Two Views of the NC Economy

by John Hood

North Carolina’s lackluster economy is the top political issue. Voters who pay scant attention to legislative sessions and partisan dust-ups in Raleigh view state leaders primarily through the economic lens. If they believe things are getting substantially better in the coming years, they’ll reelect the Republican legislature in 2014 and Pat McCrory in 2016. If they don’t, GOP dominance will be increasingly imperiled.

The most commonly accepted political marker for economic performance is employment. Both the unemployment rate and changes in the rate are important in modeling voter behavior. But other trends are important, too. Changes in per-capita personal income are not only a valid marker but actually affect far more people than unemployment does. And prices for some consumer goods, such as gas and milk, are so visible that they can shape public sentiment to a significant extent.

It’s important to remember that employment, personal income, and output are related but distinct phenomenon. Some industries are capital-intensive, with a high ratio of equipment to workers, while others are labor-intensive, with a lower ratio of equipment to workers. Some industries such as finance and health care tend to employ people for lengthy stretches of time, at relatively high wages. Other industries such as food service and recreation tend to employ lots of temporary or transient workers, at relatively low wages. Many of those workers are young and inexperienced. They are learning both hard skills (how to do a particular job) and soft skills (how to be punctual, reliable, personable, and a successful member of a team). Their total compensation is actually a combination of wages, non-wage benefits, and valuable on-the-job training.

A good starting point for putting all this together is to look at two different snapshots of North Carolina’s economy by industry cluster. First, let’s take a look at the distribution of total output as measured by gross domestic product for the most recent period (late 2011):

• 21% — Financial Services & Real Estate

• 20% — Manufacturing

• 15% — Government (all levels)

• 13% — Trade, Transportation & Utilities

• 12% — Health Care, Social & Education Services (other than gov’t)

• 10% — Professional and Business Services

• 3% — Leisure, Hospitality & Food Services

• 3% — Media and Information Services

• 3% — Construction, Mining & Other

Now, take a look at the same list of industry clusters with a different statistic: share of total North Carolina employment:

• 5% — Financial Services & Real Estate

• 11% — Manufacturing

• 17% — Government (all levels)

• 19% — Trade, Transportation & Utilities

• 14% — Health Care, Social & Education Services (other than gov’t)

• 17% — Professional and Business Services

• 10% — Leisure, Hospitality & Food Services

• 2% — Media and Information Services

• 5% — Construction, Mining & Other

As you can see, some industries are highly capital-intensive. Financial services, real estate, and manufacturing together account for more than 40 percent of North Carolina’s total economic output but only 16 percent of total employment. Leisure, hospitality, and food service, on the other hand, are highly labor-intensive and full of many part-time jobs.

So a singular focus on job counts, while understandable, can become misinformation. Increases in productivity – in output per worker – are good news, not bad news. The “economy” is an abstraction that describes the process by which markets coordinate the production of goods and services to satisfy shifting consumer demands. In other words, we produce in order to consume. The goal of business is to sell things to customers, thus generating a return to its owners. Employment is a side effect of the process, not its purpose. Figuring out new ways to make more goods with fewer inputs, including labor, allows scarce resources to be shifted to the production of goods and services previously unattainable or unaffordable except by the wealthy.

The reallocation of labor from making stuff to delivering services has been going on since human civilization began. It is no longer necessary that 90 percent of us produce food, clothing, housing, and household goods. That frees us up to do many other useful things.

Hood is president of the John Locke Foundation and an NC Spin Panelist