Underachiever: Illinois lags nation in jobs, but growth potential is high

Underachiever: Illinois lags nation in jobs, but growth potential is high

2023 data on Illinois’ labor market gives cause for both concern and hope as state emerges from pandemic job losses.

Illinois’ labor market is a story of both incredible resilience and unmet potential.

Payrolls throughout the state continued to grow in 2023 and finally surpassed pre-pandemic levels despite a shrinking labor force – a truly impressive feat. But data from the Census Bureau, IRS and multiple moving companies shows the state’s labor force is shrinking and unemployment levels are on the rise. The state’s unemployment rate has increased for five consecutive months and now sits at 4.8%, the third highest in the nation.

The future of Illinois’ labor market remains incredibly uncertain. It is increasingly unlikely the state will be able to sustainably increase payrolls in the future if the labor force continues to shrink. The data suggests those who are leaving the labor force aren’t just choosing to sit on the sidelines: they are leaving the state altogether. This is evidenced by the state’s increasing labor force participation rate despite a shrinking labor force, meaning a larger share of the 16-plus population is either working or looking for work, but there are simply fewer individuals in the state.

This stands in contrast to the experience of the U.S. labor market. The national economy is increasing labor force participation rates and adding to the labor force. The U.S. labor force is growing so much that individuals can’t be matched with jobs as quickly as they enter the labor force, which is the primary driver of the slight uptick in the national unemployment rate this year. Despite not being able to create jobs as quickly as new individuals are seeking them, the U.S. unemployment rate remains substantially lower than Illinois’ at 3.7%.

Job growth as a whole – and across virtually every industry – is lagging in Illinois compared to the U.S. average. Total nonfarm payrolls increased by 0.9% in Illinois during 2023, adding 57,800 jobs to the economy. The nation nearly doubled that by growing payrolls at an annual rate of 1.7% and adding 2.7 million jobs during the year.

Of the 11 large job sectors reported by the U.S. Bureau of Labor Statistics, Illinois only outperformed the national economy in two: financial activities and government. Financial activities payrolls grew far faster in Illinois at 2.3% than the U.S. at 0.5%. This is a relatively small sector compared to the rest of the economy, so this substantial growth only yielded 9,300 additional jobs in Illinois. The government sector is far larger and grew far faster in 2023, with government payrolls in Illinois growing 4.5% (+35,500) compared to the U.S. average of 3%. Most of this growth was driven by increases in local government employment.

Education and health services, which excludes public sector educators and health workers, contributed the second-most to job growth in Illinois and was the largest job creator nationally in 2023. Illinois’ sector grew at a rate of 3.1% (+29,900) compared to 4.2% (+1.1 million) nationally. The construction sector also grew in both economies, though at a faster pace nationally. Construction expanded at a rate of 1.8% (+4,200) in Illinois compared to 2.5% (+197,000) nationally.

The rate of jobs growth in the leisure and hospitality as well as the other services sectors were virtually identical between the U.S. and Illinois. The Illinois economy failed to keep pace and, in many cases, shed jobs where the U.S. economy was growing in all other industries.

Outside of the mining industry, which is less than 0.5% of all U.S. jobs, this was perhaps most pronounced in the professional and business services sector where the largest numeric drop in job losses occurred in Illinois. The industry – which is among the largest as a share of total employment in both Illinois and the nation – shed 25,900 jobs throughout the year in Illinois while adding 132,000 nationally. Illinois also lost 3,800 (-0.7%) jobs in the manufacturing sector and 6,500 (-0.5%) jobs in the trade, transportation and utilities sector, which grew 0.1% in Illinois and 0.3% in the U.S.

The starkest contrast in growth rates between the U.S. and Illinois economies came in an industry that saw payroll contraction nationally. The information sector was the only area of the national economy that failed to grow jobs in 2023. That decline was far more pronounced in Illinois as information payrolls declined 6.9% (-6,600) in Illinois compared to 2.2% (-69,000) nationally.

While a lagging economy is obviously not good news for Illinois, there is reason for optimism heading into 2024 and beyond.

First, the industry mix – the share of total jobs each industry is responsible for – in Illinois is virtually identical to the nation. The state’s economy is diverse and well-balanced, not overly reliant on any single industry. This leaves Illinois in a particularly good position to capitalize on future jobs growth in whichever industries this might occur.

Second, Illinois has many natural advantages over other states. Despite its struggles, Chicago remains the economic engine of the Midwest, a metropolis with world-class universities and a pipeline for a highly skilled labor force – if the state can keep them here. Coupled with one of the largest inland ports in the world and multiple major airports, Chicago’s central location makes it one of the most accessible cities in North America. Outside of Chicago, the state boasts the third-largest interstate highway system in the U.S., second-largest rail and large river networks allowing it to be a leader in agricultural exports, making the state incredibly important for the movement of critical goods throughout the nation.

Third, labor demand in Illinois remains high. Monthly job openings rates average 6.1% in Illinois for 2023 compared to 5.7% nationally. This means employers are searching for employees more intensely in Illinois than elsewhere, even if that hasn’t yet culminated in higher payroll growth. Job openings are a leading indicator for employment and consistently outperforming the national average is reason for optimism for the future of the state’s labor market.

To capitalize on these advantages and begin outperforming other states, Illinois must address the issues pushing residents away. Illinoisans of every age and income bracket are leaving the state on net, but the bulk are in their prime working ages.

Historically, high taxes have been the No. 1 reason Illinoisans considered leaving the state. Polling from NPR Illinois and the University of Illinois found 61% of Illinoisans thought about moving out of state in 2019, and the No. 1 reason was taxes. The Paul Simon Public Policy Institute found 47% of Illinoisans wanted to leave the state in 2016. It also found “taxes are the single biggest reason people want to leave,” with 27% citing that motive. More recently, the Illinois Policy Institute’s Lincoln Poll in 2023 substantiated these sentiments.

These are not unfounded fears. Illinois’ state and local tax burden is the highest in the Midwest. Illinois also levies the second-highest state corporate income tax in the nation and the state’s tax code is among the least friendly for businesses in the Midwest.

Even when taxes were not a response option, surveys of those who have left the state showed the major reasons were for better housing and employment opportunities. Both have been made worse by poor public policy in Illinois. The housing and labor markets are closely linked and are both affected by tax policy. Recent income tax hikes have already fostered an environment in Illinois that makes it harder for -Illinoisans to find work and reduces wage growth prospects for those who are employed. Rising income and property taxes have made housing less affordable in Illinois and reduced returns on housing investment relative to other states.

If Illinois is to meet its potential, state leaders need to stop hamstringing the economy with high taxation and poor public policy. Illinois must focus on strengthening its fiscal positionremoving regulatory burdens, and providing real tax relief both to workers who are already finding it difficult to remain and to job creators who are desperately trying to stay.

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