New England Economic Partnership May 2012: Massachusetts

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1 Executive Summary and Highlights MASSACHUSETTS ECONOMIC OUTLOOK The Massachusetts economy has been in an expansion phase since the summer of The pace of expansion appears to have slowed from the robust growth in 2010, although in 2011 it appears that the state s economy grew moderately, with growth as least as fast as the nation s. The labor market improved throughout 2010 and 2011, with moderate employment growth and declining unemployment rates. Since the employment trough in November 2009, Massachusetts has gained back 81,500 of the 143,000 jobs it lost during the recession. Between December 2009 and April 2012, the Massachusetts unemployment rate fell from 8.7 percent to 6.3 percent. The broader U-6 unemployment rate also fell substantially over this period of time, from 16.4 percent to 12.2 percent. The Massachusetts economy is expected to continue to expand at a moderate pace. This assumes that the effects of the economic crisis in Europe and the slowing Chinese economy will be more than offset by growing demand within the U.S., and that the looming fiscal austerity scheduled to begin in 2013 will be softened by post-election compromises in Washington. Payroll employment is projected to grow 1.2 percent in 2012 and 1.0 percent in 2013, on a fourth-quarter to fourth-quarter basis, to accelerate moderately to about a 1.5 percent annual rate in 2014 and 2015, and then to slow in 2016 as retiring baby-boomers slow the growth of the labor force. Growth in income and output will essentially follow the same profile as employment. Real gross state product growth will average 2.3 percent per year over the forecast period, while nominal personal income growth will average 5.2 percent and nominal wage and salary growth will average 5.8 percent over the five year forecast horizon. The state s unemployment rate is expected to rise somewhat, to 7.0 percent by mid-2013, as improving job prospects entice workers who have given up looking to re-enter the labor force. Thereafter, the unemployment rate is expected to fall steadily to just over five percent by the end of The residential housing market may finally be at its bottom. Sales and permits are expected to reach pre-recession levels in 2015, while prices will rise at an average annual rate of nearly three percent between the end of 2013 and the end of By the end of the forecast, the median existing home price will still be 13 percent below its peak in Despite the present high unemployment, there are two long-term challenges for the development of the Massachusetts workforce: 1. The distribution of skills demanded in the future is shifting towards STEM and other high-skill, high-knowledge occupations. 2. The aging workforce and impending retirement of baby-boomers a generation of high-skilled workers could result in a massive shortage of skilled workers.

2 Recent Economic Performance The Massachusetts economy has been in an expansion phase since the summer of 2009 (since July 2009 as dated by the Massachusetts Current Economic Index). The pace of expansion appears to have slowed from the robust growth in 2010, although in 2011 it appears that the state s economy grew moderately, with growth as least as fast as the nation s. In 2010, state real gross domestic output grew 4.2 percent on an annual average basis according the U.S. Bureau of Economic Analysis, the fourth best performance among states that year. In contrast, U.S. real gross domestic product grew 3.0 percent. In 2011, growth in both the nation and Massachusetts slowed. Real output in Massachusetts grew 2.9 percent, as estimated by Moody s Analytics 1, and the U.S. grew 1.7 percent according to the BEA. The labor market improved throughout 2010 and 2011, with moderate employment growth and declining unemployment rates. Massachusetts payroll employment grew 1.1 percent in 2010 (December 2009 to December 2010) and likely grew at a similar pace in , while U.S. payroll employment grew 0.8 percent in 2010 and 1.4 percent in Since the employment trough in November 2009, Massachusetts has gained back 81,500 of the 143,000 jobs it lost during the recession. Unemployment rates have also fallen significantly since the recovery began. Between December 2009 and April 2012, the Massachusetts unemployment rate fell from 8.7 percent to 6.3 percent. The U.S. unemployment rate fell from 9.9 percent to 8.1 percent over the same period of time. The broader U-6 unemployment rate also fell substantially over this period of time, from 16.4 percent to 12.2 percent for Massachusetts 3, and from 17.1 percent to 14.5 percent for the U.S. Nevertheless, unemployment remains high, with an historically high number of persons who are underemployed, discouraged, or marginally attached to the labor force. National and international information technology markets, which rebounded sharply from the spring of 2009 through 2010, cooled in The level of output and sales in these markets was high but showed markedly slower growth in 2011 than in The exception was U.S. industrial production of information and processing equipment, which exhibited faster growth in 2011 than in Massachusetts merchandise export growth also slowed, from 11.3 percent in 2010 to 5.5 percent in U.S. merchandise export growth was considerably faster in both years: 21.0 percent in 2010 and 15.9 percent in The slower growth in Massachusetts may reflect a higher dependence on Europe as and export destination. The Outlook: Steady Progress Towards a Recovery The Massachusetts economy is expected to continue to expand at a moderate pace. This assumes that the effects of the economic crisis in Europe and the slowing Chinese economy will be more 1 The BEA will release its estimate for 2011 state gross domestic product in late June. 2 The official growth in 2011 was only 0.3 percent, but recent estimates from MassBenchmarks using ES-202 data through September 2011 have payroll employment growing 1.2 percent in the first nine months of 2011 (not annualized). If the current official fourth quarter growth figures turn out to be accurate, then state payroll growth in 2011 will have turned out to be about 1.4 percent. 3 Author s calculations, using the Current Population Survey. The figures are seasonally-adjusted and smoothed.

3 than offset by growing demand within the U.S., and that the looming fiscal austerity scheduled to begin in 2013 will be softened by post-election compromises in Washington. The forecast assumes, however, that the cut in the social security tax rate will not be extended again, but will revert back to its full rate at the beginning of Payroll employment is projected to grow 1.2 percent in 2012 and 1.0 percent in 2013, on a fourthquarter to fourth-quarter basis, to accelerate moderately to about a 1.5 percent annual rate in 2014 and 2015, and then to slow in 2016 as retiring baby-boomers slow the growth of the labor force. For the forecast period as a whole, for , employment growth is expected to average 1.3 percent per year. Growth in income and output will essentially follow the same profile as employment. Real gross state product growth will average 2.3 percent per year over the forecast period, while nominal personal income growth will average 5.2 percent and nominal wage and salary growth will average 5.8 percent over the five year forecast horizon. Massachusetts workers are expected to retain their pay premium over the average U.S. worker, that is, wage and salary income per payroll worker in Massachusetts is projected to remain about 22 percent higher than for the U.S. as a whole. The state s unemployment rate is expected to rise somewhat, to 7.0 percent by mid-2013, as improving job prospects entice workers who have given up looking to re-enter the labor force. Thereafter, the unemployment rate is expected to fall steadily to just over five percent by the end of Employment by Sector By the end of the forecast period, in 2016, the industrial structure of the state s economy will look significantly different from the one that preceded the recession. This is due to long-term trends in the demand for the mix of goods and services, the comparative advantages and disadvantages of the state s economy in supplying the nation and the world with products and services, and technological change. Business cycles often accelerate the timing of these changes. At one extreme, the number of jobs in education and health services is expected to be 16 percent higher by the end of 2016 than in the beginning of 2008, while at the other extreme, the number of jobs in construction is expected to be 21 percent lower. Total nonagricultural employment is projected to be 3.6 percent higher, with the number of jobs reaching its pre-recession peak in the first half of Leisure and hospitality; and professional and business services will also comprise higher shares of the economy in 2016, with employment in both sectors about 10 percent higher than before the recession. Government, information, and other services will comprise roughly the same share of jobs as before the recession. Financial activities; trade, transportation, and utilities; manufacturing; and construction will comprise a lower share of jobs than before the recession. Furthermore, the number of jobs in these sectors will be lower than before the recession began. The number of jobs in financial activities and trade, transportation, and utilities will be roughly five percent less, while the number of jobs in manufacturing will be about nine percent less. Much of the changes in the relative share of super sectors are due to differential rates of job loss during the recession. For example, education and health care continued to grow throughout the recession, while construction lost over 20 percent of its jobs, manufacturing lost 13 percent of its jobs, and professional and business services lost nearly eight percent of its jobs.

4 Over the five year forecast period, from the last quarter of 2011 to the last quarter of 2016, overall payroll employment is projected to expand at an annual average rate of 1.3 percent, which is somewhat higher than in the prior expansion (2004q1-2008q1), in which employment growth was 0.9 percent per year on average. Employment in professional and business services; information; leisure and hospitality; and education and health services will grow substantially faster than overall employment, with average annual growth rates of 2.5 percent, 2.1 percent, 2.1 percent, and 2.0 percent respectively. Employment in the remaining sectors will lag that of overall employment. The number of jobs in government, financial activities, and manufacturing will grow at annual average rates moderately below that of overall employment, at 0.9 percent, 0.9 percent, and 0.7 percent respectively. Employment in other services will grow at only 0.3 percent per year, construction not at all, and trade, transportation, and utilities employment is expected to shrink at 0.3 percent per year. Skills and People Matching: Where are the Jobs? Despite the present high unemployment, there are two long-term challenges for the development of the Massachusetts workforce: 1. The distribution of skills demanded in the future is shifting towards STEM and other highskill, high-knowledge occupations. 2. The aging workforce and impending retirement of baby-boomers a generation of highskilled workers could result in a massive shortage of skilled workers. Meeting these challenges is imperative for the state s economy because its success is based on providing current and potential employers with a large, highly-educated labor force. Skilled labor is the key strategic input for businesses in the global economy, and is the key natural resource that Massachusetts is endowed with. As an example of how the future occupational distribution of jobs might change, one recent study estimated job growth in Massachusetts by occupation from 2007 to The greatest growth can be expected among computer and mathematical occupations (16 percent), followed closely by health care support occupations (15.1 percent), personal care and service occupations (14.4 percent), and community and social service occupations (14.2 percent). These occupations account for an additional 53,000 jobs, or more than half of the net new jobs in the Massachusetts economy. Double digit growth is also expected among healthcare practitioners and technical occupations (12.7 percent) and life, physical and social science occupations (11.6 percent), which account for another 32,000 new jobs. At the other end of the spectrum, production occupations are expected to continue a long-term decline, losing 22,000 additional jobs by 2020, a 13.4 percent decrease. No other occupational group comes close, with construction and extraction (down 4.3 percent) and transportation and material moving (down 3.8 percent) losing a combined 12,000 jobs. Office and administrative support occupations are projected to decline 2.4 percent, or almost 11,000 jobs. These changes, as large as they might seem, do not reflect the magnitude of the workforce challenge because they represent only the net changes in the number of jobs. As workers retire,

5 they will also create the need for replacement jobs, so the number of new employees needed with these skills is many times higher than the net change required. 4 There is a particular concern that the most severe shortages of skills in Massachusetts and New England will be in so-called middle skills jobs, that is, jobs that do not require a Bachelor s degree but instead require specific job skills that can be met by credentials and certificates from community colleges and vocational schools. 5 This view is not universal, however. In a recent PhD dissertation, Mark Melnik 6, in projecting skill requirements needed in 2016 in the Boston metropolitan area, found evidence of a credential mismatch in that workers in Greater Boston tended to be more educated than the jobs required, where educational requirements were measured by the Bureau of Labor Statistics O*Net survey of occupations. Employers adapt to the skill levels of the region s labor force by boosting the educational requirements needed to obtain these jobs. The upshot is that persons who train for the expected skill requirements and get the associated credentials may be passed over by employers who instead hire more highly-educated workers. It may be the case that the technology of production is more like moldable putty rather than brittle clay, in that employers choose how they make goods and provide services based on the skills of the available labor force; or it may be that production follows a clay-putty model, where skills are needed in fixed proportions, but the types of businesses that locate here use the fixed proportions that match the region s labor force. In either case, there appears to be no downside to having too many highly-educated and highly-skilled workers. In the case of highly-skilled workers, Say s law applies. Say s law applied here means that there cannot be an over-supply of highly-skilled workers. If the workers are available, businesses will move or expand here to accommodate the supply. The low unemployment rate for college-educated workers appears to bear this out. However, this does not mean that middle-skills are not important. The putty and putty-clay models do have a limit in their applicability. Sectors such as medical devices and information technology could not thrive in this region without the local manufacturers that are able to provide prototype and custom production services. These manufacturers, in turn, require middle-level skills as well as engineers and scientists. Even in the current situation with high unemployment, employers are talking about the difficulty of finding qualified workers, and labor economists note that the Beveridge curve appears to have shifted outward, which implies that part of the high unemployment rate is due to mismatches between the skills of the unemployment and those required by job openings, 7 although by far this is outweighed by insufficient aggregate demand to fully employ the population. 8 In this regard, the role of public workforce development agencies like the One-Stop Career Centers is critical. 4 See, for example, Bluestone, Barry; and Melnik, Mark After the recovery: Help needed. The coming labor shortage and how people in encore careers can help solve it., Kitty and Michael Dukakis Center for Urban and Regional Policy, Northeastern University. 5 Modestino, Alicia Sasser Mismatch in the labor market: Measuring the supply of and demand for skilled labor in New England, New England Public Policy Center, Research Report Melnik, Mark Assessing the role of industrial and demographic change on regional economic health: A case study of Greater Boston. PhD Dissertation. Department of Sociology and Anthropology, Northeastern University. 7 Dickens, William T.; and Triest, Robert K Potential effects of the great recession on the U.S. labor market. Prepared for the Federal Reserve Bank of Boston Conference on the Long Term Effects of the Great Recession, October 18-19, Sum, Andrew; McLaughlin, Joeseph; and Palma, Sheila The depression in blue collar labor markets in Massachusetts and the U.S.: The implications of growing labor surpluses for future economic stimulus and workforce development policies. MassBenchmarks, Vol. 13 No. 1.

6 Studies have shown their effectiveness in connecting unemployed and displaced workers to job openings, often after retraining education. 9 So, what can be done to meet the future workforce challenge? Expand the capacity and resources of the One-Stop Career Centers. This is needed to transition unemployed workers to new careers. There is a critical shortage of staff and resources given the number of unemployed workers. In the future, these centers can coordinate with vocational schools, community colleges, and universities to retrain the adult workforce. An expanded and coordinated vocational school and community college system, needed to train workers for middle-skill jobs. Continued educational reform of the public pre-school and K-12 system. The quality of education and educational outcomes (for example, graduation rates) still vary dramatically across school systems. A good set of general skills is needed for successful middle-skills as well as high-skills attainment. Increased funding for the UMass system. More highly-educated residents are needed. The public university system provides a more affordable education than do private universities, and UMass graduates have a higher propensity to remain in Massachusetts than graduates of the state s private institutions. In-state tuition for immigrants. It is cost-effective with a large positive net benefit to the state s economy. A television series that promotes manufacturing. There are plenty of shows featuring doctors, lawyers, and police officers, and no shortage of these workers. Is this simply a coincidence? What is needed is a series that shows young, intelligent, sexy, men and women with STEM skills working in modern manufacturing facilities. Alan Clayton-Matthews Associate Professor, School of Public Policy and Urban Affairs, and Economics Department Northeastern University a.clayton-mattehws@neu.edu See, for example: Heinrich, Carolyn J.; Mueser, Peter R.; and Troske, Kenneth R Workforce Investment Act non-experimental net impact evaluation. Final report. IMPAQ International.