Analysts John Madigan and Kevin Kennedy take a deep dive into select economic clusters in the United States. This is a follow up to March’s “Growth on the Margins.”
A vicious cycle
A new US Census Bureau report denotes which states gained or lost seats in the House of Representatives based on the results of the 2020 population survey. The distribution of seats in the House correlates strongly with which states are surpassing or lagging behind the nation as a whole in terms of economic performance. States that won seats, namely Texas, Colorado, Florida, Montana, North Carolina and Oregon, have exhibited broad based economic gains in employment, establishments and population growth since 2010. Meanwhile, other states which have not done so, such as California, Illinois, Michigan, New York, Ohio, Pennsylvania and West Virginia, will lose seats.
In a follow up to “Growth on the Margins,” which examined regions of the United States that have been economically outperforming the national average, the following will examine the regions of the nation which are underperforming, including New England, the Mid-Atlantic, the Great Lakes and the Plains. To illustrate, this article will cover employment, establishment formation, tax burdens and other factors that contribute to, or are influenced by, population change.
Sticks in the mud
The COVID-19 (coronavirus) pandemic contributed to the most substantial unemployment spike in recent history, increasing the national unemployment rate an estimated 120.7% in 2020 alone. While many state labor markets were resilient compared with the country as a whole, the broader effect was overwhelmingly negative. Ultimately, for the regions discussed in this article, total employee counts declined 7.8% in 2020, translating to more than 4.2 million total job losses.
Great Lakes
The Great Lakes Region, including Illinois, Michigan and Wisconsin, is the slowest growing region of the United States in terms of annualized population growth, which exhibited an increase of 0.2% between 2010 and 2020. The region, a major center of auto manufacturing, meat processing and food production, exhibited a decline of 7.1% in employment in 2020, while displaying an annualized decline of 0.7% in total employment between 2015 and 2020.
Mid-Atlantic
The Mid-Atlantic, a hub for financial and insurance services and professional and technical services, has also exhibited slow growth, with total population rising an annualized 0.4% between 2010 and 2020. However, this region has also shown a significant employment contraction as a result of the pandemic, with regional employment declining 9.4% in 2020 alone. Zooming in, New York experienced the most substantial negative effects, with state employment declining 11.2% in 2020, representing more than 900,000 job losses in a single year. New Jersey, Pennsylvania and Maryland all experienced similar employment losses of more than 7.0%, contributing to regional annualized decline of 0.9% between 2015 and 2020.
The Plains
The Plains region, which include Iowa, Kansas, Minnesota, Missouri, Nebraska, North and South Dakota, has exhibited weak annualized population growth, rising an annualized 0.5% over the 10 years to 2020, with total employment declining an annualized 0.5% between 2015 and 2020. While the region has fared better than other areas, total employment declined a substantial 5.5% in 2020 alone. The Plains region is a major agricultural producer, with Iowa, Nebraska, Kansas and North Dakota exhibiting some of the highest concentrations for beef cattle, poultry, pork, corn and other field crops production. Overall, the agronomy sector has exhibited wildly varying and challenging operating conditions, exacerbating regional weakness.
New England
The New England region has also lagged behind the overall nation, with its population increasing at an annualized 0.5% between 2010 and 2020, and with most employment concentrated in the Healthcare and Social Assistance Sector, Construction Sector and Professional and Technical Services, while Connecticut and Massachusetts being the main population centers and economic engines of the region. Overall, total employment in New England decreased 8.5% in 2020 alone as a result of the negative effects of the pandemic, with regional employment declining 4.2% between 2015 and 2020.
Of the more than 20 states covered in this report, only South Dakota boasts total current employment figures above 2015 values.
The true effect of labor market declines becomes apparent when examining employee data on an annualized basis. While employment in these regions expanded over much of the past five years, employment gains have been diminishing as a result of slow population growth and have declined more recently due to pandemic-related affects. Of the more than 20 states covered in this report, only South Dakota boasts total current employment figures above 2015 values.
It is interesting to note that areas that were hardest hit by the coronavirus pandemic simultaneously display the slowest population growth and the largest employment declines during the observation period. Furthermore, this is shockingly consistent across states and metropolitan areas across the country, adjusted for population. North Dakota stands at the bottom of the lot, in which the state has lost more than 40,000 jobs between 2015 and 2020. While this figure may appear unsubstantial on the surface, this translates to employment decreasing an annualized 2.3% between 2015 and 2020. For more populous areas, New York and New Jersey combined have lost nearly 550,000 jobs during the same period.
This suggests that centers of economic activity that are nondiversified in terms of employment and establishment distribution across various economic sectors are more prone to slow population growth and overexposed to market risk in those core sectors. An overall decline in economic performance is primarily a result of the pandemic, but it also underlines some functional challenges that will likely continue to hamper labor markets and population growth moving forward.
Lots of eggs, few baskets
The regions covered in this article exhibit nondiversification in terms of employment and establishment distribution across economic sectors. The least-to-most diversified regions in this list are New England, the Plains, the Mid-Atlantic and, lastly, the Great Lakes. This illustrates that less populous regions contribute to less diversification among regional economies.
New England
New England contains more than 540,000 business establishments and employs nearly 6.0 million individuals; however, it also represents the least-diversified regional economy. New England’s business environment is dominated by healthcare and social assistance, professional and technical services and retail trade, which when combined, account for 41.8% of regional establishments, along with 36.7% of total employees in 2020. Massachusetts is the largest offender, with more than 43.0% total state employees and more than 48.0% of state establishments being sourced from these sectors in 2020.
The Plains
The Plains region accounts for nearly 700,000 business establishments and more than 8.4 million employees. The Plains, similar to New England, is heavily skewed toward healthcare and social assistance, professional and technical services and retail trade, which account for a combined 38.2% and 36.7% of regional establishments and employees, respectively, in 2020. Within the region, Minnesota and Missouri exhibit the least amount of diversification in regard to employment and establishment figures. In 2020, the aforementioned sectors account for 46.9% and 35.5% of state establishments in Minnesota and Missouri, respectively, in addition to contributing to 38.3% of Minnesota’s state employment and 37.7% of Missouri’s. The New England and Plains regions exemplify the nondiversification that occurs in less populous areas; however, even the most populous regions exhibit similar trends.
The Mid-Atlantic
The Mid-Atlantic region is also characterized by a nondiversified regional economy. Similar to the Great Lakes, the Mid-Atlantic is among the most populous regions in the country, maintaining more than 1.5 million business establishments that employ nearly 18.0 million individuals. The Mid-Atlantic region is heavily skewed toward healthcare and social assistance, retail trade and professional and technical services, which combined account for 37.4% of establishments and 40.9% of employment in 2020. Within the region, Delaware and Pennsylvania exhibit the least amount of diversification. Professional and technical services, healthcare and social assistance and retail trade account for 41.2% and 39.2% of state establishments and employees, respectively, in 2020. For Pennsylvania, manufacturing, retail and healthcare and social assistance account for 43.7% of establishments and 30.9% of employment in 2020.
Great Lakes
The Great Lakes employs more than 17.6 million individuals across nearly 1.2 million business establishments. Yet, economic activity is heavily skewed toward manufacturing, wholesale trade and transportation and warehousing, which account for more than 35.7% of regional establishments in 2020. This figure reaches nearly 44.0% when examining regional employment. Within the region, Illinois and Wisconsin are among the most nondiversified states. In 2020, professional and technical services, retail trade and healthcare and social assistance contributes nearly 35.0% to Illinois’ state establishments. In contrast, agriculture, mining and utilities account for only 1.0% of state establishments. Wisconsin is slightly more extreme, with healthcare, retail trade and professional services accounting for almost 38.0% of total state establishments in 2020. Employment concentrations are more rampant in other states within the Great Lakes, such as Indiana and Ohio. For these states, manufacturing, retail trade and healthcare and social assistance account for 47.9% and 44.6%, respectively, in 2020.
Show me the money
States lagging in annualized population and employment growth correlate strongly with states that carry high tax burdens and underfunded pension liabilities. For example, Illinois, which exhibited no annualized population growth since 2010, is ranked 49th by the Tax Foundation for pension funding ratio to plans, at just 39.0% of liabilities being funded. Furthermore, according to the Illinois Policy Organization, 25.0% of the general fund budget went to cover government employee health insurance and pension plans in 2018. Unless funding and structural issues are addressed, entitlements will likely continue to crowd out increased state government spending on all other social services, likely driving population out of the state.
States such as Illinois are in the company of others, including New Jersey, New York and Connecticut. According to the Tax Foundation, these are the three worst-ranked states on the national Business Tax Climate Index, while also being among the top 10 states with the highest effective state and local tax burdens. For example, New Jersey only has 36.0% of pension plans funded and its population has only increased an annualized 0.6% since 2010, while also imposing one of the highest effective state and local tax burdens on its residents, at 11.7%.
While New York has the fourth best funded pension in the nation, funding 92.0% of pension plans, this is likely due to the fact that the state imposes the highest effective state and local tax burden in the nation, at 14.1%, while population in New York has increased an annualized 0.4% between 2010 and 2020. Furthermore, Connecticut’s population has increased an annualized 0.1% during the same period and only had 46.0% of pension liabilities funded in 2020, while imposing an effective state and local tax rate of 12.8%.
Give and take
In conclusion, the domestic population continues to migrate away from these regions as a result of high tax burdens, poor employment and establishment diversity and diminishing social services, among other factors. These trends have been further amplified by the coronavirus pandemic by stifling revenue streams for private businesses and state governments. The Great Lakes, Mid-Atlantic, New England and Plains regions are expected to continue struggling to regain economic and population growth in comparison with national benchmarks in the immediate future. However, this will also likely serve as a primary catalyst for expansion in other regions of the country.
