FRBSF Economic Letter
2003-02; January 31, 2003
Increased Stability in Twelfth District Employment Growth
Regional Report: The
Regional Report appears on an occasional basis. It is prepared under the
auspices of the Financial and Regional Analysis Section
of the FRBSF's Economic Research Department.
Since the mid-1980s, virtually all states in the nation have seen
nonfarm employment growth rates become much more stable than they were
in the 1960s,
1970s, and early 1980s. However, the volatility of employment growth
has declined by different amounts in different regions. In addition,
although the general reasons for greater stability are similar across regions,
the
individual sectors making the greatest contribution to smoother growth
differ. This Economic Letter discusses the major reasons for differences
between
each of the Twelfth District states and the country outside the Twelfth
District in how much employment volatility has declined and in the primary
causes of the declines.
Smoother sailing
Many kinds of economic data have shown much more stability
in recent years. For example, McConnell and Perez-Quiros (2000) chronicle
the dampening
of GDP fluctuations in the U.S. They note that the variance (a measure
of volatility) of output fluctuations during 1953-1983 was more than
four times
as large as the variance during 1984-1999. Using formal statistical techniques,
the authors find evidence that 1984 was indeed a "break point," indicating
a one-time drop in the variance at this point, rather than a gradual
downward drift.
The smoothing of fluctuations also is evident in employment
for U.S. regions. For example, although variance was a little higher
in the Twelfth
District than in the rest of the country, both before and after 1984,
variance declined by more than half in both regions.
The variance of employment
growth for each Twelfth District state and the median of the variance
of employment growth for the non-Twelfth District
states ("Other Districts") also declined. However, as seen in
Figure 1, the decline in the variance of annualized quarterly employment
growth between 1960-1983 and 1984-2001 differed widely across these areas.
Why the decline in employment volatility?
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The pervasive decline in the volatility
of employment growth is due partially to reduced variability within industries.
Figure 2 depicts the medians,
taken across all states in the U.S., of the variances of employment growth
for 1960-1983 and 1984-2001 for the eight broad employment sectors defined
by the Census Bureau's Standard Industrial Classification system: construction;
finance, insurance, and real estate (FIRE); government; manufacturing;
mining; services; transportation, communications, and public utilities
(TCPU); and
wholesale and retail trade. For all sectors, the figure shows more stable
growth in the latter period than the earlier period, with the largest
changes in mining, construction, and manufacturing. The changes for the
latter two
sectors are consistent with McConnell and Perez-Quiros, who find reduced
volatility in residential and inventory investment. They also find consumer
spending to have been a chief contributor to increased stability in U.S.
output, which helps account for the broad-based reduction in the volatility
of employment. Other developments, such as the greater use of outsourcing
for workers, also may have helped to smooth employment growth in recent
years.
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Smoother total employment growth also is due to a redistribution
of employment across sectors. Figure 3, depicting median U.S. sector
employment shares
as of the period midpoints, shows declines in the more volatile goods-producing
sectors and increases in the less volatile service-related sectors.
Which
factor—declining sector volatility or changes in the sectoral composition
of employment—played the bigger role in bringing about smoother
overall employment growth? Decompositions of estimates of the variances
suggest that, for the country as a whole, declines in sector volatilities
have been somewhat more important than the redistribution of workers.
Which
sector played the biggest role? A sector's contribution to the total
variance is greater, the greater is its own variance and the higher
is its share of total employment. Taking both factors into account, for
the U.S. overall, manufacturing's contribution to employment growth volatility
declined the most of any sector. Manufacturing is a high volatility sector
which experienced sharp declines in both the variance of employment and
employment share.
What happened in Twelfth District states?
In each Twelfth District state
and in Other Districts, sector volatility declines also appear to have
been somewhat more important than sector
share shifts to smoother overall employment growth. However, differences
between
the Twelfth District states and Other Districts in sector contributions
to smoother employment growth have meant that the sector that contributed
the most to greater stability in the Twelfth District states was not
always manufacturing, whereas, for Other Districts, it was. Such differences
also
caused the differences in the declines in employment growth variances
of the Twelfth District states compared to the decline seen for Other
Districts.
For example, as seen in Figure 1, Alaska posted a much greater
decline in the variance of employment growth than did Other Districts.
In fact,
Alaska showed the largest decline in employment volatility among all
the states in the nation. (Adjusting for Alaska's high initial period
employment variance, its percent decline in employment variance, at eighth
in the
nation,
also was relatively high.) Alaska's larger decline in employment growth
variance was due primarily to a larger decline in the variance of its
construction employment than that seen in Other Districts. Alaska's relatively
large
decline in construction volatility may be due partially to diversification
within the sector to include more residential building and population-based
commercial construction in addition to government projects and pipelines.
The greater decline in construction volatility in Alaska also put changes
affecting construction ahead of those affecting manufacturing in explaining
the decline in overall employment volatility that did take place in Alaska.
Other
states that showed larger declines in employment growth variance than
Other Districts were Nevada (ranked 4th in the nation), Idaho (6th),
Oregon (9th), Washington (11th), and Arizona (13th). In Nevada, a larger
decline in the variance of services employment growth than in Other Districts
was instrumental in explaining that state's larger decline in overall
employment volatility. In addition, Nevada's decline in services volatility
counted
for more in that state than it would have in Other Districts, due to
Nevada's large gaming industry and consequent higher services share.
In fact, services'
contribution to smoother employment growth in Nevada was the largest
of any sector in the state.
As in Other Districts, manufacturing made
the largest contribution to the decline in employment growth variance
in Idaho, Oregon, and Washington.
In Idaho and Oregon, manufacturing's contribution was even greater than
in Other Districts, due to larger declines in the volatility of manufacturing
in those particular states. These relatively large declines may be due
partially to less emphasis on resource-based manufacturing and more on
information technology and machine manufacturing. In Oregon, the larger
decline in
manufacturing
employment volatility was the main factor behind that state's larger
decline in overall employment variance than in Other Districts. In Idaho,
on the
other hand, a sharp decline in volatility within the FIRE sector, in
contrast to a very slight increase for Other Districts, was even more
important than
changes in Idaho's manufacturing sector in explaining that state's relatively
large decline in total employment growth variability.
Manufacturing's
contribution to greater stability in Washington was about the same as
in Other Districts. It has been a larger decline in trade
sector volatility in Washington than in Other Districts that has accounted
for
most of the difference between that state's decline in total employment
growth variance and that seen in Other Districts.
Arizona's larger decline
in employment growth volatility was due mainly to Arizona's larger reduction
in the volatility of mining employment
and its larger mining sector. In addition, mining's contribution to the
variance
of total employment growth fell the most of any sector in Arizona. The
latter also held in Utah. However, in Utah, the boost to smoother growth
through
the mining sector was countered by the effect of a smaller reduction
in manufacturing volatility, applied to a smaller manufacturing sector.
On
net, the decline in employment growth volatility in Utah was about the
same as in Other Districts.
California and Hawaii showed smaller declines
in volatility than Other Districts. As in Other Districts, in each of
these states, manufacturing
was the most important sector in explaining smoother employment growth.
However, California's manufacturing share and its manufacturing employment
growth variance started from lower bases and declined less than in Other
Districts. Manufacturing's contribution to greater stability was about
the same in Hawaii as in Other Districts, but Hawaii experienced a considerably
smaller decline in services volatility than in Other Districts.
Conclusion
Employment growth for the Twelfth District states and for Other
Districts is considerably more stable than it used to be, due to smoother
growth
within broad industry sectors and the general redistribution of employment
away
from the more volatile goods-producing sectors and towards the less volatile
service-related sectors. For both the Twelfth District states and Other
Districts, smoother growth within sectors appears to be somewhat more
important than sector share shifts in explaining smoother growth in total
employment.
However, due to differences in sector contributions to smoother employment
growth, the volatility of employment growth has declined by different
amounts in the Twelfth District states than in Other Districts. Of particular
note
here are the larger contributions to employment growth stability made
by developments in the construction, services, and mining sectors in
Alaska, Nevada, and Arizona, respectively. In addition, the sectors which
have
been
most important in explaining the declines that have taken place in the
District states have not always been manufacturing, the sector of prime
importance
for Other Districts.
Liz Laderman
Economist
Reference
McConnell, Margaret, and Gabriel Perez-Quiros. 2000. "Output Fluctuations
in the United States: What Has Changed Since the Early 1980s?" American
Economic Review 90 (December) pp. 1,464-1,476.
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