports, higher defense spending) to above potential GDP in the first quarter of 2019.  In this post I highlight two employment trends that indicate (to me at least) the U.S. economy is not growing as rapidly as recent reports suggest.

First, growth in aggregate hours worked in the economy is slowing, despite strong gains in job growth.  Aggregate hours worked is a function of both job growth and the number of hours worked each week and the latter has shrunk a bit, offsetting some of the gains in employment.  Aggregate hours worked is related to GDP growth because the more hours worked, the more output the U.S. economy produces.

The growth in aggregate hours worked plus productivity growth is a good surrogate measure of trends in GDP growth. Growth in aggregate hours worked plus growth in productivity (how much each worker produces), at a minimum, will tell you whether GDP growth is accelerating or decelerating.  When the average number of hours worked each week is factored into job growth, April job growth looks much more like 100,000 or less, than 263,000.  This makes sense because productivity growth in the first quarter was initially estimated at 3.4%, a remarkably high rate given that annual productivity growth has averaged about 1% for a decade and the combination of 263,000 job growth and 3.4% productivity growth would imply a very high GDP growth (higher than the 3.2% first quarter growth first reported but which I believe will be revised downward).  Productivity growth is notoriously difficult to calculate and count me skeptical of the 3.4% estimate for the first quarter. Still, the first estimate is the one that gets the headlines and later revisions garner less attention.

The rate of job growth is also slowing, not accelerating, as the initial April job growth estimate implies.  Again, the labor market is strong, there are more job openings than workers available to fill them.  Both of the  survey instruments used to measure employment tell a similar story of job growth that is solid but slowing.  Briefly, the payroll survey is a survey of employers in the country, it provides an estimate of the number of non-farm jobs, the average number of hours worked by employees, and the average hourly wages that they are paid.  The payroll survey does not count the self-employed or those not covered by the unemployment insurance program.  It also counts jobs, not people, so one employed person holding two jobs is counted as two jobs by the survey.  The household survey is used to calculate the unemployment rate and labor force participation.  It provides much more information about the characteristics of the employed and of job growth or job loss in a month than does the payroll (employer) survey.  The household survey counts the self-employed and those not covered by unemployment insurance and it counts an individual working more than one job as a single job for total employment purposes.

The household survey tends to be more volatile, as can be seen in the chart above, but the relevant point is that both surveys show employment growth slowing.  That does not necessarily mean a weaker U.S. economy, but rather than the economy is unable to growth because of labor constraints.  The monthly Job Growth and Labor Turnover Survey (JOLTS) highlights this fact.  Looking at the JOLTS data released today shows that the job openings rate continues to rise much faster than the hiring rate, highlighting the growing gap between labor demand and labor supply.  The chart below shows how the gap between openings and hires has grown in just the Northeast region of the country, where labor shortages are among the most acute.

In conclusion, the U.S. economy is solid and labor markets are strong, just not as strong as recent data points suggest, and at a time when there are more downside than upside risks to the outlook.

Why The Drop in Avg. Weekly Wages?

April 11, 2019

In a presentation I gave to the NH Senate Ways and Means Committee I noted two important wage trends. First, the average weekly wage of NH workers today is actually a bit lower than it was in June of 2017. This does not mean that no worker’s wages are increasing.  Rather, it reflects the mix of industry and occupational job growth in NH.  Lower productivity and wage industries have added more jobs in NH than have higher productivity/wage industries.average weekly wages

Second, the weighted average weekly wage in the industries that added jobs in 2018 was $946 while it was $1,163 in the industries that lost jobs.    But it is not accurate to suggest this implies the NH economy is somehow being “hollowed-out” of higher paying jobs.  Data from the end of 2018 showed that there where 50% more job openings in the state in occupations that require a college degree (9,522) compared to jobs that don’t require a degree (6,132) at the same time there were 60% fewer individuals looking for a job and who have a degree than those looking for a job who don’t have a degree (5,532 vs 13,380).

openings an ed

Labor shortages are significant in all industries but higher skill jobs are much harder to fill so more lower skill/wage jobs are being added while higher skill jobs go unfilled, skewing the job growth mix and lowering wage growth trends in the state.  Other contributing factors to slower average weekly wage growth in include a small decline in the average number of hours worked per week by employees in many industries.

Not So Fast on NH’s Job Growth

March 14, 2019

The monthly payroll employment report gets a lot of attention. The monthly estimates are based on a survey sample of employers (differing from the monthly survey of households that is the source of unemployment and labor force estimates). Prior year monthly payroll estimates are revised early each year as more complete data (than the sample survey) are analyzed.  For a number of reasons (including the fact that newer firms are slow to get included in the survey) NH’s employment estimates more often than not have shown stronger (than first reported) job growth rates. Not this year. The new benchmark numbers have cut the state’s annualized job growth by more than half (to below 1%). The chart below shows the year-over-year growth rate in private sector employment in NH is about 1% (including government employment shows a slightly slower rate of job growth 0.8%).

Benchmark revisions

Early in 2018 I forecast NH’s job growth for 2018 would be about 0.6% (based on labor force constraints – not a weaker economy) and for several months I have been issuing a mea culpa for what looked like a significantly inaccurate employment growth forecast. While my sagacity is less challenged than I originally thought, I was more comfortable with NH’s employment trends when it was.

More Workers are Quitting Their Jobs and Getting Better Pay

August 7, 2018

U.S. job growth remains strong while real wage growth remains tepid despite a 3.9 percent unemployment rate nationally, but things may be changing. It is unlikely that companies can hold the line on wages – and depress real wage growth – when low unemployment encourages workers to quit their jobs in search of a higher salary. The rate at which workers are voluntarily leaving their jobs (the “quit rate”) is as high as it has been in 17 years (see graphic) as measured by the U.S. Bureau of Labor Statistics  “Job Openings and Labor Turnover Survey” (JOLTS).Quit Rate

This indicates a strong labor market where workers are confident that if they leave their job they can easily find another. The prospect for higher wages is a big reason. The Federal Reserve Bank of Atlanta’s wage measure for job switchers — people who leave one employer for another — reached 4.4% in March and is at 3.9% in June, well above wage growth for workers overall. It is a good environment for workers facing stagnating real wage growth to start looking for better pay, forcing firms to boost compensation to attract and retain employees. Although this is good for consumer spending, corporate profit margins may get pinched unless employers can cut costs elsewhere.

What the Unemployment Rate Doesn’t Tell Policymakers Can Hurt Us

June 22, 2016

Last week the NH Labor Market Information Bureau released the NH jobs report for May and as usual all of the attention focused on NH’s low (2.7 percent) unemployment rate.  The more significant story was the April to May decline of 4,000 payroll jobs in the state.

Private sector jobs in NH were lower by 3,400 in May, the largest one month decline since 2008 – with one exception – a month in 2014 when workers at the Market Basket grocery chain left their jobs in support of their ousted CEO.  May 2016 job losses were an out sized drop for any month of seasonally adjusted data (a decline of that size would more likely be seen in the not seasonally adjusted data where large changes in employment occur annually during certain months of the year).  I am inclined to attribute some, but not all, of the drop in NH’s May employment to problems with seasonal adjustments and other statistical issues.  Still, the May data marks the first time since 2011 that a three month moving average of private sector employment growth in NH has been negative.

3 mos avg change in private emp

For some added context on the NH payroll employment numbers I wait for a release from the U.S. Bureau of Labor Statistics, usually about one week after NH releases its state’s job numbers.  That monthly report provides employment, unemployment, labor force and other labor market data for all 50 states.  Here is a bit of the context provided in the June 20th release from the U.S. Bureau of Labor Statistics:

“In May 2016, four states had statistically significant over-the-month decreases in nonfarm payroll employment and three states and the District of Columbia had significant increases. The job losses were in Tennessee (-13,400), Michigan (-12,700), New Hampshire (-4,000), and Montana (-2,700). In percentage terms, Montana and New Hampshire had the largest declines (-0.6 percent each), followed by Tennessee (-0.5 percent) and Michigan (-0.3 percent).”

The term “statistically significant” decline in employment is important.  Twenty seven states experienced declines in nonfarm payroll employment in May but in only four of those states was the decline deemed “statistically significant,” meaning that the decline was large enough for the BLS to be at least 90% certain that the change in employment did not fall within the margin for error of the employer survey on which the employment estimates are based.

May emp change

It is not wise to be too concerned with one month’s job report.  Whether the  May job growth number is real or illusory and the product of statistical anomalies, the numbers for NH still should have attracted more attention (than a 0.1% uptick in the unemployment rate) from the media and especially from lawmakers and public officials.  The May job growth number is certainly more noteworthy than a slight uptick in the state’s unemployment rate that was the focus of most media reports.   As I noted in my previous post, employment growth nationally and in NH is going to slow and one bad month is not reason to panic.  But NH’s year-over-year percentage increase in private sector employment took a big hit with the May jobs report and the state’s ranking among states on private sector job growth did as well.  Private employment growth in NH has been on a solid pace for more than a year but with the May data NH moved from the top third to the bottom half among states on year-over-year private sector job growth.

Ranking Private Sector Job Growth

Public sector job cuts continue to be a drag on NH’s total nonfarm job growth, shedding about 2,500 jobs between May of 2015 and May of 2016, by far the largest percentage decline of any state in the nation.

Change in Govt Jobs May 15 to May 16

Still, while the May jobs report was troubling, initial unemployment claims are a very good leading indicator of economic activity and they remain subdued in NH and have yet to suggest a significant downtown in either the U.S. or NH economies.  The May jobs report also showed a continuation of the recent trend of solid labor force growth.

IUC

Implications for State Revenue

My primary concern about the May jobs report for NH, and with monthly jobs reports for NH in general, is how little attention payroll employment numbers get from policymakers and how much attention and importance is given to the state’s unemployment rate.  The state will begin crafting its two-year budget this fall and solid revenue gains over the past year and a budget surplus are building pressure for substantial increases in state spending.  This isn’t a commentary on the merits of specific spending proposals (I will save that for later posts) just a caution that the fiscal environment into which spending proposals will be entered can change and the need to recognize that change as far in advance as possible.  I would feel more comfortable about the upcoming budget process if NH’s weak May jobs number, and the possibility that weaker job growth will continue, were at least acknowledged by policymakers, state agencies, and the media.  I want to know that there is someone in NH’s wheelhouse focused on the horizon and not on our wake.   I understand the appeal of the unemployment rate as a single, intuitive metric that summarizes economic conditions but the unemployment rate is a lagging indicator of labor market and economic trends.  For policymakers and anyone who needs to assess the near-term economic outlook, using the unemployment rate as a guide is a bit like driving using the rear view mirror.   The unemployment rate is an important economic indicator that says a lot about current economic conditions, it is just not that useful for forecasting purposes. Moreover, NH’s demographics (fewer individuals in demographic groups that typically have high rates of unemployment) mean that the state will almost always have a relatively lower unemployment rate than the U.S..  Too frequently that leads lawmakers and others in NH to assume the state’s economy is performing better than it actually is and better than the U.S. economy.

Business taxes are a big reason that NH revenues have outperformed expectations this fiscal year, accounting for almost two-thirds (or $61.4 million) of the $99.4 increase in traditional taxes and fees over FY2015 during the first 11 months of fiscal year 2016.  Focusing on changes in private sector  payroll employment and wage growth is especially important for lawmakers in the Granite State and especially important as we head toward a budget making year.  As a lagging indicator of economic activity NH’s unemployment rate will remain low, even as the economy slows.

Emp Growth and Business Taxes

If lawmakers focus too much on NH’s unemployment rate in their assessment of state revenue trends they risk delaying recognition of turning points in the NH economy and thus changes in state revenue trends.  Private sector employment and payroll growth slow before significant changes occur in the state’s unemployment rate and private sector employment growth is a better indicator  of trends in NH business tax revenue than is the state’s unemployment rate.  So the next time a public official brags about NH’s unemployment rate, ask him or her how many jobs were added in the state during the last month.

Presidential Campaign Impacts on U.S. Job Growth and Implications for NH

June 9, 2016

The May U.S. jobs report with downward revisions to the March and April job numbers was bad, not bad enough that you should start stocking canned goods and bottled water in your basement but bad nevertheless.  The impact of 35,000 striking Verizon Corp. workers on the May numbers is cited as one explanation for the weak report but there were 25,000 temporary workers hired by the company during the strike so the overall impact was actually fairly small.  Seasonal adjustment factors (the statistical procedure used to smooth regular annual fluctuations in employment data throughout the year– things like Christmas hiring, summer employment of youth etc.) seem to be more problematic in recent years and that may also be a contributor.   Of course it is possible that hiring was just weak, plain and simple.  Hiring will continue to weaken, I just don’t think job growth is really as weak, and the slowdown as rapid, as the May jobs report suggests.

Presidential Campaigns Appear to Impact Job Growth

The first rule of politics is to forget all of the rules of economics and that is more problematic now that the national political climate seems to increasingly influence real economic variables. Think of the impact that debt ceiling debates and government shutdown threats have had on economic activity recently.  With almost no focus in the current presidential election on sound economics and economic policies it is easy to see how politics could  contribute to a weak May jobs report (when the empirical evidence doesn’t provide a clear explanation for economic events it is hard to go wrong blaming politics and politicians).  But there is some evidence that presidential elections can temporarily depress job growth.  The uncertainty of a presidential election, especially in a year without an incumbent, and the people and policies that candidates may employ in their administration can give pause to businesses investment and hiring decisions. The uncertainty surrounding future economic and fiscal policies in a presidential election year should arguably be greater several months prior to the election rather than a month or two when the election outcome and policy directions become clearer.  I compared average private sector job growth (government employment should not be affected) in the U.S. during the months of June-August in presidential election years, to the average job growth from September (of the year prior to the election) to May (of the election year).   Since 2000, in each presidential election year the average private sector job growth from June-August significantly lagged average job growth over the prior nine month (Sept-May) period. The pattern held in 2008 but because the U.S. economy was in free fall for other reasons it is not included here.   In years with no presidential election this generally was not the case (years such as 2002, 2003 and 2007 when the U.S. was entering or exiting a recession are exceptions).

UncertaintyJob growth in NH is going to slow regardless of political uncertainties given existing labor force constraints.  NH is essentially at full employment and the nation is close. The longer a recovery lasts the greater are the chances that job growth will slow.  Still,  there are more uncertainties regarding the presidential candidates and the policies that could affect business and the economy in this election than is typical in a presidential year so it is not unrealistic to think that politics is already affecting hiring and investment decisions.

Will New Hampshire Follow the National Trend?

State level job growth numbers for May will be released June 17th.  In a small state like NH monthly job growth can be especially volatile. Up or down  conclusions about a state’s economy should not be drawn from a single month of employment data.  A three month trend in private sector employment is a better reflection of the direction of a state’s economy and by that metric NH has been on a roll.  The chart below shows that after several years of below national average private sector job growth, the pace of job growth in NH is now at a level equal to the U.S. average.  Moreover, the growth trend for NH has accelerated while the rate of private sector job growth in the U.S. has decelerated.  The rate of private sector job growth NH is going to slow nonetheless,  just as it has in the nation overall.

private sector job growthI don’t think the private sector job growth trend has gotten enough attention in NH.  Many (including me at times) focused on several years of NH’s subpar total non-farm (including government) employment growth.  But as I have noted in prior posts, the percentage drop in government jobs in NH is among the largest of any state in the nation, masking some of the strength of hiring trends in NH’s private sector.  The chart below shows how both private sector and state and local government employment in NH have grown since each sector’s pre-recession peak.  Private sector employment in NH peaked in February of 2008 and after shedding 6% of those jobs during the recession NH has regained that many plus an additional 3%.  State and local government employment in NH did not peak until April of 2010.  It takes a couple of years for property valuations to reflect economic conditions so the largest declines in property valuations – and thus local revenues and employment- occurred as the recession had ended.  State and local government employment in NH is about 8.5% lower than at its peak, with local government shedding about 6,800 jobs and state government about 1,000 jobs.

public vs private sector growth

Labor Market Response in NH May Be Too Late

For too long in NH private sector job growth remained consistent at a subpar rate despite a large increase in help wanted ads in the state.  A combination of slow or no labor force growth and a mismatch between job opportunities and the skills of job seekers were the causes and not a fundamental erosion of NH’s business climate as I argued in this post.

NH US Help Wanted

But now help wanted ads in NH and the nation are slipping (chart above) and while the recovery isn’t over we are getting better more slowly.  Unfortunately, that is occurring just as the labor market conditions –  low unemployment, rising wages, and signs that NH is once again seeing net in-migration from other states, are all resulting in a more rapid expansion of the NH labor force, the key ingredient wages

the state has lacked in recent years to achieve a faster pace of  job growth.

NH Labor force growth

A Bumpy Ride for the Remainder of 2016

I am frequently in error but rarely in doubt and in this post  last fall I was confident NH would again exceed the U.S. rate of employment growth (it is still possible but not likely) and that NH would see a 2.5% increase in total employment in 2016 (that is not going to happen). In fairness, private sector job growth has been on a more than 2% growth pace for the year and I did include two caveats in my forecast last fall: first that labor force growth in NH would have to accelerate (in part due to a resumption in net in-migration to the state) and while the labor force is once again growing in NH,  it is at a pace that may not sustain the 2% plus growth that NH’s private sector is currently on.  Second, the decline in government jobs would have to abate – it hasn’t.  A month ago at a presentation at a local community bank I downgraded my job growth forecast for NH in 2016 from 2.5% to 1.8%.  With more recent national economic data – including the May jobs data and March/April revisions, readings from my PolEcon NH Leading Economic Index, along with the uncertainties produced by the nation’s political climate, I now believe the rate of growth will be just 1.2 to1.4 percent.

The Business Tax Discussion NH Should Have

June 23, 2015

What to do about New Hampshire’s business taxes is near the top of lawmaker’s agenda in the Granite State. Many policymakers are concerned that the business tax climate is contributing to a fundamental erosion of New Hampshire’s business climate that is reflected in lackluster employment and revenue growth. Reports that NH has recently outperformed  New England and the U.S. in gross state product (GSP) growth highlight the disconnect that can occur between economic metrics of output (GSP) and measures that more directly affect individuals in their daily lives, such as employment and wage growth. Better than regional or national average growth in GSP is good but state-level GSP numbers are relatively imprecise and should not obscure the fact that employment, wages, and state revenue growth have all been disappointing in NH by the standards of the past few decades. Sustained, disappointing employment and revenue growth since the end of the recession have prompted well-meaning lawmakers in NH to consider a number of policies to accelerate growth in the state.

NH and US emp Growth

Business Taxes Seen as Key

Business tax rates impact business decisions but I don’t believe they are the fundamental factor behind NH’s disappointing economic performance. Lawmakers should consider “what to do about business taxes” but that consideration should go well beyond current tax rates and regulations. Lawmakers should also be concerned with the long-term prospects (revenue yield) of business taxes because business taxes are the largest source of general revenue supporting state government.  New Hampshire’s fiscal structure is fundamentally tied to the performance of the state’s business taxes.  As importantly, lawmakers should be concerned with how NH’s business taxes will interact with key economic and demographic trends to influence the state’s future economic performance. The chart below shows combined quarterly business profits and business enterprise tax collections on an annualized basis and illustrates that nearly six years post-recession and more than seven past their high mark, business tax revenues in NH have not fully recovered. Some of the failure of revenues to rebound following the recession is a result of changes in the state’s business tax rules and some is the result of total private sector wages and salaries (the largest portion of the BET tax base) that declined in  2009 and 2010. Whatever the reason it highlights concerns about the viability of business taxes as the primary source of support for state government. I don’t believe that either raising or lowering rates is likely to improve the performance of business tax revenue enough to alleviate those concerns or even result in revenue gains that match those seen in the first half of the 2000s.

NH Business Tax Revenue

The Business Tax Burden in NH

Using tax rates to measure burdens over time is not a true measure of the impact that business taxes have on companies. Comparing state business tax climates using rates is problematic because of the various provisions of each state’s tax code that affect nominal rates. Here I assess business tax “burdens” using an economic measure – business tax collections as a percentage of private sector gross state product (GSP). This metric documents the state’s business tax burden placed on the total value of private sector goods and services produced in a state. Even using this measure of “burden” is problematic because it does not include all of the taxes, fees, and charges that may apply to a business in each state. Nevertheless, when it comes to addressing the primary sources of tax burden and the ‘headline taxes” that are identified with a state’s business climate, it is a better measure than looking at just business tax rates.

As the chart below shows, as a percentage of GSP, business tax burdens have nearly doubled in New Hampshire since the early 1990’s. Much of that is the result of the addition of the Business Enterprise Tax in 1993, as well as increases in the BET’s rate from 0.25% to 0.50% in 1999, to 0.75% in 2001. But some is also the result of increases in the rate of the business profits tax (BPT) which began the time period shown at 8.0% (from FY 92 through FY 93), dropped to 7.5% in FY 94 and hit a low of 7.0% (from FY 95 through FY 99) and finally rose to its current rate of 8.5% in FY 02. Importantly, the chart also shows that business tax revenue as a percentage of private sector gross state product has fallen since the recession and is now at a level seen at the beginning of the last decade. Again, changes in rules and a decline in wages and salaries both play a role in that decline. For comparison purposes the chart also shows the percentage of GSP that corporate income taxes take in Massachusetts, however, as noted, a number of other taxes are applied to or affect business in addition to corporate income taxes.

Taxes as a pct of GSP

What’s Ailing the NH Economy?

I don’t believe there has been a substantial, fundamental erosion of the ‘business climate” in NH. Slow labor force growth is by far the largest factor contributing to New Hampshire having gone from a leader to a laggard in job growth. That labor force issue is much broader and more complicated than the simplistic and too often noted “young people moving out-of-state.” The chart below shows that labor force growth has slowed more in NH than nationally in recent decades. Where once NH enjoyed a significant advantage in labor force growth, the state now lags the nation as a whole. Above average labor force growth is what allowed NH to have exceptional job growth in the 1980’s and much of the 1990’s.

lf growth 3 time periods

Labor force growth (largely via in-migration of skilled, educated individuals and families from other states) provided NH with a resource advantage for decades. Slow labor force growth is now capping the amount job growth that is possible in the state. Some believe the state’s labor force would experience stronger growth if more job opportunities existed in NH and that simply reducing business taxes will make that happen. While that is true to a degree, today, businesses rarely locate where there is not clearly a sufficient supply of needed labor. A sharp rise in help-wanted advertising in NH in recent years even as private sector employment growth has remained relatively constant and disappointing (chart below) shows that in the near-term at least, demand for labor does not necessarily increase its supply.  Significantly, the chart also shows that after a rapid rise in help wanted advertisements that was not accompanied by a noticeable increase in the rate of private sector job growth, help wanted ads have begun to decline in what may be a sign that employers, because of labor supply constraints, are increasingly looking  elsewhere for labor.

help wanted june 2015

The demand for labor does generally increase the supply of labor but when the supply is growing slowly everywhere (especially in the Northeast where NH has typically attracted much of its increase in labor force), supply will respond accordingly. Increasingly businesses follow labor rather than the other way around and they do not rely on their demand to increase labor supply.  Looking ahead, population and demographic projections show that both nationally and in NH, the working age population (defined here as age 18-64) will show almost no growth over the next 25 years. Competition for labor among businesses will become more intense and to keep and attract a labor force businesses will have to offer more than just the promise of a paycheck. I would argue that states and communities will also have to offer more (in terms of amenities – natural, social, civic, cultural, and services) to attract and retain the labor force needed for employment and economic growth. Evidence of the importance of amenities to labor supply (and employment growth) can be seen in the differential employment growth between some of NH’s regions such as the Seacoast (which has had higher population, labor force, and employment growth and which has several high amenity communities) and other regions of the state.

New Hampshire can improve its business taxes and business climate but whatever reforms are enacted, alone, are not going to overcome demographic and labor force imposed constraints on employment growth in the state. Lawmakers should, however, seek to assure that business taxes do not worsen key constraints on the NH economy moving forward.

The Longer-Term Problem

NH’s combination of a traditional tax on the profits of business profits (the business profits tax or BPT), along with its “business enterprise tax” or BET (on the combined compensation, interest, and dividends paid by businesses) may well exacerbate some of the disadvantages the state’s economy will face as a result of national and state demographic trends, making it more difficult for NH to overcome key constraints on employment growth in the state.

Reducing business tax rates that many see as too high is a near-term solution to a longer-term problem. The longer-term problem is slow or no labor force growth nationally and in NH in the coming decades that will limit profit growth everywhere but which will also place additional burdens on NH businesses. The labor force problem and NH’s reliance on business taxes will present NH businesses and state government with challenges that are unique to the state.

Wages and salaries are generally lower for comparable positions in NH than they are in Massachusetts. At one time it was easy to justify that wage differential because of large differences in the cost of living between the two states. Today, the cost of living differential between the two states has narrowed and NH is considered a high cost-of-living state. The U.S. Bureau of Economic Analysis (BEA) produces a “regional price parity index” Regional Price Parities (RPPs) measure the differences in the price levels of goods and services across states for a given year. RPPs are expressed as a percentage of the overall national price level (100). As the chart below shows (apologies for the poor quality – I lifted it directly from a BEA publication), NH (seen in red) has become a high cost state (largely because of housing costs), nearly as costly as Massachusetts.

price parityIn a state (NH) with living costs that are increasingly comparable to Massachusetts, workers in NH can be expected to seek wages nearly comparable to wages available in Massachusetts. For the most part, however, NH employees do not receive wages comparable to wages in Massachusetts and that contributes to some of NH businesses inability to hire needed workers and to NH’s modest job growth, despite increased job openings in the Granite State.   It may also be a contributing factor to NH’s significant drop in its unemployment rate with only modest job growth (the unemployment rate is a residency-based measure that considers only whether or not a resident of NH has a job or not, regardless of where that job is located).  Little or no growth in the labor force in the coming decades will increase competition for workers and will put more pressure on NH businesses to narrow wage and salary differentials with other, higher-cost states, if higher-skill jobs located in NH are going to grow. The catch 22 is that higher wages increase the BET liability of businesses at the same time they can reduce profitability (if productivity isn’t rising along with wages). A growing disconnect between the profitability of businesses in NH and the tax burden placed on them is not likely to be an incentive for businesses to compete for labor in a era when it is ever more scarce.

Higher wages would not be a problem as long as productivity increases justify wage growth. When workers produce more they should see higher wages. Productivity growth has been modest over the past decade and shows little sign of accelerating. Thus increasing wages will likely mean slower profit growth for businesses in NH and elsewhere. I think we have seen the high mark nationally for corporate profitability for some time. But in NH, the higher wages needed to attract labor will also increase the business enterprise tax (BET) liability of companies. If profitability is indeed more modest because of faster wage growth and modest productivity growth, the BET liability of NH businesses relative to their business profits tax (BPT) liability will increase. An ad valorem tax on a resource (labor) in short supply with a rising price and that is paid regardless of the profitability of a business may increase (or cushion from decline) state revenue for a time but it also seems like a disincentive for businesses to pay the wages necessary to compete for labor and to hire in New Hampshire over the longer term.

New Hampshire’s tax structure has never really been a boon or an advantage for business but it has been attractive to large numbers of individuals and families over the years and it contributed to growth in the state’s labor force via inter-state migration into NH. Growth in key demographic groups within the labor force – skilled individuals with higher levels of educational attainment  and regardless of their age ( two wage-earner, college educated, married couple families with children characterized the typical inter-state migrant to NH) made New Hampshire a much more attractive place for businesses to operate. The in-migration of “talent” fueled the state’s transition to a more sophisticated, technology dependent economy. But there is less state-to-state migration everywhere today and national and regional population, demographic, and labor force growth make it much less likely that NH will continue to realize those benefits from its fiscal structure. In the coming decades as competition for labor increases because of limited growth in the labor force, stronger wage growth will be needed to attract a limited pool of labor. Taxing compensation (as NH’s BET does) will increase tax liabilities for many NH businesses even as higher wages limit their profitability.

It is time for a discussion of NH’s business taxes, but that discussion needs to involve a lot more than just tax rates, credits, and how the rules apply to publicly traded companies.


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