Low Unemployment Rate Defies Conventional Logic

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Low Unemployment Rate Defies Conventional Logic

Last month, I heard several well-founded and optimistic forecasts about the future of employment and growth in our local economy. If true, these forecasts will break a trend of bleak growth data since 1990. The statistics show that the Cincinnati Metropolitan Statistical Area (MSA) has lagged behind the nation and other U.S. Metropolitan areas since 1990. The reasons for this poor performance -- including the industrial make-up and slow population growth -- have been widely discussed.

Since 1990, the Cincinnati region’s population has grown at an average annual rate of 0.32 percent. The national average was almost twice that at 0.62 percent. However, comparing a metropolitan region with the nation as a whole is not always appropriate. A better, apples-to-apples approach is to compare our metropolitan region with other, similar metropolitan regions. Accordingly, the Economics Center at UC calculated the population growth rates of the 20 regions closest in size to the Cincinnati MSA. Here again, Cincinnati’s population growth rate was lower than all but 5 of the 20 MSAs in the comparison group.

Population growth is due to “natural” population growth, i.e., the number of births less the number of deaths. The natural growth in the Cincinnati MSA is about average. Population growth also depends on the net migration, which is the difference between the number of people moving in and the number moving out of the region. The Cincinnati MSA net migration of people is negative, i.e. more people move out of the region than choose to move here. Especially ominous is the age category of those who are moving out. We are disproportionally losing our educated 25-34 year olds, and thus we will lose their prime years of contribution to our economy. Statistically, those of age 35 and older are less likely to move, so many of those who leave this region will not return. Also notable is the Cincinnati region’s share of in-migration from foreign-born individuals. This group made up 40 percent of the population growth in the U.S.; in our region, it makes up less than one third the national average, one of the lowest rates among metropolitan areas.

Comparing employment growth rates yields similar results – the Cincinnati MSA trailed the national average and all of the 20 MSAs in the comparison group. Conventional logic indicates that people follow jobs. Slow job growth reduces the incentives for people to move into a region; therefore, the population growth will be slow. Because of the slow job growth and a lower demand for labor, one would expect that unemployment rates would be relatively high. However, in 12 of the last 16 years, the data show that the Cincinnati MSA had lower unemployment rates than the other metropolitan areas in our comparison group. Low unemployment suggests a tight labor market – one in which employers may have difficulty finding workers. Since an ample supply of labor is a critical issue for most employers, tight labor markets can restrain the economy and job growth. Slow population growth will make labor markets even tighter; thus, slow population growth may be the cause of slow job growth, not the other way around.

There is broad agreement among economists that the size and quality of a region’s workforce is critical to economic vitality. The optimistic forecasts cited above may be an indication that progress has been made on this front, and, perhaps, employers who might locate here have found new ways to solve the workforce problem.