Hawaii Labor Market Conditions 2003

Introduction

It has now been over a year since the terrorist attacks of September 11, 2001 and we have some important knowledge as to the response of the Hawaiian and mainland economy. At the time of the attacks their was some disagreement nationally as to whether the response would be something like a the response to a natural disaster or whether it would be short recessions and a slow recovery. In the case of a natural disaster, a hurricane or an earthquake, there is a sharp fall in output and things return quickly to normal. In the case of a prolonged recovery there is a fall in output and the economy grows too slowly to produce additional employment and there is a prolonged period of high unemployment. The latter seems to be the case nationally. Oddly enough the former appears to be something like the case for Hawai'i.

The Hawaiian Economy and Labor Market Conditions

The October unemployment rate in Hawaii was 4 percent while the unemployment rate nationally was 6 percent. Nationally there are at best mixed signals and some talk of a double dip recession. Hawaii’s growth in real personal income during the first half of 2002 was 5.2 percent at an annual rate. While employment fell in Hawaii by about 10,000 and the civilian labor force by approximately 12,000 from June 2001. Under normal conditions the strong growth generated in the first half of 2002 should have led to an increase in employment. What appears to have happened is that the employed are working somewhat longer hours and that there is an increase in overall productivity. The chart below provides a look at the relavent statistics for seasonally adjusted labor force, employment and the unemployment rate.

graph

As the chart indicates the seasonally adjusted employment statistics indicate that the labor market is in roughly the same position it was in during the period July 2000 to July 2001. The peak in unemployment during the last three months of 2002 was caused by a somewhat larger monthly increase in the labor force and a small decline in employment.

More generally there are a series of well known relationships between economic growth and the labor market. First, the unemployment rate adjusts to economic growth above a certain level. That level is determined by a combination of demographics and productivity.. In Hawaii unemployment begins to fall when annual growth exceeds two percent. Second, employment and the civilian labor force change slowly in response to growth. Employers generally increase hours rather hire, while people enter the labor market because they anticipate that jobs are available. Thus 1 percent growth in the economy above 2 percent leads to a lower than 1 percent decline in the unemployment rate. A signal that we have turned the corner in growth will be when we see an increase in the labor force. Paradoxically this will probably mean an increase in the unemployment rate.

What can be said is that the past year (2002) turned out to be far better than the consensus forecast for the year. The consensus forecast was for economic growth to be below 2 percent and for unemployment to rise to the 5 to 6 percent range. It appears that growth was above 2 percent, and this prevented a rise in the unemployment rate to the level projected.

Forecast for 2003

It appears that the consensus forecast is for growth in the 2.3 to 2.4 percent range for 2003 and 2004. The table below presents estimates for unemployment and inflation.

Annual Forecast
Unemployment
2003	4.2
2004	4.2


Inflation
2003	1.7
2004	1.7

The forecast is for a modest improvement in the annual average unemployment rate to 4.2 percent. The margin for error suggests an unemployment rate somewhere between 3.9 percent and 4.5 perecent. Thus it appears we will be able to avoid the persistant and high unemployment rates of the mid 1990s.

Inflation should remain below the national average. Both of these prodictionms, indicate that labor market condiktions should be