OLMIS

by Mike Meyers
Published Feb-1-2010

Oregon's High Unemployment Rate Durable Goods Manufacturing in Oregon Oregon Compared to Other States Concentration of Durable Goods has Weak Effect on Unemployment Rate Other Factors that May Cause High Unemployment Rate in Oregon Conclusions

People often ask why Oregon has such a high unemployment rate. It's a question for which economists in Oregon rarely have a simple answer. Why? Well, there are a lot of factors that probably affect Oregon's, or any other area's, unemployment rate. One of the factors that economists have sometimes mentioned to explain the high rate is Oregon's relatively high concentration of durable goods manufacturing employment compared to other states. The logic is that durable goods employment is cyclical in nature, adding lots of jobs during times of economic growth, and shedding lots of jobs during recessions. This seems like a plausible explanation for Oregon's historically high unemployment rate, especially during recessions, where job losses in durable goods such as wood products and computer and electronic products have been significant. Broadly speaking, Oregon's recessions have been characterized by large job losses in durable goods manufacturing and some of the highest unemployment rates in the nation. As a result, economists have hypothesized that Oregon's concentration of durable goods manufacturing negatively impacts the unemployment rate. This article tests that hypothesis.

Oregon has, in fact, had one of the highest unemployment rates in the U.S. over the past 30 years. Between 1979 and 2008, Oregon had an average annual unemployment rate of 6.9 percent, the seventh highest in the nation over that time. Over those 30 years, Oregon rarely had a rate lower than the U.S. average. The one exception was the brief 1991 recession and the five years after it. During that time, Oregon had a rate that was at or below the U.S. average. The lowest Oregon's monthly rate reached was 4.7 percent in the spring of 1995, which was more than 1 percentage point lower than the U.S. rate. Other than those five years, Oregon's rate has been higher than the U.S., especially during the recessions of the early 1980s and the two recessions so far this century.

The recession of the early '80s caused high unemployment in Oregon and large job losses. Wood product manufacturing, Oregon's dominant manufacturing subsector at the time, was hit particularly hard. Employment in wood products declined 39 percent from its peak in 1979 to its low in 1982, by far the biggest loss of any industry sector during the recession. With the exception of 1983, Oregon maintained an average annual unemployment rate from 1979 to 1985 that was among the 10 highest in the country.

The unemployment rate gradually improved over the next 10 years, reaching a milestone in 1995 when the average annual unemployment rate fell below 5 percent. Oregon's improved labor market during that time can be largely attributed to rapid growth in computer and electronic product manufacturing. Total employment in this subsector eventually surpassed wood products to become Oregon's largest manufacturing subsector in the 1990s. Unfortunately, it would be Oregon's growth in computer and electronic products that would be its downfall during the recession of 2001. As the tech bubble burst, Oregon's computer and electronic product employment fell along with it. For three consecutive years - 2001, 2002, and 2003 - Oregon had the dubious distinction of having the highest average annual unemployment rate in the nation. Computer and electronic products employment declined by 24 percent, the biggest decline of any industry subsector. Oregon ranked in the top 10 for highest average annual unemployment rates in the U.S. every year between 2000 and 2007. In 2008, Oregon finally fell out of the top 10, landing at 12^th.

Manufactured goods are broken down into two categories: durable and nondurable goods. Durable goods are products designed to last three years or more. Examples include motor vehicles, various equipment and machinery, electronics, and wood products. Nondurable goods are things like paper products and food. Since durable goods are meant to last longer, demand for these items tends to be more elastic since consumers can often put off replacement of these items for longer periods of time than they can for nondurable goods, which don't last long and warrant replacement much sooner. As a result, during recessions durable goods manufacturing often loses more jobs than nondurable goods. On the flip side, during times of economic growth, durable goods often add more jobs than nondurable goods.

Durable goods employment in Oregon represented 8.3 percent of total nonfarm employment in 2008. In the U.S., durable goods accounted for 6.2 percent of total employment. As a percent of total employment, Oregon had 34 percent more employment in durable goods than the U.S. Given the relative instability of durable goods, this would seem to suggest that Oregon would be more susceptible to greater job loss in recessions and greater job growth in expansions.

There are 10 industry subsectors under durable goods manufacturing. Graph 2 shows the percentage of durable goods employment in each subsector for Oregon and the U.S. in 2008. In terms of employment diversity in durable goods, Oregon is a little less diverse than the U.S. Using Theil's entropy index, Oregon's durable goods sector is about 5 percent less diverse than the U.S. base. Generally speaking, the more diverse an area's manufacturing base, the less sensitive it should be to fluctuations in the economy. Oregon's durable goods diversity improved over the past couple decades with the decline of the once dominant wood products subsector. Even so, Oregon still has a much higher concentration in wood products than the U.S. Oregon's largest durables subsector is computer and electronic products. The largest subsector in the U.S. is transportation equipment, followed closely by fabricated metal products.

Economic research shows a strong correlation between economic instability and the unemployment rate. Durable goods manufacturing is an unstable industry. Therefore, it could be hypothesized that the higher concentration of durable goods manufacturing in Oregon should negatively impact the state's unemployment rate.

While Oregon has a strong concentration of durable goods employment, it is not the highest among the states. Oregon had the 12th highest concentration in 2008 (Table 1). The largest durable goods subsector in most of these states was transportation equipment. Of those states, most of them are located in the Midwest and the South, and the main products are automobiles. A look at average annual unemployment rates in 2008 reveals that not all of the states with high concentrations of durable goods employment had high unemployment rates. The average annual unemployment rate in the U.S. was 5.8 percent in 2008, and more than half of the 15 states with the highest concentration of durable goods employment had rates below that. Does this mean, in fact, there isn't a correlation between the concentration of durable goods employment and unemployment rates?

A simple, linear regression analysis shows us the relationship between the concentration of durable goods employment and unemployment rates in all 50 states. Graph 3 plots each state based on its concentration of 2008 durable goods employment and 2008 average annual unemployment rate. The regression line running through the graph shows the positive correlation between the two variables, but this is a very weak correlation. Statistically, the concentration of durable goods employment only explains about 6 percent of the variation in unemployment rates. Based on this analysis, there seem to be other factors that have a stronger correlation to the unemployment rate than the concentration of durable goods employment.

A similar regression analysis was also conducted with a slightly different variable related to durable goods. In an attempt to analyze the diversity of durable goods employment as it relates to the unemployment rate, the variable for concentration of durable goods employment was swapped out for a variable that looks at the percentage of employment in the single largest durable goods subsector for each state. The hypothesis was that perhaps there would be a stronger correlation between high unemployment rates and states with the largest concentration of durable goods employment in any one subsector. In Oregon's case, that was computer and electronic products, which accounted for 2.3 percent of total 2008 employment in Oregon. The state with the highest employment concentration in any one durable goods subsector was Michigan with 4.1 percent of total employment in transportation equipment manufacturing. As it turned out, the results of this analysis showed a very similar correlation to that of the concentration of total durable goods, explaining about 6 percent of the variation in unemployment rates.

There are certainly other factors that lead to Oregon's higher than average unemployment rate beyond the concentration of durable goods manufacturing. Geography seems to be a factor since states located on the coasts with milder climates tend to have higher unemployment rates. Seasonality also appears to be a factor. Oregon's employment is more seasonal than average. Agriculture, logging, and food manufacturing are some of the industries that contribute to this above average seasonality. Research has shown that correlations may exist between unemployment rates and factors such as labor force participation rates for women, educational attainment, and race. Oregon's relatively rural population outside of Portland could also be a factor, but there are also many rural states with low unemployment rates. The high minimum wage could be a factor, although research suggests it has not had a strong correlation with unemployment rates.

Further research is needed to better explain Oregon's higher than average unemployment rate. The concentration of durable goods manufacturing employment in Oregon is only one of the factors influencing the unemployment rate, and it is most certainly not the biggest. So how then do we explain the big losses in durable goods that accompanied Oregon's high unemployment rates during three of the past four recessions? What about the big losses in wood product manufacturing over the past three decades? And the losses in computer and electronic products over the last decade? Employment statistics show that durable goods manufacturing in Oregon decreased by 17 percent between 1979 and 2008. Total durable goods employment declined by 31 percent in the U.S. over that time. Oregon ranked 24th best in the country during that time out of a total 43 states with data available going back that far. Clearly, Oregon has not been alone in durable goods job loss over the past 30 years. Many states lost even more durable goods employment. New Jersey, New York, West Virginia, Michigan, Pennsylvania, Illinois, and Maryland all saw their durable goods employment decline by 50 percent or more over that time. Ohio, the state with the second highest number of durable goods jobs in the U.S. behind California, was just outside this group, losing 48 percent of durables employment. While Oregon's big job losses in wood products and computer and electronic products certainly contributed to higher unemployment rates, it would seem they weren't the main contributors to Oregon's high unemployment rates over that time since there were many states with more substantial durable goods losses than Oregon that had lower unemployment rates over that time.

It should be noted that analysis presented here generally compared durable goods manufacturing in Oregon to the U.S. and other states. Comparisons were not made between durable goods manufacturing and other sectors of the labor market. If these comparisons were made, it would be evident how durable goods manufacturing is relatively unstable compared to most other sectors. This instability does lead to higher unemployment rates. However, this analysis has shown that there isn't much correlation between the concentration of durable goods employment in a state and its unemployment rate. There appear to be other factors that have much more influence on Oregon's unemployment rate than the concentration of durable goods employment.