Maryland and Virginia

First published in the Washington Herald Telegraph

Jobs and the Plight of the Maryland and Virginia Governors

Both of the incumbent governors in Virginia, and Maryland have staked their political plans and reputation on creating more jobs. In Virginia, Governor Robert McConnell has pledged to make jobs his top priority while in Maryland Governor Martin O’Malley is defending his record and priorities on jobs. Given the well published need for jobs their promises are easy to understand, but let’s weigh the prospects for success.

Virginia reached its highest monthly average of 3.76 million establishment jobs in 2008 whereas Maryland reached its highest monthly average in 2007 with 2.61 million jobs. Both had declines for 2009 from their previous average highs. In Virginia, jobs were off by a monthly average of 126,000; for Maryland jobs were off a monthly average of 87,000.

The jobs picture is not improving yet (June 2010). The 2010 monthly average of seasonally adjusted jobs through May dropped another 19,000 in Virginia and by another 16,000 in Maryland. To be fair to the governors though, the last decade has not been a good decade for jobs and both governors face similar problems creating jobs.

Both states have well publicized job losses in manufacturing, but the decline goes back many years. Virginia has a loss of 148 thousand manufacturing jobs since 1990. Maryland is down 80 thousand in the same period. For Virginia manufacturing was 13.4 percent of statewide jobs in 1990, but only 6.6 percent by the end of 2009. In Maryland manufacturing accounted for 9.1 percent of statewide jobs in 1990 but only 4.7 percent now.

Both states need new jobs to replace their lost manufacturing jobs before they can add jobs. That means both states must have faster than average growth in service industry jobs to make up for the decline in manufacturing. Trouble is there are major sectors of the service economy that are not growing at all, or growing too slowly to maintain their share of statewide jobs.

For example, wholesale and retail trade accounted for 383 thousand jobs in Maryland for 1990 but 364 thousand trade jobs in 2009. In Virginia trade jobs were 474 thousand jobs in 1990 and 511 thousand in 2009, but the 2009 total is 14 percent of statewide jobs compared to 16.4 percent in 1990. Both states show a continuously declining share of statewide jobs in trade.

Using computer technology in trade, especially for barcodes and inventory management increases labor productivity. Retail and wholesale sales volumes per work hour are up and sometimes at rates comparable to productivity in manufacturing. Higher productivity limits job growth.

The use of digital technologies and business consolidation has affected labor productivity and jobs in other service industries. In addition to manufacturing and trade Maryland and Virginia have a nearly identical group of service industries that have a twenty year record with a declining percentage of jobs. Include mining, utilities, information services such as publishing, broadcasting, and communications, banking, real estate, and repair and maintenance sectors as service industries losing share in statewide jobs. Maryland’s declining industries lost 10 percent of jobs since 1990. In Virginia the losses are 11.4 percent.

Shares must total 100 percent, which assures a higher percentage of jobs in a shrinking number of other services. These other services are health care especially, along with education and selected professional services, particularly computing. Business support services and restaurant jobs show gradual increases, but they are hardly the services that governors want to promote when they discuss new jobs.

Health care including social services continues to create more jobs month after month in the national economy where it now has 12.5 percent of establishment jobs. The recent expansion of health care insurance passed by Congress will help the states generate new jobs. Virginia lags behind in health care jobs with only 10.1 percent of statewide employment. Maryland health care has 12.7 percent of statewide jobs, slightly above the national average, but both governors will need to support health care expansion and concentrate on producing as much health care within their respective states in order to meet their employment goals.

Education like health care has a 20 year record of steady growth in jobs. Maryland jobs in private and public education are now just over 11 percent of statewide employment, above the national average. Education and health care are both sectors where computer technology and the digital revolution have limited ability to raise labor productivity compared to service sectors like finance and communication. Even though many people write checks and do their financial business with paper, the wider use of digital technology could further erode employment in finance, insurance and communications.

Both states have a third service sector with a continuously higher share of jobs: combined business and professional services. Virginia has the best record here with a 4.4 percent jump in professional service employment from 5.9 to 10.3 percent of statewide jobs from 1990 to 2009. Virginia has been able to attract computing design services, which jumped from 45 thousand jobs in 1990 to 137 thousand jobs by 2009.

Maryland has also done well with professional and business service jobs, which are up to 224 thousand in Maryland for 2009, but only 8.9 percent of statewide jobs. Like Virginia, computer design services have the most jobs in professional services, but 60 thousand jobs compared to 137 thousand for Virginia.

Virginia has also been successful in bringing corporate headquarters to northern Virginia. Jobs in the management of companies reached a high of almost 77 thousand in 2008, an impressive total with 2 percent of statewide employment, higher than the national average. Maryland has 20 thousand jobs in this category.

The professional service part of business and professional services has jobs in law, accounting, architecture, engineering, computer design, management consulting, scientific research, advertising, and veterinary services. The business services part has supporting jobs in administrative and facilities services, employment services, and support services in telemarketing, security, janitorial, landscaping services and a few more.

Professional services have the best chance of any services to be sold in other states and in the global economy. Business support services along with health care, education and so many service industries tend to be local services, whereas professional services give both governors a chance to promote services and jobs the bring money from outside their states to support jobs with exported services.

The reality of shifting jobs within the service industry along with the long term decline in manufacturing limits the options of both governors. If they can generate economic activity and jobs in health care, education, and professional services then these should pull along additional jobs in business support services along with leisure, hospitality, and personal service jobs.

Federal, state and local government jobs in both Maryland and Virginia continue to be the biggest employers in both states. Governments have 19.2 percent of Virginia jobs in 2009 including public education; 19.5 percent of Maryland. Politicians seldom advocate government jobs as a solution to job needs, but neither governor can afford to sit by and let these jobs decline, no matter how unpopular taxes and spending come to be. State and local jobs are spread out geographically and help maintain a core of jobs in many communities. If these jobs decline, other jobs will decline with them.

Both governors will need to maintain construction jobs, but neither can expect there will be enough new construction jobs to help much with statewide job needs. Construction employment in the national economy fluctuates around 5 percent year in and year out. It has not gone above 6 percent in the national economy since the 1940’s.

Both Virginia and Maryland are already doing about as well with construction jobs as any state could expect. Virginia had construction jobs above 6 percent of statewide jobs in some years over the last 20 years and continued above 5 percent even through the recession. Maryland has done quite well also with construction jobs above 5 percent through the last twenty years.

Both governors made promises on jobs that will be difficult to keep. We wish them well and want to remind them they are not alone. There are 27 states showing lower employment in 2009 compared to 2000 but Maryland and Virginia are not among them. If the two governors concentrate on health care, education, and professional services, then new jobs could generate enough new spending to boast employment in the supporting service sectors. They are getting off to a slow start, but we can check their progress at a later date.

Value and Work

Sometimes I hear people say something like “The wealthy worked hard for that money, and free markets determined what they do is of such high value.”

Such statements raise a question for economists. Can value be measured to show that wages reflect individual productive value?

It is an old question that goes back into the 19th century when British and European philosophers and economists applied science reasoning to the craft industries of the day: wheelwrights, blacksmiths, shoemakers and so on.

These economic philosophers suggested that if a shoemaker works 8 hours a day producing 5 pairs of shoes and then sells them at $10.00 each, he produces $50 worth of value.

Then they had the shoemaker hire a helper to specialize in cutting leather while the shoemaker sews and assembles the final product. Together they make 9 pairs of shoes a day.

We can see right away the shoemaker’s shop went from 5 pairs a day to 9 pairs a day so the helper added 4 more pairs to the total produced in a day. His production can be measured in money terms when the product is sold.

Craft industries would be expected to have small local markets so it might be necessary to lower the price to sell 4 more pairs of shoes a day. If the price is lowered to $8 a pair to sell 9 pairs per day instead of 5, then the revenue jumps to $72. With that knowledge we can see the new hire’s work added $22 = $72-$50 of value a day to the firm.

If the hired helper is paid what he is worth to the firm it will be $22. It is a maximum because if pay exceeds $22 the firm’s net revenue will drop below $50 and the shoemaker would do better without the helper. The wage could be less than $22 depending on how many other people apply for the job and how many other shoemakers compete for hired help.

It might be a surprise to learn I have condensed and summarized what continues to be part of current study in economics courses throughout U.S. colleges. It uses the scientific method because only one thing changes, labor time, while everything else remains constant. The additional product of labor can be precisely determined as part of the experiment. Economists continue to use examples like the shoemaker because it applies science to wages and they want people to believe that today’s wages reflect individual productive value as part of science, and not politics or favoritism.

For those who are comfortable transferring the fable of the shoemaker to the wages and incomes in today’s economy, including the wealthy, they will feel comfortable that the wealthy earn what they produce. For some of us though, it is all bluff.