Insurance and Economy and Government

An unemployment riddle defies logical explanation ECONOMIC ANALYSIS Patrick Barkey:

May 2, 2005

You may not believe it, but the data tell us it is true. Indiana is leading the Midwest in job growth. In fact, through the last 14 months, the state's employers have kept up with the national economy in net job creation, while Illinois, Ohio, and Michigan have seen their job totals remain stubbornly stagnant.

But just as we are getting out the party hats to celebrate, along comes news of an entirely different tone on unemployment rates. The process of data revision has introduced a delay, but the information we have through the month of February tells a more depressing story.

Due to an unexpectedly large surge in unemployment in the first two months of 2005, the state's unemployment rate now stands above the national average for the first time since 1987. The Indiana unemployment rate in February rose to 5.7 percent, significantly above the 5.4-percent jobless rate for the nation for the same month.

The same pattern is evident in most of the state's major cities. In Indianapolis, where employment totals are up by almost 21,000 jobs from last spring, the unemployment rate rose to a not-seasonally-adjusted 6 percent. Even Elkhart, whose employment gains of 5.5 percent over the last 12 months pace the state, had a higher unemployment rate in February than one year earlier.

That's a surprise to seasoned analysts and casual observers of the economy alike. Jobless rates are up at the same time job growth finally arrives? At first, this sounds like a logical impossibility. After all, if more workers are being hired, there must be fewer who are idle, correct?

As the gag line goes from the Federal Express television commercials, "not exactly."

The relationship between unemployment rates and job growth, never a perfect one, has gotten a whole lot more slippery over the last five years. We saw that in the beginning of the recession-when Indiana suffered such harsh job losses, the worst in the country at one point-its jobless rate remained comfortably below the national average.

We tried to explain that partly as a situation where workers whose jobs were destroyed were unable or unwilling to consider working at lower rates of pay, thus deciding to leave the labor force altogether. In doing so, they did not show up among the official tally of the unemployed. It was a convoluted explanation, admittedly, and one that didn't adequately answer an obvious question: Why hadn't this happened in previous recessions?

Now that the economy is moving in the other direction and job opportunities have improved in many areas of the state, the surprising behavior of unemployment rates is even harder to explain. Especially since the upward rise in the joblessness statistics also disagrees with two other key economic indicators.

The first of these is unemployment claims. Statewide, claims for unemployment insurance have been at or below their year-ago levels for more than a year. In Indianapolis, where jobless rates spiked up to 6 percent in February, claims actually declined for the month and remain about 15 percent below February 2004 levels.

A second indicator of state economic performance is the tax revenue collections of state government. Personal income tax collections were 11 percent higher in the first three months of 2005 than year-ago levels. Reconciling that growth with reports of more than 200,000 unemployed workers in the state-the highest since 1987-is difficult.

Perhaps future reports will clarify this mystery. Until then, we'll have to remain confused.



Barkey is an economist and director of economic and policy studies at the Miller College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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