Meet the Author

Timothy Dunne |

Vice President

Timothy Dunne

Timothy Dunne is a former vice president and economist of the Federal Reserve Bank of Cleveland.

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Meet the Author

Kyle Fee |

Economic Analyst

Kyle Fee

Kyle Fee is an economic analyst in the Research Department of the Federal Reserve Bank of Cleveland. His research interests include economic development, regional economics and economic geography.

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08.15.08

Economic Trends

State Labor Markets

Kyle Fee and Tim Dunne

Since the start of the credit crisis, labor markets in the 50 states have generally weakened. As the national unemployment rate rose from 4.7 percent to 5.5 percent from September 2007 to June 2008, the vast majority of U.S. states also saw rising unemployment rates. Rhode Island led the country with an increase of 2.4 percentage points, followed by Tennessee and Illinois, each with 1.5. Regions of the country that saw the largest percentage point increases were in the Midwest and Southeast. In the West, California and Nevada—states relatively hard–hit by the housing slump—also saw relatively sharp increases in unemployment rates.

Underlying these changes in state unemployment rates is both an expansion in the number of people unemployed as well as a contraction in the number of people employed. According to household survey data, U.S. employment declined 0.26 percent between September 2007 and June 2008, with 28 states experiencing a decline in the number of people employed. Within the Fourth District, Pennsylvania was the only state adding employment over the period.

While employment growth was mixed across the 50 states, there has been a substantial rise in the number of people unemployed in most states.  This is due to the fact that labor force growth has remained relatively strong in comparison to employment growth in most states. For the United States as a whole, employment fell by 370,000 from September 2007 to June 2008, while the number of people in the labor force rose by 880,000. As a result, the number of unemployed workers rose by 1.25 million—a 17.3 percent increase. The substantial growth in unemployment is seen across the 50 states, with 44 out of the 50 states experiencing a rise in the number of people unemployed from September to June.

An alternative measure of the health of state–level labor markets comes from the payroll survey conducted by the Bureau of Labor Statistics. This survey of firms paints a somewhat more optimistic view of labor markets over the September 2007–June 2008 period. According to it, only 10 states experienced contractions in employment. However, it is important to note that the payroll survey is subject to revisions and that these revisions can be substantial.

The Federal Reserve Bank of Philadelphia constructs an index of state economic activity that is based on a combination of labor market data—the state’s unemployment rates, nonfarm payroll employment, average hours worked in manufacturing, and real wages and salaries. Using these data series, the Philadelphia Fed constructs an index for each state, as well as a diffusion index that summarizes economic activity across the states. The 50–state diffusion index is simply the percentage of states in which the index is rising minus the percentage of states in which the index is declining. Two versions of the index are constructed, each with a different time horizon. One reflects one–month changes and the other, three–month changes. A reading below zero implies that more than half of the 50 states have declining index values, while a reading above implies the opposite. For example, a diffusion index of −60 could be generated if 20 percent of the state indexes rose while 80 percent fell (−60=20-80).

The Philadelphia Fed’s diffusion index moves with the overall business cycle, and in each of the previous recessions it bottomed out at values in the range of −40 to −70. The one-month index turned negative in March, and the three-month index turned negative in April. The June 2008 readings of the one- and three-month diffusion indexes are −28 and −48, respectively. Given that these indexes are based primarily on labor market data, they show that labor market weakness spread across states, especially during the second quarter of 2008.