Economic growth in the State will slow, but continue to grow according to the most recent
projections for the year ahead. While the possibility of any very strong 1999 economic outlook
has been somewhat tempered by volatile domestic and world events, no recession is foreseen.
Connecticut's economy is still poised to see growth in employment, housing permits, retail
sales, income, and gross state product (GSP).
A consensus of several recent forecasts provides evidence for this positive outlook.
Meeting on November 20, 1998, the Connecticut Economic Conference Board (CECB) reviewed
three forecasts. A proprietary outlook prepared semi-annually for a business, academic, and
government consortium of the six New England states known as the New England Economic Project
was presented by Fairfield University Economics Professor Dr. Edward J. Deak. According to
his forecast, employment will be up by 2,000 in 1999, well below the employment growth last year.
Presenting for the University of Connecticut's Connecticut Center for Economic Analysis (CCEA),
Managing Editor of The Connecticut Economy Steven P. Lanza noted a slowing detected by the CCEA's
leading and coincident indexes of employment. Finally, Ed Guay, Wintonbury Risk Management,
cautioned about certain risks to Connecticut associated with national and world events. In a straw
poll at the November meeting of the Hartford Area Business Economists (HABE), opinions ranged from
"ebullient" optimism to "sustained slow growth," but none were forecasting a downturn.
Employment growth in Connecticut over the twelve months to October 1998 increased 1.4 percent,
by 22,200 to 1,649,400. While slower than the national employment growth rate of 2.3 percent for
the same period, the employment expansion is projected to continue. Moreover, a drop in the unemployment
rate to 3.8 percent in October put Connecticut's unemployment rate a full percentage point below its
level a year ago and well below the 28-year low of 4.4 percent for the U.S..
Connecticut retail sales growth, as reported in this column last month, was higher than
the nation's in 1996 and 1997. Data through September indicated year-to-date retail
sales at $27.17 billion, up 6.7 percent from year-to-date sales for the same period a year
ago. (See "Business Activity," p. 7.) Few risks were evidenced by an apparently
busy fourth quarter, likely making 1998 another consecutive positive year in the closely
watched retail sector. The accompanying growth in sales tax receipts, up 5.8 percent for
the year through October, provided additional confirmation of the strength of consumer
Housing permits were also among the positive indicators. Through October 1998, the
year-to-date permits were up 21.9 percent to 9,595 from the 7,871 units authorized through
the same period last year. In October 1998 alone, authorized housing units increased by
20.3 percent to 1,025 from the 852 units authorized for October 1997.
The Labor Department's forecasted first quarter 1999 increase of 4.6 percent in
personal income from the first quarter a year ago also points in a positive direction. The
NEEP forecast also projects an increase in "real" (adjusted-for-inflation)
personal income of 2.0 percent for all of 1999.
Finally, the real Gross State Product (GSP) is projected to increase from $121 billion
to $122 billion in 1999, a growth rate of about 1.0 percent in 1999, compared with the
estimated increase of 2.7 percent in real GSP for last year according to the NEEP report.
GSP is the total dollar value of final goods and services produced in the State.
Risks To The Outlook
Among the risks to this outlook are a few world and national developments. U.S. exports
through the third quarter, for example, were down 1.1 percent. Yet, Connecticut exports
rose 7.2 percent even as the State's exports to Asian destinations fell 11.4 percent.
An encouraging sign of the strength of Connecticut's overall export performance was
an increase of 7.0 percent in exports to Connecticut's top ten trading partners
(including Canada, Germany, France, and Taiwan) through the third quarter from the same
period a year ago.
Among technical indicators of possible trouble ahead is the December-reported decline
for a fourth consecutive month in the Connecticut leading employment index developed by
the University of Connecticut's Connecticut Center for Economic Analysis (See p. 5).
The leading index, a barometer of future employment activity, fell in September to a level
not seen since November 1995.
Finally, to the extent that consumer confidence determines future spending behavior and
therefore future economic activity, it should be noted that the consumer confidence index
for both the U.S. and New England were down 4.9 percent and 14.2 percent, respectively, as
of October. (See p. 8 for current levels.) Likewise, in polling conducted in early October
by the Center for Survey Research and Analysis at the University of Connecticut, consumer
expectations for future economic activity dropped dramatically from 117.7 to 79.6, the
sharpest quarterly decline in expectations since the measurement began in 1992.
In summary, the Connecticut economy, different today than it was even ten years ago, is
likely to weather these otherwise challenging circumstances looming on the horizon. Based
on the indicators and sound fundamentals, continued, if slower, growth is expected in 1999.
A new "Industry Cluster
Progress Report," released
in October 1998, represents the
first interim report since last
February when the leadership
of the industry cluster advisory
boards presented their Partnership
for Growth report to the
Governor and legislators.
Within that original report, a
series of recommendations were
proposed intended to "enhance
the ability of Connecticut's
businesses and citizens to
compete more effectively as we
enter the 21st century." The
latest report describes progress
being made in implementing
In the closing days of the 1998
legislative session, the Governor
and Legislature unanimously
approved the "Cluster Bill" and
the financial support needed to
launch a major industry cluster
initiative in Connecticut. Those
funds became available in July 1998.
Among the progress reported,
the Governor has approved the
Executive Order that establishes
a "Governor's Council on
Economic Competitiveness and
Technology" that will be cochaired
by the Governor and a
business leader. The Council
will consist of: (1) about 45
Chief Executive Officers (CEOs)
from a cross-section of industries
throughout the State,
large and small; (2) legislative
leaders; (3) heads of key educational
institutions; (4) labor
representatives; (5) officials of
important associations; and (6)
several Commissioners. The
Council's first meeting was to
be held in December.
Commissioner James F.
Abromaitis of the Connecticut
Department of Economic and
Community Development announced
that Connecticut communities
authorized 817 new
housing units in November 1998,
a 45.6 percent increase compared
to November of 1997 when 561
The Department further indicated
that the 817 units permitted
in November 1998 represent a
decrease of 20.3 percent from the
1,025 units permitted in October
1998. The year-to-date permits
are up 23.5 percent, from 8,432
through November 1997, to
10,412 through November 1998.
"The Connecticut housing
market is enjoying its greatest
strength in a decade," Commissioner
"The number of new starts in
Bridgeport has nearly doubled
over the past year and permits are
up in Hartford, New Haven, and
Reports from municipal officials
throughout the state indicate that
Tolland County with 113.5 percent
showed the greatest percentage
increase in November compared to
the same month a year ago.
Hartford County followed with a
68.5 percent increase.
Hartford County documented
the largest number of new, authorized
units in November with 219.
Fairfield County followed with 159
units and New Haven County had
131 units. Farmington led all
Connecticut communities with 46
units, followed by Ellington with
28 and Manchester with 26.
As a result of Connecticut's new minimum wage law, the State's minimum wage will rise to $5.65
per hour on January 1, 1999, and to $6.15 per hour on January 1, 2000 (or to a value that
is indexed to the Federal minimum wage, whichever is greater).
Connecticut has not been the only jurisdiction in recent years to take this action. For
example, on November 3, 1998, Washington State voters approved the first minimum wage
indexed to inflation. At the Federal level, the 1996 amendment to the Fair Labor
Standards Act increased the minimum wage to $5.15 per hour on September 1, 1997.
However, this may be the last Federal increase for a while. In September 1998, the Senate
voted to block a Federal increase in the minimum wage which would have raised it to $6.15
in two increments.
Until recently, there had been a long-standing consensus among mainstream economists
that increases in the minimum wage caused employment reductions in covered industries.
That consensus changed with the publication of new research by David Card and Alan Krueger
in 1995. Since all the issues surrounding the minimum wage cannot be covered in one
article, what follows is a brief discussion of several selected areas of disagreement
among economists that highlight their different opinions about the effects of the minimum
The Causes Of Unemployment
Keynesians believe that unemployment arises when the level of income in the
economy is not sufficient to absorb the current level of output. It is the result of
fluctuations in economic activity over the business cycle, or an inadequate growth rate.
They focus on the level of aggregate demand as the principal cause of unemployment, with
wages playing a secondary role. Neoclassical economists argue that
unemployment is the result of the wage rate being set or stuck above that which would be
obtained by the interaction of supply and demand for labor in the labor market. This
causes the supply of labor to exceed the demand for labor (i.e., there is a labor surplus,
or unemployment.) Structuralists maintain that unemployment is caused by a mismatch
between available jobs and available workers. It results from structural factors (such as
industry, occupational, or geographic immobility that can result from job search and
relocation costs) that impede the job matching process. Removing these impediments would
Since Keynesians view the wage as playing a secondary role to other factors, the
minimum wage is not considered a critical determinant of employment. Structuralists look
more to increased labor mobility, in both the geographic and occupational sense, than to
the wage as a determinant of employment. It is the Neoclassical economists that view the
wage as the primary determinant of employment. To them, a minimum wage, presumably above
that determined by the market, will lead to reductions in employment.
The Responsiveness Of Labor Demand To A Wage Change
There is disagreement among economists over the response of labor demand to a given
minimum wage increase. The Big Responders contend that there will be a large
relative reduction in employment for a given percent increase in the minimum wage. The Small
Responders argue that the response will be small and likely to be statistically
Theories Of Market Structure
There are two models of market structure that can be thought of as being at
opposite poles. These two templates are the most frequently used to study the effects of
policy. Under Perfect Competition, there are many sellers and many buyers of labor
services in the labor market. No one participant is large enough to affect the wage rate.
Under Monopsony, there is only one buyer of labor services in the labor
market. This single buyer has some latitude in setting the wage rate. Further, the wage
rate and the level of employment are lower than they would be under perfect competition.
If the sectors subject to the minimum wage most closely resemble perfect competition,
the minimum wage will result in job loses. If the sectors covered resemble monopsony, then
the minimum wage will not necessarily lead to job losses.
The Controversy Over Recent Findings
In Myth and Measurement, David Card and Alan Krueger state that they
found no evidence of any of the job losses often believed to be associated with either
Federal or state minimum wage increases. Their observations were based on their review of
previous work, as well as their own studies. They found their results difficult to
reconcile with the assumption that covered sectors approximate the perfect competition
model. Their findings have economists and policymakers debating and rethinking the
conventional assumptions about the effects of the minimum wage.
What Can We Conclude?
In light of the issues discussed here, what is to be concluded about the prudence
of raising the minimum wage? Clearly, a large enough increase in the minimum wage would
result in job losses in the covered sectors. Since 1954, the historical record for the
U.S. indicates that the Federal minimum wage has seen, for the most part, small to
moderate increases that are far from what could be considered excessive. In 1996 dollars,
the Federal minimum peaked at $7.21 an hour in 1969 and has declined ever since. It was
$4.75 in 1996 (in 1996 dollars). In conclusion, the evidence indicates that moderate
increases in the minimum wage probably do not reduce employment and serve to raise the
wage of those covered. This would especially pertain in times of economic expansion.
The Connecticut coincident
and leading employment
indexes both rebounded from
previous months' declines with the
release of (preliminary) October
data. The coincident index recovered
most of its September fall
after reaching new peaks in June,
July, and August. The coincident
index now lies just below its
August peak and just above its
peaks in June and July. The
leading index rose after falling for
four consecutive months and now
lies above its August and September
levels and within range of its
previous peak in February. As
noted last month, the August and
September retrenchment in the
leading index probably reflected in
large measure the GM and SNET
strikes. As such, there is still
considerable uncertainty about
what the recent movements in the
leading index imply. We shall
carefully monitor future data
releases to identify, if and when,
the leading index signals an
impending downturn in the Connecticut
The future of the Connecticut
economy's current expansion, as
noted before in this column,
hinges critically on the continuation
of the U.S. expansion. That is,
the Connecticut expansion will not
long survive once the national
economy heads south. In addition,
the continued expansion of the
U.S. economy may require policy
changes in the U.S. and/or in the
world. First, the Federal Reserve
has already lowered market
interest rates three times in recent
months and is unlikely to lower
rates again, unless serious signs of
weakening in the national
economy emerge. Second, the
European countries led by the
German Bundesbank recently sent
a strong signal by engineering a
coordinated cut in interest rates to
boost their economies. Finally,
analysts cannot predict with any
confidence the effects of the "Asian
contagion" on the U.S. or world
economies. Analysts do agree,
however, that Japan needs to
develop a credible plan to address
the serious problems in its
economy, otherwise the "Asian flu"
will continue to haunt the world's
In summary, the coincident
employment index rose from 91.4
in October 1997 to 95.7 in October
1998. All four index components,
once again, point in a positive
direction on a year-over-year basis
with higher nonfarm employment,
higher total employment, a lower
insured unemployment rate, and a
lower total unemployment rate.
The leading employment index
increased from 89.9 in October
1997 to 90.4 in October 1998.
Four of the five index components
sent positive signals on a yearover-
year basis with a lower shortduration
(less than 15 weeks)
unemployment rate, a longer
average work week of manufacturing
production workers, lower
initial claims for unemployment
insurance, and higher total housing
permits. The other component
sent a negative signal on a yearover-
year basis with lower Hartford
SOURCE: Connecticut Center for or Economic Analysis, University of Connecticut. Developed by Pami Dua [Economic Cycle
Research Institute; NY,NY] and Stephen M. Miller [(860) 486-3853, Storrs Campus]. Kathryn E. Parr and Hulya Varol [(860) 486-3022, Storrs Campus] provided research support.
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