June 8, 2017

Labor Market on Road to Recovery

Adam Millsap

Assistant Director, L. Charles Hilton Jr. Center for the Study of Economic Prosperity and Individual Opportunity, Florida State University

J. Patrick Higgins

PhD Student, Department of Legal and Political Doctrines, University of Lodz, Poland

Kentuckians suffered mightily during the Great Recession — people lost their jobs, fewer new businesses formed, and there was less economic activity overall. Since then, states’ labor markets have been recovering, but at different speeds and in different ways. In new research we authored with Matt Crumb, we compared the labor market recoveries of Kentucky and its neighbors. Kentucky’s recovery has been stronger than most, but there is still room for improvement.

The Great Recession officially ended in June 2009, but as late as September 2015, Kentucky’s labor force — the number of people either working or looking for work — was still smaller than it was when the recession began in 2007. Some of this is likely due to large numbers of Baby Boomers retiring, but not all of it.

In fact, from 2007 to 2014 the percentage of Kentuckians aged 25 to 54 in the labor force declined from 79 percent to 75 percent. These people are in their prime working years and should not be affected by increasing retirements, so this decline is likely due to a weaker labor market — one that caused some people to give up looking for work altogether.

But there is good news, too. The state’s private employment has fully recovered since the recession. Two neighboring states, West Virginia and Ohio, actually had less private employment in 2015 than prior to the recession.

Business starts — a statistic often used to measure entrepreneurship — are also way up in Kentucky. This is consistent with another measure of a state’s level of entrepreneurship, the Kaufmann Foundation’s 2015 Index of Entrepreneurship, which also gives relatively high marks to Kentucky, along with Missouri. Together, these measures suggest that smaller local businesses helped Kentucky’s economy offset job losses in sectors like coal mining.

We also examined five of Kentucky’s metropolitan areas — Louisville, Lexington, Bowling Green, Elizabethtown-Fort Knox and Owensboro — each of which had surpassed their pre-recession level of employment by September 2015. The three smaller areas of Bowling Green, Elizabethtown-Fort Knox and Owensboro had particularly strong recoveries.

Another important indicator of an improving labor market is the growth of real wages — or wages adjusted for inflation. While average weekly real wages have surpassed their pre-recession level in all five of the metropolitan areas we examined, wage growth in these areas was weaker than in the state overall. This could be because people moved from rural areas to urban areas during the recession to find work, which would push down wages in the cities, and there is evidence that this occurred.

 

While Kentucky’s labor market recovery is on the right track, the state has recently taken steps to further improve it. Kentucky recently became a right-to-work state, joining all of its neighbors except for Illinois and Ohio. This should increase its attractiveness to businesses and generate additional economic activity.