Michael Hicks: Indiana's labor markets aren't ready for a recession

Michael Hicks

With the General Assembly poised to consider the biennial budget, it is useful to write a bit more about how prepared Indiana is for a looming global downturn. I’m not predicting a recession in Indiana, just a slowdown in 2019 and 2020, but many others are forecasting a national downturn. If it comes, it will have both fiscal and labor market effects. Let me start with the good news.

Indiana has a very modest unfunded liability, which is the result of three decades of bipartisan consensus on pensions and bonds. We also have extremely low tax rates and a robust “rainy day” fund. Today, as we face the real likelihood of the global downturn turning into a national recession, Indiana has perhaps the best prepared state finances in the nation. The credit for these very happy outcomes lies almost exclusively with three successive governors, the supermajority in both houses and their collective budget discipline. We should be thankful for this, as it will spare Indiana from much of the budget volatility that other states will experience. That does not mean all is rosy.

Local governments are a more mixed bag. While many have good rainy day funds and can be expected to muddle through a modest recession, others will not. A growing reliance on local option income taxes introduces far more volatility into many municipal and state governments. I hasten to add that the volatility itself isn’t the problem, failing to account for it is. Still, our public sector should do well in a modest recession, unless of course Indiana’s private sector is poorly prepared for a downturn.

A recession will most likely be transmitted to us through the foreign markets for goods. With Indiana exporting about 10.5 percent of our total economy, we are at an amplified risk of oversized impacts resulting from even a small recession. While a short downturn would be harmful to our manufacturing and agriculture, the biggest worry I have involves our labor market changes over the past decade.

The long-term effect of a recession is mostly determined by the labor market response of businesses. If firms anticipate a short recession, or feel it is too costly to lay off workers, the mal effects will be lessened. Nationwide there is a lot of evidence that firms will be reluctant to lay off workers during a mild recession. The best evidence of that is the composition of jobs. Since the end of the Great Recession, the nation has experienced a dramatic shift of employment towards workers with a college degree. Among workers aged 25 and older, there are 11.55 million new jobs for college grads, 2.75 million new jobs for those with an associate’s degree or some college and 0.012 million for those with a high school degree or some post-secondary training that did not involve attending college. There are 0.697 million fewer jobs for those without a high school degree.

Nationally, among the new jobs since the end of the Great Recession, 80.71 percent went to graduates with a four-year degree or more, 19.2 percent went to those with some college or an associate’s degree, while less than one-tenth of one percent went to high school graduates, including those with post-secondary certificates not obtained from a college. What this means is the new jobs created in the economy have gone to more highly skilled workers who are harder to replace. It is more likely that firms will hold on to these workers more tightly through a modest downturn.

Indiana’s story is much different. Though Indiana grew jobs a bit faster than the U.S. as a whole, about 0.2 percent per year faster, the composition of jobs has been very different. A whopping 30.8 percent of Indiana’s job growth went to adults without a high school degree, and 25 percent went to high school graduates. Since 2009, 27.4 percent of our new jobs went to those workers with an associate’s degree or some college and a paltry 16.8 percent went to college graduates.

Compared to the nation as a whole, Indiana ended the recession with a much larger share of poorly educated adult workers, and a much smaller share of adult workers with college degrees. Since then, things have gotten worse. At the start of the recession, 24.2 percent of working Hoosiers held a college degree. By early 2018 that dropped to 23.4 percent. Nationwide these figures went from 35.7 percent to 40.1 percent.

The worry that all of us should have is that a far larger share of the new jobs in Indiana involve workers with low levels of educational attainment. These workers are easier to replace, and less productive to firms. Thus, they are far less likely to survive even a modest economic downturn.

The causes for this divergence between Indiana and the nation are many. Some aren’t even bad. We have a large Amish population who work but do not complete high school, and the abundance of low-skilled jobs means that the recovery has at least benefited the least skilled among us. Still, part of the problem is an industrial structure that is more reliant on low-wage workers, a continuing problem attracting workers with choice and a suite of human capital policies only tenuously guided by data analysis. There is no short-run remedy for any of these problems. So, I am afraid that as we brace ourselves for the potential for a coming recession we should expect a larger labor market effect, disrupting a larger share of our labor force. Let us hope, without much expectation, that a recession is a bit farther away than international data now suggest.

Michael Hicks is the George and Frances Ball Distinguished Professor of Economics and the director of the Center for Business and Economic Research at Ball State University.