News Column

Struggling Connecticut job market a key element of gubernatorial race

August 4, 2014

By Brian Charles, New Haven Register, Conn.

Aug. 04--During his inauguration speech in 2011, Gov. Dannel P. Malloy vowed to grow Connecticut's economy and create jobs.

Malloy took office in Connecticut on the heels of a crippling recession that had left millions across the country without work, evaporated billions of dollars in home equity and rocked consumer confidence in the economy. Unemployment in Connecticut on the night the new governor made his inaugural address was 9.3 percent, according to the state Department of Labor.

Malloy's optimism was welcome; his promises seemed bold.

"We will put in place an economic development strategy that makes sense for the 21st century economy, aggressively competing with other states and nations for lucrative biotech, nanotech, fuel cell technology and stem cell research jobs," Malloy said in his 2011 inaugural address. "We will join Connecticut to the Energy Economy, attracting companies that reduce our dependency on fossil fuels. We will aggressively develop our three deepwater ports to spark commercial activity and decrease our reliance on heavy trucking and the congestion they bring to our highways."

At first blush Malloy's strategy seemed to work. Biotech and digital media firms moved to the state, often lured by tax breaks and state-backed loans.

The ports weren't deepened, but the economic tide began to rise. The official unemployment rate had declined, although it remains higher than the surrounding states and the nation. According to the most recent estimate by the state Labor Department, the official unemployment rate in Connecticut is 6.7 percent, the national unemployment rate is 6.2 percent.

During his most recent State of the State speech, Malloy didn't declare victory in his battle to restart the Connecticut economy, but he noted the progress.

"Taken together, all of these positive changes have helped create more than 40,000 new private sector jobs and lower Connecticut's unemployment rate by two percentage points in just three short years," Malloy said in his speech.

Still, job growth has been slow. Connecticut has recovered less than two-thirds of the jobs lost in the Great Recession, according to the state Labor Department. At the same time, median household incomes have steadily declined, and the percentage of work age adults participating in the labor force is at its lowest point in more than 30 years, according to the U.S. Bureau of Labor Statistics.

"It's not that job growth stalled, it's that job growth is slow," said Pete Gioia, an economist with the Connecticut Business and Industry Association, the state' largest business association.

Malloy's much heralded job recovery, which has averaged an addition of 14,000 private sector jobs per year, is not nearly enough to signal the return of a robust labor market. The business climate and job growth are seen as key elements of the 2014 campaign.

Republican gubernatorial candidates Tom Foley and state Sen. John McKinney, who face each other in an Aug. 12 primary, have been highly critical of Malloy's policies. The state Office of Fiscal Analysis is projecting a $2.8 billion deficit in the next biennium.

The looming deficit, debt and long-term pension liabilities make the state unattractive to investors, Gioia said.

Foley and McKinney both promise to work on the business climate in the state by lowering taxes and streamlining regulations, rather than offering specific job programs.

McKinney has said he would cut state spending beyond the flat-funding of discretionary spending promised by Foley. He seeks a balanced budget, concessions from state workers, elimination of the income taxes on those earning up to $75,000, preservation of the sales tax exemption for clothing/footwear and the phase-ou of the business surcharge tax.

Foley, in his second video ad, associates Malloy and McKinney with "Pushing failed policies -- costing us jobs. Billions in higher taxes. More spending -- more debt. Bigger, intrusive government." Foley will "stop out-of-control spending, lower taxes, support job creators," the ad says.

Economists, including Gioia, say a truly healthy job market in Connecticut would create closer to 30,000 private sector jobs per year.

But Connecticut's declining unemployment rate masks deeper problems in the labor market. The state has ranked near the bottom -- 49th in 2012 and 46th in 2013 -- in percentage of long-term unemployed residents, according to the U.S. Bureau of Labor Statistics. Those who have left the labor market and given up on their job search are not counted in the official unemployment rate.

"The truth of the matter is that most of the decline in the Connecticut unemployment rate has not been due to people getting jobs, but people dropping out of the labor market," said Wade Gibson, director of the Fiscal Policy Center at Connecticut Voices for Children, a nonprofit that studies the impact of the economy and education on families and children in the state.

The state's fickle and frustrating labor market is something Malloy inherited. Malloy proposed a $1.5 billion tax increase, which the legislature put into effect, along with contract changes and other cuts, when he was faced with the one-year, $3.6 billion deficit that he inherited from the previous administration.

Job prospects in the state, according to many economists, have been flagging for years. Connecticut has transformed from one of the most dynamic state economies in the country to downright average. In the process, incomes and wealth disparity has grown. Malloy's policies -- a mix of tax breaks, state-backed loans, small business assistance programs and a tinge of fiscal austerity -- have created jobs, but economists and labor analysts agree that there only is so much any governor can do to improve the fortunes of an economy.

"There are real limits of what a state can do," said Steven Lanza, a University of Connecticut economist, and executive editor of the The Connecticut Economy, a quarterly economics publication. "The fact of the matter is, our economy is embedded into a much bigger national and regional economy. We are largely at the mercy of outside forces. We all know if the U.S. has a recession, (Connecticut) is going to lose jobs."

Defense industry fizzle, left job market with no pop

Connecticut's manufacturing history dates back to the early 19th century. Dubbed the "arsenal of Democracy" the state's factories churned out the materials that armed the U.S. troops in the War of 1812 and the Union during the Civil War. Despite its limited amounts of land and a population, Connecticut's remained among key states for defense manufacturing well into the 20th century.

Factory workers in the Nutmeg state fashioned and fabricated guns, ammunition, submarines, helicopters and jet engines. The state's economic fortunes were tethered to the defense industry. At one point defense contracting accounted for one-fourth of all manufacturing output in the state, according to Gioia.

The end of Cold War started the steady decline of the state's manufacturing sector.

"When the Berlin Wall fell it landed on top of Connecticut's manufacturing base," Gioia said.

Cancelled defense contracts, relocating factories and automation led to a severe contraction in manufacturing. From 1990 to present nearly 150,000 manufacturing jobs in Connecticut were lost. The size of the manufacturing base shrunk by 50 percent, according to the state Department of Labor.

"In terms of the lost jobs. It was a much more severe recession in the early 90s that was centered not only in financial services, because of the banking crisis going on back then, but also in the end of military contracts that were ended due to the end of the Cold War," Lanza said.

A labor market once marked by a high workforce participation rate, began to dramatically slow down.

At it's peak in 1990, 72 percent of working age adults in Connecticut participated in the labor market, much higher than the participation rates of both the surrounding states and the nation as a whole. According to the latest, Bureau of Labor Statistics figures, less than 65 percent of the working age population here participates in the labor market, the lowest participation rate in more than 30 years.

During the same period retail, and leisure and hospitality jobs grew, the latter by about 50 percent.

However, retail and hospitality jobs have traditionally paid less than factory work. The median salary in retail services is close to $10,000 a year less than the annual pay in manufacturing, according to the state Department of Labor.

And Connecticut's median household income has reflected the labor market trends. From 2007 to 2012, median wages across the state didn't keep up with inflation, according to the state Department of Labor. And the U.S. Census Bureau recorded a decline in median household income during the same period. The two-year average median income in Connecticut was 69,160 in 2009-10 and was 65,515 in 2011-12, census statistics show.

"In all the rust belt cities unless you are talking about a New York, Pittsburgh, and Boston, median incomes have not risen in the last 30 years," Gibson said.

And while unemployment dipped to record lows in early 2000, the recession that followed in 2001 would lead to further erosion of the manufacturing sector.

The most recent recession would strike a severe body blow to financial services, among the state's largest job sector, Lanza said. The blow to banking coupled with the foreclosure crisis has made a job recovery harder to come by. At the same time income inequality rose in Connecticut. It has become the second most unequal state in the country in terms of income. The fall from where Connecticut was -- a state with robust industrial, insurance and financial sectors, to one with a wilted manufacturing base and growing divide between rich and poor was dramatic.

"We look more and more average, which is a decline for us because we are the richest state in the country," Gibson said. "We used to be somewhat equal in terms of income, but now we are among the most unequal. We used to have below average unemployment and now we have higher than average unemployment."

Transformation

At the same time that state's manufacturing base has wilted, the education and healthcare sector has seen explosive growth. Seemingly immune to recessions, the education and healthcare job sector has grown 81 percent since 1991. The median income in the field is solidly middle class and the Bureau of Labor Statistics forecast continued growth in the sector.

Politicians and business leaders, Malloy included, have tried to harness the power of the state universities to corral research dollars and investment, and ultimately create jobs. To that end, the state has poured millions into tax breaks, loans and incentives to biotech firms, including almost $300 million in loans to lure Maine-based Jackson Laboratories to Connecticut. In return, the company must produce 300 jobs in 10 years.

In New Haven, the under construction 100 College St. building, which will be 14 stories and have 508,000 square feet of lab and office space, will be anchored by Alexion Pharmaceuticals' global headquarters.

The $140 million building, is expected bring some 350 workers to the city, and the state has approved a $51 million grant if it adds another 250 jobs by 2017.

Critics, including Foley and McKinney argue that the incentives offered by Malloy aren't worth the return in the number of jobs. Economists question how effective corporate tax incentives are in creating jobs.

"I have been critical of efforts of not only this administration, but previous administrations, to the extent with which we are investing in trying to retain jobs through targeted tax credits," Lanza said. "I am not sure how effective those strategies are in states like Connecticut, or any state."

McKinney voted for the bipartisan backed STEP (Subsidized Training and Employment Program) and the Small Business Express in 2011 in a special session devoted to job creation. Also in 2011, McKinney voted for the "First Five" program, where Malloy has offered tax credits for business to stay or move here, but the minority leader has been highly critical of it since then.

In 2013,McKinney voted against funding up to $100 million in bond sales for the Small Business Express for fiscal 2014 and 2015.

While corporate welfare is the sexy pejorative term for the use of tax incentives and state-backed loans to lure businesses, policy experts often term the practice "renting jobs."

The state, for instance, agreed to pay a significant portion of the property tax on the New London offices of pharmaceuticals giant Pfizer. The company would eventually move the operation back to its Groton offices just before the tax breaks were set to expire in 2011. Many economists frown upon deals like the one given to Pfizer, a tax break that predates the Malloy administration. But given the aggressive nature of tax incentive programs in neighboring states, Connecticut can hardly avoid not given out corporate tax breaks to lure and in some cases retain businesses, Lanza said.

Malloy or any other Connecticut governor will find it hard to not offer up incentives to businesses. New York is making an aggressive play to draw in business with 10 years of tax breaks for businesses that relocate to the Empire State. Ads for the program have run in Connecticut and as far away as California.

Still, the better investment, according to Lanza, might be doubling down on education. The idea: make Connecticut's workforce irresistible by increasing the level of education of the state's already very educated workforce.

A looming fiscal crisis also needs to be addressed before the state can attract many new investors.

"Malloy inherited a nightmare," Gioia said of the fiscal crisis.

This and a looming pension crisis have spooked investors, Gioia added.

Beyond the fiscal challenges, Connecticut ranks near the top in energy cost, according to the U.S. Energy Information Association, which Gioia says works as a deterrent to business investment.

State registration for Republicans is 436,550, while the Democrats have 798,478 and 917,535 are unaffiliated voters as of Oct. 29, 2013.

___

(c)2014 the New Haven Register (New Haven, Conn.)

Visit the New Haven Register (New Haven, Conn.) at www.nhregister.com

Distributed by MCT Information Services


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Source: New Haven Register (CT)


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