Bay Area Economic Pulse

Signs of Recovery Appear but Job Gains are Still Missing

by Michael Dardia

Over the past several months, evidence has continued to mount that the national recovery is accelerating and national employment is increasing, even if slowly. Thanks in part to the sharp rise in stock market indices, California tax collections are estimated to be $2 billion higher than previously forecasted. Venture capital funding to the Bay Area has increased by 22 percent over the past quarter. Home prices remain firm and interest rates remain near historic lows. One-third of Bay Area business executives report that they intend to hire more workers in the next six months, while only 7 percent anticipate further layoffs. Almost three-quarters of the executives surveyed are optimistic about the Bay Area economy, and hopes for improvements in the business climate have also risen as state government addresses workers’ compensation reform..

Despite these positive signs, the employment picture in the Bay Area actually worsened over the past quarter. Although some of the employment declines may be due to the measurement concerns discussed in my previous column, most of the declines are apparently real. Employment fell in most sectors and counties (Figure A), and in some cases, the rate of job losses throughout 2003 rivaled that seen in 2002. The slight employment gains that were seen last quarter in information services were reversed in the fourth quarter, and jobs continued to be lost in high-tech manufacturing and business services. Losses also returned to the government sector, and public sector jobs—especially at the local level—will continue to face downward pressure for some time as the state struggles to put its financial house in order. The only bright spots were construction, health care and the leisure and hospitality industries.

Risk to Housing Market
The sluggish pace of job creation has been widely discussed as a national issue, but it remains a major risk factor for the regional economy. As noted in previous columns, too long a lag between when interest rates rise and job growth begins could mean trouble for local housing markets, which saw median prices increase by over 10 percent in the past year thanks to the decline in interest rates (Figure B). Home price appreciation, however, has slowed in most counties, and in the Bay Area prices have risen at about half the pace of the rest of California for a second year in a row.

Over the past several quarters, surveys of households have shown a rise in total regional employment of approximately 1 percent; surveys of employers have shown a decline of regional employment of 1.5 percent. Although some analysts suspect that the employer survey fails to measure jobs in new and smaller firms, recent national estimates using new benchmarks to correct this problem have not materially changed the employment estimates. Despite anecdotal evidence that some employers have begun recruiting again, and traffic congestion has increased a little, we should assume that job creation is still failing to keep up with job loss in the region.

Cyclical vs. Structural Job Loss
Why might this be happening? Popular explanations include the rise of off-shoring, rapid productivity increases and steep increases in the non-wage components of compensation. (Employer-paid premiums for workers’ compensation, health insurance and unemployment insurance have all increased dramatically in the past two years.) A more fundamental explanation comes from a recent study by researchers at the Federal Reserve Bank of New York. This report distinguishes between job losses that are due to cyclical factors and those due to structural factors. Jobs lost due to cyclical factors return once economic activity picks up, and many workers displaced from those jobs can find replacement jobs in their original industries and regions. Jobs lost due to structural change are unlikely to return, and workers displaced from those jobs face long searches, require more retraining and often suffer large wage losses even when reemployed. Structural factors slow the process of reallocating workers in the short run as the economy reshapes itself.

In the recessions of the mid-1970s and early 1980s, jobs were evenly divided between those affected by cyclical and structural factors. The structural component grew slightly to 57 percent in the recession of the early 1990s and then jumped to 79 percent in the recent recession. The sluggishness in job creation in this recovery may well be due to the fact that many firms are still trying to determine what their workforce needs will be during the expansion, and displaced workers and training providers are still trying to decide what kinds of new jobs require retraining.

Bay Area firms may be even more uncertain than most since they are disproportionately involved in those industries going through the most dramatic structural factors. With large structural factors and the severe financial strains many firms faced in this recession, another year may well pass before the regional labor market really begins to recover. The Association of Bay Area Governments predicts a gain of a mere 17,000 jobs in the region for all of 2004 and only another 32,000 in 2005. Against the backlog of 360,000 jobs lost since December 2000, these small gains demonstrate why there should be concern about the short-term prospects for the local labor force and the housing market.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. Michael Dardia is Vice President of the SPHERE Institute, a nonprofit organization that provides analysis and advice for policy makers. He prepares this column for the Bay Area Council, a public policy organization for the 275 largest employers in the region. More information is available online at www.bayareacouncil.org. Copyright © 2004.