The Texas unemployment rate is now higher than the national rate. Should we be concerned? The short answer is “no,” and here are six reasons why.
First, there are problems with the unemployment rate as a measure of the health of the job market. Back in my academic days, my poor students often had to endure a 50-minute rant on the subject. For one thing, it only counts people who are actively looking for work, and anyone who hasn’t looked for work recently is not counted. If conditions begin to improve and people start getting out again to hunt for jobs, it could actually be a good sign for the economy, yet the unemployment rate rises.
Conversely, the unemployment rate can paint a rosier picture than it should if there are many discouraged workers. When an area is doing well and is seen as a good place to find a job, people can move in very quickly and cause the unemployment rate to rise as it takes a while to assimilate everyone.
On the other hand, if people desert a declining area in droves, the unemployment rate may actually go down. Like any fraction with a numerator and denominator that measure different things, the rate can move for multiple, not always consistent, reasons. There are also some problems with the way the rate is collected and compiled.
Second, a better indicator of health in the labor market is job gains. Between June 2016 and June 2017, the Texas economy added more than 300,000 positions, which is about a 2.7 percent growth. Over the same time period, the nation added about 2.3 million jobs, which is 1.6 percent growth. Even though the U.S. unemployment rate is slightly lower than that of Texas, the Texas labor market has been substantially healthier during the past twelve months than the nation as a whole.
Third, Texas is still recovering from the downturn in energy. A few years ago when oil was on the rise, Texas was far and away the leader in terms of total job growth and among the top few states in percentage terms, gaining over 400,000 jobs per year. In 2015, when the sharp decline in oil prices surfaced, Texas only gained around 165,000 jobs (well below the national growth rate), with about 220,000 in 2016 (roughly the same as the national average). Clearly, the oil bust took its toll. At this point, Texas is moving back into the upper tier of states in terms of growth, and led all states in job creation in June.
Fourth, the state economy has demonstrated that it can survive a setback in a major industry and keep generating jobs. Back in the 1980s, a similar drop in oil prices brought the loss of hundreds of thousands of jobs, and the recovery was long in coming. This time, the pace of growth clearly slowed (as noted above), but there were only a couple of months of overall losses and a quick return to positive territory.
Fifth, there are many contributing factors to Texas’ economic health. The abundance of natural resources (oil and gas), available land, and large and growing workforce are certainly assets. The state is also more business friendly than some, with lower taxes and a more predictable regulatory environment, and offers strong economic development programs at the state and local levels. This diversity provides a multitude of sources for jobs and solid prospects for long-term growth. The state has led the country in new locations and expansions for the past five consecutive years.
Sixth, Texas demographics are different. Younger age groups tend to have higher unemployment rates than older groups, and Hispanics tend to have higher rates than many other groups. The Texas workforce is disproportionately young and Hispanic, which could cause the unemployment rate to be higher than other areas even when growth is strong. In fact, there have been a few times over the years when the Lower Rio Grande Valley simultaneously had one of the highest growth rates and one of the highest unemployment rates in the country.
The unemployment rate may well be the most watched of all of the economic indicators. It is a prime candidate for media attention, because it is somewhat intuitive and very timely. People can get their arms around it and have a general sense of what it means much easier than some of the other measures. Gross Domestic Product (GDP), for example, is harder to understand because it’s a multi-trillion-dollar number which is complicated to calculate and involves an economic concept many people don’t tend to think about in the usual course of their days. Unemployment rates are also one of the most timely numbers that we get, with the U.S. rate released on the first Friday following the end of the month and the state numbers a couple of weeks later. GDP, on the other hand, is released quarterly with a lag of a couple of months.
This combination of being intuitive and timely leads to a lot of focus on the unemployment rate, even though it isn’t a perfect measure, or anywhere close for that matter. There is no doubt that the state had a difficult time in the wake of the oil downturn, but the unemployment rate in and of itself is not a particular concern. The current performance of the Texas economy is quite encouraging on multiple fronts.