The economy added 531,000 jobs in October, but many Americans aren’t going back to work. As of last month, employment across the United States was still 2.8 percent below its pre-pandemic peak, which translates into 4.2 million missing jobs. Even more concerning is that the U.S. economy seems to have cooled down considerably, growing at a 2 percent annual rate in the third quarter, down from over 6 percent in the second quarter of 2021.
Most of the employment recovery is concentrated in a few states, and Covid-19 vaccination rates seem to have nothing to do with it. States with the highest vaccination rates—Massachusetts, Maine, and Vermont—have recovered as many jobs as have many states with below-average rates, such as West Virginia, Alabama and Mississippi.
What do seem to be driving the differences in Americans getting back to work are state and local government policies. More affordable and business-friendly states are near or above pre-pandemic employment levels. States with the lightest regulatory burdens—Utah, Idaho, and Arizona—have already surpassed their pre-Covid employment levels. Red tape kills job creation; occupational licensing rules mostly raise consumer prices while limiting employment opportunities.
Migration also matters. In recovering states, inflows of Americans during the pandemic fueled labor supply and housing demand that resulted in higher employment growth and hotter housing markets. Americans move to places where they can get more for less. Harsh Covid-19 restrictions and a decline in the number of international migrants have hurt states such as California, New York, Hawaii and Illinois, their superior vaccination rates notwithstanding. High housing costs and a decline in the quality of amenities, despite crippling tax burdens, also drove those states’ residents to move.
Taxation and spending policies factor in as well. Support from the federal government meant most states’ finances recovered quickly. Eleven states, including Arizona, Iowa, New Hampshire, Missouri, Montana and Wisconsin, reformed their income-tax systems to reduce residents’ overall tax burden. They cut taxes to provide relief for residents and to jump-start their economies.
But debt repayment and public-employee retirement costs constrained states such as Connecticut, Illinois and New Jersey. They had trouble preventing business failures, providing additional tax breaks for cash-strapped businesses, and avoiding cuts in state and local government payrolls—all factors that hurt labor demand. The number of job openings per unemployed worker is lower in these states. And in Illinois, public-employee retirement costs now account for nearly 27 percent of the state budget, with pension costs nearly doubling in real terms since 2010. Despite tax increases, pension costs are bleeding dollars away from infrastructure, welfare and education.
States can help get Americans back to work by reducing barriers to entry and unnecessary red tape, lowering the cost of new investment and shifting budget priorities to focus on public investments that boost economic potential. Continued Covid-19 effects, and early retirements, may have slowed the jobs recovery—but if state governments make the right public policy choices, they can provide an important tailwind.
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