Maine’s low unemployment rate may not be good news

By Matthew Gagnon

Last week, the Maine Department of Labor announced that the state’s unemployment rate in January had declined to 2.8 percent, the lowest it has been since February of 2020. This is unquestionably good news, and seems to indicate that Maine’s economy is returning to its pre-pandemic state.

But does it, really? That is a more complicated question than you might suspect. 

There are many types of unemployment — structural, frictional, cyclical, etc — but whatever the cause, the government measures unemployment in a very specific way. Officially, the unemployment rate is calculated by evaluating the number of unemployed workers actively seeking work, measured against the total labor force.

This concept of a labor force will become important as we discuss this topic, because not everyone is in it. People who are retired and people who no longer wish to work are not counted as being in the workforce.

When unemployment rates typically go down, they do so for fairly simple reasons. Previously weak economic prospects turn around and optimism returns, so firms begin to hire additional workers in order to grow. Unemployed people who want jobs, in turn, end up filling these new positions. 

There are other ways the unemployment rate can go down, though. Rather than changing the numerator in the unemployment calculation (number of unemployed people), you could instead change the denominator (people in the workforce). 

Let’s say that we had 150 people, 100 of which were workers in the labor pool, and six of those people were not employed, but actively looking for work. That would give us a 6 percent unemployment rate. 

Now let’s say that we had the same 150 people, but two of the previously unemployed citizens gave up looking for work and dropped out of the labor force. We would now have only 98 people in the workforce, and four unemployed people, giving us an unemployment rate of just over 4 percent.

The rate is lower, but is anything different? The same number of people exist, and the same number of people aren’t working, but the rate is lower.

Sadly, this is not a hypothetical exercise. When Janet Mills was sworn in as governor of Maine in January of 2019, our labor-force participation rate stood at 62.8 percent. Maine’s rate in July of 2022 was down to 58.8 percent, a full four percentage points lower. Four percentage points may not seem like that much, but it is an enormous loss of workers. It is the difference between 700,746 workers, and 678,439, and represents a loss of 22,307 people.

Talk to almost any business owner in Maine today, and you are likely to hear them complain of an inability to hire workers. Staffing issues have been plaguing everything from restaurants to ferry services to nursing homes. 

Which begs the question: where did all the workers go?

Ask the Mills administration, and you will likely hear blame cast on Maine’s aging population. We’re the oldest state in the union, the logic goes, and after the pandemic, a lot of people decided to simply walk away and retire, and are not coming back. 

Sure, that’s a factor. But neighboring New Hampshire is the second oldest state in the Union, and its labor-force participation rate stood at 65.7 percent in July, nearly 7 points higher than ours.

Was it the so-called “Great Resignation,” whereby fed-up workers left jobs in lower wage, labor-intensive jobs? Again, maybe a little. But generally speaking, workers quitting jobs they don’t like don’t just drop out of the workforce entirely, and instead search for new, better jobs. And with wages rising and desperate hiring managers, workers have never been better positioned to negotiate perks, benefits and higher pay. And Maine isn’t much different than any other state, New Hampshire included, in that regard. 

So what gives? Well, it is a complex problem for sure, and it is one afflicting the county as a whole but it hasn’t been the same everywhere. States like Florida, Texas, Indiana and South Dakota have seemed to have both prevented a massive loss and had an easier time restoring their lost workforce than others (like Maine) with a more restrictive business climate. 

The lesson of this should be that if you want people to work, you need policies that not only incentivize work but develop an economy where working is more attractive and barriers that make investment and growth harder are removed. The result could be higher paying jobs, and more people that want to work those jobs.

Gagnon of Yarmouth is the chief executive officer of the Maine Policy Institute, a free market policy think tank based in Portland. A Hampden native, he previously served as a senior strategist for the Republican Governors Association in Washington, D.C.