Download the PDF.

June Employment Numbers:

Total Employment Falls,

Local Government Hiring Continues to Grow

Last week we demonstrated that South Carolina’s improved employment picture hasn’t really improved much at all. Rather, government hiring and a shrinking labor force are making the job numbers look better than they are.

Our analysis looked at government hiring from January to May 2010. The numbers for June—which account for the elimination of thousands of temporary Census positions at the federal level—tell the same story.

Here are the government employment numbers for January, May and June 2010:

Federal hiring has obviously skyrocketed in South Carolina and across the nation. This is true even once we account for the drop off in federal Census positions from May to June.

January to May 2010: 

1.  Federal: 32.38 percent increase (31,500 to 41,700)
2. State: 1.52 percent decrease (99,000 to 97,500)
3. Local: 1.33 percent increase (221,900 to 226,200)  

January to June 2010: 

1. Federal: 15.5 percent increase (31,500 to 36,400)
2. State: 1.71 percent decrease (99,000 to 97,300)
3. Local: 2.16 percent increase (221,900 to 226,700) 

All in all, total public sector employment in South Carolina increased 2.27 percent from January to June 2010. That is to be compared to a 3.69 percent increase from January to May 2010. Granted, federal Census positions made up a significant part of the May increase, but what is even more interesting is that local government hiring continues to grow.

Now, let’s look at the June numbers within the context of the current recession. Since December 2007, private sector employment in South Carolina has declined by 124,100 jobs, or 7.71 percent. By comparison, public sector employment has increased by 19,600 jobs, or 5.75 percent.

In other words, the ratio of private sector to public sector jobs has declined from 4.72 to 4.12 since the beginning of the recession. This translates into a 12.7 percent contraction in the size of the private sector relative to the public sector. What is worse is that owing to the decline in private sector employment for June (see below), the ratio of private sector job losses to public sector job gains increased from 5.31 in May to 6.33 jobs lost for every public sector job created.

December 2007 to June 2010: 

1. Federal: 22.15 percent increase (29,800 to 36,400)
2. State: 1.22 percent decrease (98,500 to 97,300)
3. Local: 8.31 percent increase (209,300 to 226,700)           

Compare this to the numbers for December 2007 to May 2010: 

1. Federal: 39.93 percent increase (29,800 to 41,700)
2. State: 1.02 percent decrease (98,500 to 97,500) 
3. Local: 8.07 percent increase (209,300 to 226,200)  

Again, local government hiring has consistently increased during the recession.

Finally, the pool of potential workers (i.e., those looking for work) shrank once again from May to June 2010—from 2,159,200 to 2,149,600—a contraction of 9,600 persons.

Similarly, despite a decline in the state unemployment rate from May to June (11.1 percent to 10.7 percent)—something typically viewed as a good thing—there were fewer people actually employed in June than in May. As of June 2010, there were 1,919,404 persons employed in South Carolina, compared to 1,920,479 as of May. If we exclude government jobs from this figure, the total employed workforce would be 1,559,004, making for an actual unemployment rate of 27.5 percent.

Nothing in the foregoing should be construed as an attempt to aid or hinder passage of any legislation.

Copyright  © 2010 South Carolina Policy Council.

Government Hiring Masks Real Unemployment Picture

Download the PDF

South Carolina’s unemployment rate has long been among the worst in the country, hitting a high of 12.5 percent in January 2010. As of June 2010 (latest data available), the unemployment rate had fallen to 10.7 percent. During the same period, South Carolina has gone from having the 4th worst employment rate in the nation to the 7th worst. Currently, the state is one of thirteen suffering from double-digit unemployment. Worse still is that even this marginal improvement in employment is misleading. In fact, government hiring accounts for much of the new hiring, suggesting a private-sector recovery is still a long way off.

Why Did South Carolina’s Unemployment Rate Fall?

Although it is tempting to conclude that the federal stimulus—or, closer to home, the Boeing economic incentives deal—contributed to South Carolina’s slight decline in unemployment, this is not the case. Rather, the following two factors are what caused the marginal improvement in the state’s employment situation:

• A significant drop-off in the number of people actually seeking employment
• A massive spike in public sector hiring: particularly part-time Census workers

Discouraged Workers Dropping Out

The unemployment rate only accounts for workers who have actively sought employment over the past four weeks. This means that persons who have been unemployed for months and stopped looking are not counted as unemployed. (In 2009, it took 19.4 weeks—the longest search time in the nation, along with Michigan—to find a job in South Carolina.) Likewise, individuals who have moved to another state to look for work or been pushed into early retirement are not counted as unemployed. In other words, a shrinking labor force could actually lead to what seems to be an improved employment rate. And this is precisely what is happening in South Carolina.

From January to June 2010, the state’s labor force has shrunk by 24,796 jobs—contracting by 9,618 persons in the last month alone. All told, 34,062 workers have withdrawn from South Carolina’s job market since June 2009—with labor pool losses accelerating rapidly since January. Consider the following trend from May to June 2010:

• The state’s labor pool shrunk by 9,618 persons
• The number of unemployed persons declined by 8,609
• The number of people actually employed in South Carolina fell by 1,009

In other words, there were fewer jobs available in June than in May. But because nearly 10,000 fewer people were actually looking for work, the unemployment rate decreased.

Overall, the state’s labor pool has shrunk by 1.56 percent since June 2009. Thus Coastal Carolina University economist Donald Schunk recently cautioned against being overly optimistic about the improved unemployment rate: “Yes, the jobless rate is moving in the right direction.… But a healthy labor market needs to be able to accommodate labor force growth, not decline.”

Government Hiring Increased by 3.66 Percent from January to May 2010

But it’s not just a shrinking labor pool that is lowering South Carolina’s unemployment rate. Government hiring is also driving up employment numbers. From January to May 2010, total public sector employment in South Carolina increased 3.66 percent.[1]

• Federal: 32.06 percent increase (31,500 to 41,600)
• State: 1.52 percent decrease (99,000 to 97,500)
• Local: 1.33 percent increase (221,900 to 226,200)

At the federal level, part-time positions hired for the 2010 Census caused a nationwide bump in the employment rate. In South Carolina alone, such workers accounted for 8,500 new hires from April to May 2010—without which, notes Schunk, “the state would have seen a slight decline in jobs from May 2009.” Likewise, local government hiring continued to grow at a rapid clip. Only at the state level did hiring slow, falling by 1.52 percent. Yet, even this decrease is countered by a 2.2 percent increase in non-seasonally adjusted hires (see box).

During the same period, private sector employment increased by 3.21 percent. And while this growth is welcome, public sector hiring has increased much more quickly than in the private sector, threatening to crowd-out, or slow, a private sector recovery.

5.3 Private Sector Jobs Lost for Every Public Job Gained

Comparing government hiring gains to private sector job losses since the beginning of the recession in December 2007, the disparity between the two sectors becomes even larger. Since December 2007, private sector employment in South Carolina has declined by 130,100 jobs, or 8.09 percent. By comparison, public sector employment has increased by 24,500 jobs, or 7.19 percent. Put another way, the private sector has shed 5.3 jobs for every public sector job created.

• Federal: 39.60 percent increase (29,800 to 41,600)
• State: 1.02 percent decrease (98,500 to 97,500)
• Local: 9.60 percent increase (209,300 to 226,200)

During the same period (FY2008 to FY2010), total state budget appropriations increased by almost half a billion dollars. Thus, while state hiring slowed somewhat, as reflected by a seasonally adjusted decline of 1 percent, spending continued to grow. The result, as we will discuss below, is that government spending is hindering a robust private sector recovery.

Government Hiring Crowding Out Private Sector Growth

As we predicted when the state first began accepting federal stimulus dollars, increased government spending will ultimately have a detrimental impact on private sector job growth in South Carolina. Not only will the federal stimulus package likely lead to a state tax increase, it will also result in 24,000 to 35,000 lost private sector jobs.[2]

These job losses will occur because government spending does not stimulate private sector growth, but limits it—precisely because government spending is fueled by taxes imposed on the private sector. Such spending constitutes a transfer of wealth from more productive to less productive endeavors. This is not to say that government jobs have no value whatsoever, but that they are less valuable, less productive, than private sector jobs. Consequently, they cause an overall loss to the economy.

This approach to government hiring was once recognized as an established fact among economists—even government economists. “The employment and unemployment statistics of the 1930s excluded people who would not be employed in the absence of public largesse,” observed economist William Shughart in a recent op-ed in The Washington Times. Continues Shughart:” To be sure, jobs financed at taxpayer expense were plentiful. But back then, the Bureau of Labor Statistics didn’t count people on work relief as employed. In fact, persons listed on Depression-era work-relief rolls were not included in the labor force at all.”

Today, however, the BLS does count government jobs as part of its total employment numbers. The result, as we saw above, is that private sector job losses are being masked by increases in public sector hiring. Indeed, if we excluded public sector jobs from the total employed workforce, South Carolina’s unemployment rate would be a whopping 28 percent, instead of the current 11 percent.[3]

This pattern of government job growth is evident across the nation—not just in South Carolina. Economist Veronique de Rugy of the Mercatus Center at George Mason University compared job losses in the private sector to gains in government hiring since the beginning of the recession.

More than 7.96 million jobs have been lost in the private sector since December 2007: a 7 percent decline. During the same period, government added 590,000 jobs: a 3 percent gain.

It’s not just that the government has been hiring more workers. According to a BLS report in June, government jobs pay significantly more than private sector jobs. In March 2010, total private industry workers averaged $27.73 per hour worked. But government workers at the state and local level averaged $39.81 per hour.

Government employees earned $12.12 more per hour.

What these figures tell us is that politicians think government hiring—and a government-driven economy—is the key to prosperity in our state (and our country). But this continued pursuit of a planned economy will only further hinder a private sector recovery and limit future opportunities for real prosperity. The alternative, as always, is smaller government, less government spending, and more freedom. To learn more, visit us at unleashingcapitalismsc.org.

[2]Assuming an immediate and direct causal relation between government hiring and private sector job losses (done here only for the sake of illustration), we could argue that government hiring has already reduced the private sector by 12.5 percent. This figure assumes an initial ratio of 4.7 private sector jobs for every public sector position.

[3]In South Carolina, there were 1,920,479 workers employed as of May 2010. Dividing that figure by the total labor force (2,158,803) results in the current unemployment rate of 11 percent. If we removed all workers employed by government (365,300), the total employed workforce would be 1,555,179. Assuming for the sake of this analysis that none of these workers were then employed in the private sector, the unemployment rate would be 28 percent. Granted, a more refined, dynamic analysis would alter these numbers, but the raw data vividly indicates the massive distortions government hiring has on the job market.

Nothing in the foregoing should be construed as an attempt to aid or hinder passage of any legislation.

Copyright © 2010 South Carolina Policy Council

Download the PDF.

Issue Summary

One of the final pieces of legislation that may pass the General Assembly this year is an omnibus economic development bill that provides an array of targeted credits and subsidies aimed at stimulating South Carolina’s ailing economy. Recipients of the credits range from alternative energy producers to start-ups to waste-grease biodiesel producers. In effect, new and unproven industries are getting the nod over established, independent businesses left to pick up the tab.

Analysis

The “Economic Development Competitiveness Act of 2010” (H 4478) was drafted by House Speaker Bobby Harrell and a team of consultants from Nelson Mullins, Nexsen Pruet, and the S.C. Association of Realtors, among others. The measure has already passed the House and Senate, but may end up in conference committee and then faces a potential gubernatorial veto. According to Harrell’s office, the bill represents a “proactive economic development strategy” that includes such recommendations as eliminating the corporate income tax and restoring the Closing Fund. The strategy, in other words, is to stimulate the economy both by enacting broad-based tax cuts and by handing out subsidies to special interests.

Except there are no broad-based cuts.

Legislators reject fundamental tax reform

As we wrote earlier this year, plans to eliminate the corporate income tax were “clearly the sweetener being used to force down the bitter pill of more government-driven economic development.” The Senate moved quickly to delete the corporate income tax cut, arguing that “it’s too expensive right now.” Never mind that the incremental tax cut would not have been implemented until FY13-2014 – at a cost of only $16.8 million. Or that no tax cut was ever envisioned for FY10-2011. Or that the full tax of 5.0 percent would not have been reduced to 0.0 percent until 2022. Currently, the tax brings in only a fraction of General Fund revenue, or an estimated $134.5 million for FY10-2011.

Of course, eliminating both the corporate income tax and the 5 percent flat tax on small businesses would have been an even better idea. Ninety-seven percent of South Carolina’s employers run small businesses, accounting for 50 percent of private sector jobs.

Special interests benefit most

Not a few lawmakers have wondered about which special interests are benefitting from  H 4478.  “The bill’s key sponsors ‘are trying to please somebody’ probably from out of state,” commented Sen. Glenn Reese (D-Spartanburg) to The State. “I think there are many, many rabbits throughout this whole bill.” This impression was seconded by a statement in the Senate journal by Senators Glenn McConnell (R-Charleston) and Lee Bright (R-Spartanburg) calling H 4478 a “Christmas tree.” 

As if to confirm these suspicions, House Ways & Means Committee Chairman Dan Cooper (R-Anderson) acknowledged that a new renewable energy tax incentive program inserted into H 4478 was “designed for a significant business prospect” looking at investing $500 million in Greenville. Possible candidates would seem to be BMW or GE. (BMW has been experimenting with hydrogen vehicles for some time, whereas GE’s Greenville plant is a major producer of wind turbine generators.)

The top beneficiaries of H 4478 include:

Renewable energy companies

·         As dictated by the “South Carolina Renewable Energy Tax Incentive Program,” firms in the renewable energy industry will receive a five-year, 10 percent tax credit. The threshold for the credit is low, requiring a minimum $500,000 investment that results in the creation of at least 1.5 full-time positions. The S.C. Board of Economic Advisors (BEA) anticipates only one company will be eligible for the credit at a cost of $40,000. This calculation, however, seems to have no basis in prior and anticipated investment patterns for the renewable energy industry in South Carolina, meaning the costs will likely be much higher.

·         Under the newly titled, “S.C. Life Sciences and Renewable Energy Manufacturing Act,” manufacturers of solar and wind turbine products, as well as manufacturers of lithium ion and other batteries used in alternative energy vehicles, will receive job development credits and other subsidies as authorized by the Enterprise Zone Act of 1995. Such companies are likewise eligible for various income tax breaks and a 20 percent depreciation allowance on manufacturing property taxes.  As highlighted in The Nerve, Proterra of Greenville, S.C., may be one of the beneficiaries of this credit. 

·         The bill also extends fee-in-lieu of property tax (FILOT) benefits to nuclear plant facilities – an industry not even billions in federal aid has been able to sustain.

·         H 4478 provides a 10 percent income tax credit for waste-grease biodiesel producers (see also H 3997). BEA analysis of this credit indicated that the “industry is in its infancy and the technology is unproven.” In other words, it’s a risky investment for taxpayers.

Firms planning on hiring anyway

·         As amended by the Senate, H 4478 includes an unemployment tax credit. The credit is not likely to encourage new job growth, as it’s too narrow and too temporary. But it will pad the pockets of businesses looking to expand anyway. Analysis by the BEA indicates the two-year credit would reduce revenue by $132.2 million in the first year (FY10-2011) and $175.8 million in the second year (FY11-2012). But it’s unclear whether this provision will survive in conference committee.

Start-ups

·         H 4778 extends license tax liability credits to entities developing “incubator buildings” for use by small start-up firms. Oddly enough, BEA analysis of this provision presumes only one company will take advantage of the new credit. In any case, contenders for the credit ($300,000 per company) would seem to be the South Carolina Research Authority “Innovation Centers” and a proposed “wet-lab incubation facility” at the near-empty Innovista complex.

Agribusiness companies

·         Agribusiness operations are being added to the list of activities (manufacturing, tourism, processing, warehousing, distribution, research and development, corporate office, qualifying service-related facilities, extraordinary retail establishment, and qualifying technology intensive facilities, and banks) eligible for annual job tax credits.

Cargo carriers/distributors

·         An existing $8 million tax credit for state port users is being expanded to include a credit against employee withholdings – up to $4 million maximum for all taxpayers. A $1 million cap on the amount of credits claimed by each recipient is also being eliminated (to the benefit of Boeing, BMW and other large manufacturers, it would seem). Finally, the credit is being amended to permit the Coordinating Council for Economic Development to give a $1 million credit to “a new warehouse or distribution facility which commits to expending at least forty million dollars at a single site and creating one hundred new full-time jobs.”

Military employers

·         Previous versions of H 4478 repealed job tax credits (5 percent of individual income tax withholding) allocated to redevelopment authorities located at Charleston Naval Complex, the Savannah River Site, and Myrtle Beach Air Force Base. The Senate not only retained the credit, at a cost of $4.3 million annually, but extended it to 2017.

The tourism industry

·         Sections 35 and 36 authorize the use of up to 50 percent of accommodations and hospitality tax revenue on the construction of “tourism-related buildings including, but not limited to, civic centers, coliseums, and aquariums.” Developers, architects and a host of others will benefit from this change as well.

Small manufacturers

·         Instead of lowering taxes for everyone, lawmakers are continuing to pursue a strategy of offering incentives and subsidies to select companies. Toward this end, H 4778 creates the Small Manufacturer’s Retention and Growth Fund, which will be administered by the S.C. Manufacturing Partnership Extension. The fund will be used to subsidize various activities of manufacturers that employ less than 250 persons. H 4778 offers several tax credits to taxpayers who contribute to the fund. See also S 1066, which would grant a 100 percent (instead of 50 percent) credit.

Other beneficiaries of H 4478 include: manufacturers and others that tend to rely on FILOT agreements, with one change (§ 2) lowering the threshold from $10 million to $5 million (see also § 7, 10, 11); firms eligible for State Rural Infrastructure Fund grants (§ 14); and businesses that pay taxes on manufacturing and productive equipment property (§ 21). Especially as regards the latter credit, it is worth noting that, at 3.73 percent, South Carolina has the highest effective manufacturing property tax in the country. But instead of slashing the tax, lawmakers are continuing to pick winners and losers by offering targeted tax credits.

Nothing in the foregoing should be construed as an attempt to aid or hinder passage of any legislation.

Copyright  © 2010 South Carolina Policy Council.

Download the PDF v

Download the full report.

The Senate voted today not to concur with the amended House budget – meaning the state budget will head to conference committee. As part of our ongoing budget coverage, we’ll be highlighting issues that currently divide the two chambers – and/or may also be subject to gubernatorial veto.

In Part I of this series, we’ll look at the I-95 Corridor Authority.

Following the publication of a taxpayer-funded Human Needs Assessment report in December 2009, support for the I-95 Corridor Authority has been growing. Legislation creating the agency enjoys bipartisan support in the Senate, but hasn’t emerged from the Ways & Means Committee in the House. The Authority would be empowered to “carry out economic development and educational improvement activities” aimed at improving the economy of any county within 30 miles of I-95.

The Senate passed a bill (S 1323) establishing the agency and then provided funding via budget proviso (89.143) using $3 million in nonrecurring dollars from the Healthcare Tobacco Settlement Trust Fund. The House removed this proviso from its final amended budget.

While we agree many counties adjacent to I-95 are in need of free market economic initiatives, the Authority represents the worst of recent legislative economic development schemes. Here are three reasons why:

Not focused. This new state agency would be charged with implementing recommendations from the I-95 needs assessment mentioned above. The assessment is wide ranging, recommending reforms in the areas of education, infrastructure, taxation and health care. In other words, the agency is essentially being given the impossible task of “making everything better.” Moreover, the counties along I-95 are very diverse. (For instance, Beaufort County’s median income of $49,638 is 89 percent higher than Bamberg’s $26,299). Creating one agency to address the different needs of all 17 counties is bound to fail.

Not transparent. Government-driven economic development plans are rarely transparent. But, at least, legislative handouts might be subject to public debate and a recorded vote. That would not be the case with funds distributed by the I-95 Corridor Authority. The Authority would instead make annual progress reports to the General Assembly. Moreover, the authority would be administered by legislative appointees, with virtually no executive oversight.

Not going to work. South Carolina has spent more than $1.5 billion on economic development incentives over the past 15 years. Yet, the state still ranks near the bottom in terms of employment and per capita income. As demonstrated by Unleashing Capitalism, such incentives are “costly, inefficient and distortionary.” This is especially the case as regards the “cluster theory” model that animates the I-95 needs assessment.

To these objections we might add that the I-95 Corridor Human Needs Assessment is meant to be the “blueprint” for the initiatives pursued by the Authority (as dictated by §11-54-10 of S 1323). This study was commissioned by Francis Marion University and S.C. State University and, accordingly, recommends that the two public universities act as “regional economic development leaders.” This role would allow the universities to become conduits for all manner of economic development funding and could even become a distraction from their prescribed educational mission.

While the I-95 needs assessment contains few practical ideas that will bring long-term prosperity to South Carolina’s poorest counties, the report calls upon the I-95 counties to “work proactively toward solving the region’s challenges.” In this same vein, we would challenge local leaders to look beyond the usual solutions proposed by state politicians and begin to listen to what their citizens, parents and local businesses really want.

Here are three reforms that would bring hope, prosperity and jobs to the communities along the I-95 corridor:

School choice. As the I-95 needs assessment observes, many of the schools along the corridor are “substandard,” and could be improved by “making a concerted effort to support an entrepreneurial economy with a pipeline of entrepreneurial education beginning with K-12.” But instead of rehashing stale ideas (in particular, additional funding for early childhood education) that won’t work, lawmakers should encourage truly entrepreneurial education models.  These include: school choice, weighted student funding and charter schools.

Tax reform. The I-95 assessment indicates that “due to state regulation, a limited taxable property base, and a lack of local initiative, the 17-county region as a whole has a limited ability to finance their own public investments.” Instead of publicly financing such investments, the purpose of genuine tax reform would be to attract private investment by lowering taxes and deregulating businesses. Eliminating any local option sales taxes would be a good start. Another local reform would entail eliminating diverse business licensing requirements/fees so that businesses can operate in more than one county without obtaining multiple licenses. State-based tax cuts to the manufacturing property tax and the personal income tax would also be highly beneficial.

Privatization. The best strategy for meeting the infrastructure needs of the I-95 counties would be to encourage private entities to invest in new roads, utilities and ports. Instead of the “we’ll build it, they’ll come” mentality that has failed in the past, private investors would use objective cost-benefit studies to determine how new infrastructure projects can best serve existing and new customers. (For an explanation of how such reforms could streamline state transportation funding, see this Policy Council Fact Sheet.)

Addressing the systemic economic and educational problems in counties along the I-95 corridor will not be easy. But more government intervention will only make things worse, driving out independent businesses and propping up failed educational strategies. Instead of using $3 million to launch another economic development project, lawmakers should look for innovative ways – funding school choice scholarships and charter schools and cutting business taxes – to unleash creativity and prosperity along the I-95 corridor.

Nothing in the foregoing should be construed as an attempt to aid or hinder passage of any legislation.

Copyright © 2010 South Carolina Policy Council.