September 29, 2013

Tale of Two Labor Markets in Virginia

Keith Hall

Former Senior Research Fellow

Robert Greene

Luce Scholar, FinTech, Henry Luce Foundation
Summary

Virginia has weathered the labor market turmoil of the past five years much better than other states have. Its mid-year unemployment rate was 5.5 percent, compared to 7.6 percent nationally. But there are two distinct labor markets in Virginia — (1) persons employed directly or indirectly by the public sector, and (2) Virginia’s “real” private sector. While the former — highly concentrated in the suburbs of D.C. — prospered during the Great Recession and continues to flourish, the latter is struggling.

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Virginia has weathered the labor market turmoil of the past five years much better than other states have. Its mid-year unemployment rate was 5.5 percent, compared to 7.6 percent nationally. But there are two distinct labor markets in Virginia — (1) persons employed directly or indirectly by the public sector, and (2) Virginia’s “real” private sector. While the former — highly concentrated in the suburbs of D.C. — prospered during the Great Recession and continues to flourish, the latter is struggling.

In a recent study published Monday by the Mercatus Center at George Mason University, we estimate that about 30 percent of Virginia’s workforce is employed by government either directly or through federal contracts, compared to about 20 percent nationwide. This gap exists largely because about 10 percent of Virginia’s workforce holds private-sector jobs financed by federal contracts, compared to just 3 percent nationwide.

Times have been good for Virginia’s government-financed labor market. Direct government employment is 4 percent higher than it was before the recession, and annual federal contract expenditures in Virginia have increased 18 percent from pre-recession levels.

Virginia received $54.8 billion in federal contracts in fiscal year 2012 — accounting for more than 12 percent of the state’s economy and greater than the amount received by any other state. According to figures compiled by USAspending.gov and the Thomas Jefferson Public Policy Institute, about 75 percent of these dollars went to Northern Virginia. The region’s 2012 unemployment rate was a staggeringly low 4.4 percent.

But for the seven in 10 working Virginians not directly or indirectly on government payrolls — Virginia’s “real” private sector — labor market conditions have remained grim since 2007.

More 30 percent of Virginia’s jobs are in four sectors—construction; manufacturing; information; and trade, transportation, and utilities — each of which has recovered at a slower rate than the national average. In Southwest and Southside Virginia, which receive few federal contract dollars, 2012 unemployment rates were 8.3 and 8.7 percent, respectively.

Excluding direct and indirect government employment, Virginia’s labor market recovery is nearly as weak as the national average.

The state has something else in common with the rest of the country: Many Virginians have simply given up on finding jobs. Unemployed persons who are not actively seeking employment are not counted as part of the labor force, or as unemployed. So if Virginia’s labor force participation rate — the number of persons employed or looking for work —had remained at its 2007 level, Virginia’s 2012 unemployment rate would have been as high as 8.6 percent.

Hundreds of thousands of unemployed and disengaged workers in Virginia need private sector employment growth now. And the situation is made even more tenuous by a seemingly unsustainable combination of record-high federal debt and sequestration’s miniscule cuts to federal spending. If federal contract expenditures actually decrease substantially in the coming years — which has not happened yet — Virginia must be prepared with a business environment that incentivizes firms to stay in the commonwealth regardless of its proximity to D.C. largesse.

To retain and grow Virginia’s private-sector employment, the state’s business environment competitiveness — which, according to CNBC and the Tax Foundation, has fallen in recent years — must be improved. One way to do this is with tax reform.

Virginia’s personal income tax is the 38th most burdensome in the country. Reducing personal income tax rates would increase economic growth and employment. Eliminating special-interest sales tax loopholes could offset the cost to state coffers.

Lowering the corporate tax rate would further boost competitiveness and growth, and given the tax’s minor — 2 percent — contribution to total state revenue, would likely have little to no effect on the budget.

The unemployment rate does not provide a clear picture of Virginia’s labor market. For Virginia’s “real” private sector, times are tough; and for those whose jobs rely on federal dollars, cuts to federal spending could make times tough as well.

The best path forward is one that helps everyone in the commonwealth: creating a private-sector job market that thrives with or without federal contracts.