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Wonks only: State economist Tom Stinson on unemployment rates and state revenues

Steve Perry//April 2, 2009

Wonks only: State economist Tom Stinson on unemployment rates and state revenues

Steve Perry//April 2, 2009

Tomorrow the U.S. Bureau of Labor Statistics will release its national unemployment figures for March, and there are already preliminary indications that the outcome will be as bad or worse than in February, when over 650,000 American jobs disappeared. State-by-state unemployment data won’t come out until a couple of weeks later, on April 17, but it’s already evident that Minnesota’s first quarter 2009 job loss numbers will easily exceed the estimate of 35,000 contained in the state’s February revenue forecast; combined January and February losses in Minnesota already add up to 32,000.

So this morning PIM rang up state economist Tom Stinson (pictured) to ask what could–and could not–be inferred about the state’s tax revenues from these faster-and-deeper-than-expected declines in employment. Is it possible, for instance, to come up with a ballpark estimate of how much revenues might fall with each additional point in the unemployment rate?

Alas, the answer is no. "The unemployment rate isn’t the variable that we watch," Stinson explains. "What we watch most specifically is how withholding tax receipts track our forecast. That’s really what it all gets down to in a revenue forecast. We pay a lot of attention to what happens to payroll employment in Minnesota, because that does have a big effect on the revenue forecast. The unemployment rate is not a really reliable indicator of how income tax revenues in the state are going to flow, because of the discouraged worker phenomenon and because of people working less than full-time for economic reasons, not by choice."

For technical reasons, Stinson points out, the correlation between unemployment rates and revenues is weak and unpredictable. There are even occasions when a rising unemployment rate doesn’t mean shrinking state revenues: "For example, assume that the economy’s on the way up and people who were previously discouraged from looking for work are looking for work again–you’d have an increase in the unemployment rate and more people working at the same time, so your revenues from withholding would be growing."

But that’s certainly not the case now, is it? "No," avers Stinson. "Now the unemployment rate may actually be disguising some of the [economy’s depressive] effect on withholding, because there are many people not even looking for work given how dismal it is–so they wouldn’t even be counted in the unemployment rate.

"Bottom line," he adds, "the [March] national numbers from all indications are going to look really ugly. We’re prepared for that, but it’s certainly no fun to watch."

Next Friday, April 10, the state will release withholding tax collection data for February and March.

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