Transcript

Charles Gerena: I'm Charles Gerena, online editor for the Research Department at the Federal Reserve Bank of Richmond.

Today, I'm speaking with Andy Bauer, vice president and regional executive at the Baltimore branch of the Richmond Fed. Andy gathers economic intelligence on three parts of the Fifth Federal Reserve District: the District of Columbia, Maryland and the majority of West Virginia. Andy will share his perspective on economic conditions in West Virginia in today's podcast.

Thanks for being here, Andy.

Andy Bauer: Thanks for having me, Charles.

Gerena: The United States has been making progress in its recovery from the physical, emotional and economic toll of the COVID-19 pandemic. But there's still a long way to go. What has been West Virginia's progress so far?

Bauer: Clearly, it has been a difficult 15 months, but the light of the end of the tunnel is certainly getting brighter.

West Virginia's recovery is going very well. There are still some challenges, to be certain. A lot of people left the labor force and have yet to come back, although West Virginia is doing much better than in other places. Employment is down considerably and that's a big issue. However, from talking with businesses, activity is very strong in a number of sectors. And, despite less people working and lower employment levels, one of the main issues is the availability of labor to meet rising demand for goods and services.

Very importantly for its outlook, West Virginia has led the country in vaccination. What started the economic downturn was the pandemic and the steps taken to combat it. What puts the pandemic behind us and a stable outlook in front of us — for West Virginia and everyone else in the world — is vaccination. At this point, 60 percent of eligible West Virginia residents — and now that's age 12 and over — have received at least one dose. For the most at-risk group that's 65 years and older, that number is 85 percent, with 75 percent of that group fully vaccinated. That's very substantial progress.

Gerena: Great. You touched on the difficulties that businesses in West Virginia are having finding employees. In talking with your contacts in West Virginia, what reasons do they give for this?

Bauer: The reasons vary. Clearly, childcare has been an issue. West Virginia did have schools open earlier than in other places. Still, between childcare and some health concerns as well, those are two [factors] that people have cited as inhibiting people getting back into the labor force.

We also hear about a number of people retiring, particularly in manufacturing or trucking, in certain sectors where they've got an older workforce. We've seen that in the data. The labor force participation rate — that is, the number of people that are either employed or unemployed, scaled by the total working age population — for the 55-plus group dropped and hasn't really recovered. Retirements is an issue as well, and West Virginia does have an older population.

And then finally, we hear from contacts — and this is something we hear everywhere we go, and we hear it more in West Virginia and I think it's just because the standard of living is different in West Virginia — the enhanced unemployment insurance benefits has been a factor as well. I talked to an industrial services company earlier this week who said if you add up all the benefits, between unemployment insurance benefits and the supplemental benefits, you can make a substantial weekly wage that he just can't compete with. For entry wage workers, that's less the case for people with some experience or higher skill levels. More of what we hear about the difficulty finding workers is at the lower end of the pay scale, that is, for unskilled or entry wage workers. And so for them, it's just difficult to compete with that level of benefits.

Gerena: This brings to mind a concept in economics called a reservation wage. This is the minimum wage that a worker requires in order to participate in the labor market. Has the reservation wage changed during the pandemic?

Bauer: Yeah, I mean, it could be the case. It is an interesting thing.

The reservation wage could have changed for a number of reasons. One is that, if you look at what other opportunities people have, that seems to have changed as well.

We hear frequently from contacts that if you're near a distribution center, for example, e-commerce has really taken off. Amazon has been building distribution centers across the country. Other e-commerce players have also increased their capacity. There's been a strong demand for labor and they've gone ahead and raised the entry wage to $15 an hour. Other firms around those distribution centers have said, "Look, I've had a hard time competing," so they're bidding up their wages as well.

It seems to be the case that, for a lot of employers that we talked to, it's difficult to find workers below a certain dollar amount. It's not exactly 15 [dollars] because it depends on the benefits package, the attractiveness of the work. I think, for a lot of workers at the lower end of the pay scale, they look at this and say, "Okay, wages have gone up in many places. Let me evaluate the type of work," and that there could be health issues. Perhaps all of this is combined to such an extent that reservation wages have changed.

I know in West Virginia, childcare was an issue prior to COVID. The type of work is often an issue in West Virginia, and you do have a decent amount of manufacturing. Some of the manufacturers have said that, "Look, this is not easy work." So, perhaps because the work is a little bit harder, people say, "You know what, I can make this amount here or I can go to some other job, which now has a higher entry wage because of wage pressures. I'm willing to take a little bit of a pay cut in order to have an easier job.

Gerena: Gotcha. Zooming back out, how does West Virginia compare to the rest of the country, and what accounts for these differences?

Bauer: I think that West Virginia is doing very well. One of the more unfortunate features of this recovery is that there's been substantial disparities in outcomes experienced by different communities and different sectors in the economy.

You can see it in a number of different ways. I think one thing that's very striking is real GDP, which measures output, income and spending in the total economy, real GDP growth fell just 2.4 percent in 2020. And I say "just" because it fell 31 percent in the second quarter but rebounded enough in the second half of the year so that it was just down a moderate amount. And 2.4 percent, I'd say, is moderate.

At the same time, however, employment fell sharply in April and May of last year and in the economy as a whole over 20 million jobs were lost. The recovery in the labor market was much slower, so at the end of the year employment was down more than 6 percent and the unemployment rate still remained well above its pre-pandemic level. A lot of people left the labor force.

And so you have this juxtaposition. The economy rebounded really well in terms of output, spending and income, yet a lot of people are still without a job, out of the labor force, or unemployed. There you can see the disparities.

Now, how could that be? Well, some sectors did very well during the pandemic. A lot of consumers switched to spending on goods. There's a lot of spending on IT services — everyone that could moved to a virtual world — so those sectors saw increases in sales and production, and income and employment rose in those sectors and remained strong, even through this year. Other sectors that got hit hard directly by the pandemic or indirectly, they experienced prolonged weakness and job loss. On net, the job loss there is enough that you still see that sluggish recovery in the labor market. But the growth in the other sectors outpaces the decline in activity in the sectors that were directly hit.

Gerena: Awesome. So you're talking about the national level. What does this look like for West Virginia?

Bauer: In West Virginia, there was massive job loss last March and April, very similar to the U.S., and it has been very slow to recover. As of April 2021, for example, employment in West Virginia was roughly 5 percent below its pre-pandemic level, which is on par for what we see for the U.S. as a whole. But there have been some sectors in West Virginia that have outpaced the recovery in the U.S.

Employment in arts and entertainment, for example, is down just 5 percent relative to pre-pandemic levels, while for the entire U.S. it's down 25 percent. Why is that? Well, West Virginia has a large outdoor tourism sector that benefited during the pandemic. People were not getting on airplanes [and] they still wanted to take a vacation. So ski resorts reported a very good season and noted that the mix of visitors was different than in prior years. Instead of flying to the West Coast or to Europe to go skiing, vacationers drove to West Virginia's ski resorts. In addition, rafting and other outdoor adventure companies saw an uptick in activity. During the pandemic, people sought outdoor activities in a location with lower population density and West Virginia fit the bill.

Another factor that helped West Virginia was that it didn't experience a first large wave until the end of 2020. We had our first waves in the spring in many parts of the country and then over the course of the summer. West Virginia didn't have any of that. It wasn't until, I would say, sometime in November that you really saw cases pick up and hit a spike over the 2020-2021 winter [season]. For a lot of last year that made West Virginia, which already had low-population density outdoor activities, that made it even more attractive.

Gerena: So you're talking about the tourism sector. Are there any other sectors that performed well in West Virginia relative to the rest of the country?

Bauer: West Virginia does have a relatively larger level of employment in its healthcare sector. Its health care and social assistance sector outperformed the U.S. last year.

We all know that, in many areas of the U.S., the healthcare sector was severely impacted as hospitals eliminated elective procedures in order to focus on COVID. As I mentioned, West Virginia didn't have that severe incidence of COVID for most of 2020, so they didn't have to go through this period of eliminating elective procedures for most of 2020. By the time the state faced a surge in cases, hospitals were able to benefit from the experience of other hospital systems that had to deal with COVID. That allowed them to maintain employment levels at a higher rate.

Long story short, when you look at the end of 2020, employment in health care and social assistance was down less than 1 percent in West Virginia, compared to 3 percent for the United States.

Gerena: You touched on this earlier — there's lots of jobs that are available and not enough people. What is the data saying about the labor force participation rates in West Virginia relative to other parts of the country?

Bauer: Yeah, and this is what's really interesting. We've got several different indicators, sources of information about what's going on the labor market. So I talked about employment levels, and that's a survey of businesses that say how many people are on your payrolls. We also survey households to ask them, "Are you working or not working? Are you employed or unemployed?" That's what gives us the data about the labor market and labor force participation.

What stands out is that, compared to the U.S., people re-entered the labor force relatively quickly. For the U.S. the labor force participation rate fell from 63.3 percent in February 2020 to a low of 60.2 in May and is only partially recovered to 61.6 percent as of May last month. In West Virginia, however, the labor force participation rate fell from 55.7 percent to 53.2 percent, which is a slightly larger drop than in the U.S., but has recovered to near pre-pandemic levels. It's currently at 55.4 percent in April. A lot of that improvement happened in the second half of 2020.

It's a very different story when you look at the survey of households, and it's difficult to fully explain this difference. Perhaps it's due to the different experience of West Virginia with the pandemic. They did not have the severe negative outcomes that we're seeing in other parts of the country up until November. But it's really difficult to say in any precise way at this point in time.

Gerena: Okay. So what is standing in the way of West Virginia's economy returning to where it was, before the pandemic? And are there some aspects of the way things are that maybe shouldn't return back to normal, whatever normal is?

Bauer: Yeah, everybody's got a different idea of what normal is.

I think one of the takeaways for the pandemic is that remote work is a greater possibility for many positions. This effectively spans the labor market for many companies as they look for workers, as well as allows companies greater flexibility for where they choose to locate.

West Virginians have noticed this change. They've taken a look and said, "We have a lower cost of living, a high quality of life," especially if you like to be outdoors and if you're an outdoors person. As a result, West Virginia as a state could benefit from this shift and they're actively working towards creating opportunities for businesses and workers to relocate to West Virginia. I think there's a lot of promise there.

Gerena: That's a great perspective.

It reminds me of a conversation that we had with Renee Haltom, your colleague in Virginia. We asked her a question about the pandemic and if there are any potential silver linings, and she pointed to the organizations that started working together to problem solve and to help each other. They hadn't talked to each other before [so] that's actually been a positive outcome.

You recently participated in a virtual visit to Parkersburg, W.Va., as part of the Richmond Fed's Community Conversations program. I understand you learned some things during that experience that's similar to what Renee learned about businesses working together. What did you learn about the state's fourth largest city and, in particular, its connection to its surrounding local economies?

Bauer: We do this Community Conversations visits a number of times a year, and they're always an opportunity to learn a lot about local businesses and learn about the communities. Our visit to Parkersburg was no exception. There's a lot of interesting things that we learned about the local industries that are driving growth in the region, but also about the role of collaboration and it's a key theme that we hear often when we go on these visits.

How the collaboration happens looks different in many places, who the key people are can be different. Those communities that have a collaborative effort among local government, businesses and the not-for-profit community, they seem to find ways to build upon the strength of the community, as well as overcome its challenges. As a result, they're able to foster economic and community development.

They build a sense of purpose and sense of place, and they're able to drive towns forward. This is particularly an issue in smaller towns or rural towns which have seen population loss in recent decades. But it's this collaborative effort which gives a sense of place that want people to stay there, relocate there, [and] help develop both the economy as well as a sense of community. It's clear that this was taking place in Parkersburg.

Gerena: Thanks for sharing. It's very helpful information for today's rural communities who are in similar situations.

At the cusp of this post-pandemic future or waning pandemic, what are the issues that you're looking at?

Bauer: It's funny, when you asked me that question it reminds me we did this podcast for Maryland back in February. And I think my first response was, "Are we allowed to try and think about post pandemic?" That was more difficult to think about back in January or February this year.

I think it's so much easier to try to think about a post-pandemic future these days. Again, we still have a lot of challenges. So I'm focused on vaccine uptake and the challenges to overcoming vaccine hesitancy.

That's a real thing. We've talked with a number of businesses and community partners that have described to us how, for certain individuals and communities, taking the vaccine is not an easy decision. For some people, it's super easy: take the vaccine and you move on. For a variety of different reasons, some historical, for some people it's not an easy decision. So, what's really important is education and outreach so that we get as many people vaccinated as possible. I'll be listening to them to see to what extent their efforts are successful. And that's on the vaccine side, which really is the path out of this.

In the meantime, I continue to monitor the economy. I'm really interested to see how, as the service sector opens up, we see demand for those activities increase. There's things people have not been able to do for the last 15 months that they'll be able to do. I like to say that I'm going to see a lot of concerts this summer.

And what's going to be interesting is demand for goods is still very strong and we're seeing supply challenges across many industries. In talking with businesses, how they're negotiating supply challenges in the face of really strong demand is going to be something that we're going to be following until we were able to work through these issues.

Gerena: Gotcha. Well, Andy, we'll circle back with you in the coming months and see what concerts you saw. Obviously, we'll be circling back with our regional executives, your colleagues, and see how the economy is evolving under these certain circumstances. So thanks very much for your time.

Bauer: Thanks, Charles. It's always a pleasure.