Florida’s Changing Business Model

• Anita Walsh, B.A. Economics
• Donovan White, B.A. Anthropology
• David Denslow, Ph.D., Bureau of Economic and Business Research and Department of Economics
• Christopher McCarty, Ph.D., Bureau of Economic and Business Research and Department of Anthropology
• Hector H. Sandoval, PhD, Bureau of Economic and Business Research and Department of Economics

Florida’s economy took a huge blow during the Great Recession from December 2007 to June 2009, which was the longest recorded recession since 1933.[1] The Florida unemployment rate more than doubled between 2007 and 2009 from 4.9 percent to 10.7 percent. Weekly continued unemployment claims in Florida, which averaged close to 100,000 claims per week from 2003 to early 2007, soared to over 300,000 per week. The Florida economy has been slow to recover after the Great Recession, but has improved since 2012.

There are four major indicators of the health of an economy: employment, spending, income, and production. Florida’s unemployment rate has fallen to 4.7 percent as of June 2016.[2] Weekly continued unemployment claims have fallen below 48,000, the lowest since the late 1980s. Total employment across all industries has rebounded since 2010 as shown in Figure 1a.[3] Employment in Florida has risen from a 15-year low of 7.1 million jobs in 2010 to a record high of over 8 million jobs in 2015. However, when adjusting employment for population growth (Figure 1b), Florida’s 2015 employment-population ratio of 56.1 percent is not nearly as impressive—hovering just below a historical average of 57.1 percent.[4]

Following this bump in employment, real personal consumption expenditures per capita has also rebounded.[5] In 2014, real personal spending reached $36,440 (in 2015 dollars), the highest level since 2007. This is not surprising because real per capita personal income in 2015 is at its highest level since 2007. The overall consumer sentiment in Florida has risen 21 points since the end of the recession.[6]

Figure 2 shows average annual wages in Florida adjusted for inflation.[7] Immediately after the start of the recession in December 2007, real wages fell 1.7 percent. The rebound in real wages in 2009 was short-lived as wages began to fall again and remained relatively stagnant. It was not until 2014 that Florida wages saw notable growth. In 2014, real wages were the highest since 2010.[8]

According to Figure 3, real Gross Domestic Product (GDP) per capita growth in Florida surpassed national growth rates for much of the early 2000s before plunging 11 percentage points from 2005 to 2009.[9] During 2008-2009 real GDP per capita growth in Florida decreased more than double that of the rest of the U.S. While national real GDP per capita began to show signs of recovery in 2010, Florida’s real GDP per capita on the other hand, didn’t grow until 2012. Nonetheless, this growth has been relatively modest since.

Real GDP per capita growth has only recently caught up with the rest of the United States. As of 2015, Florida’s real GDP per capita is roughly $5,000 below pre-recession highs in 2006 (which were bolstered by unsustainably high housing construction), but is relatively close to historical averages.

Typically, as the number of available workers in the labor force decreases, firms respond by increasing wages to attract the fewer remaining workers. Although the total employment is increasing, for the better part of the recovery, real average annual wages has been stagnant. The question is: Has there been a structural change in Florida that may be responsible? Before answering this question, let’s backtrack and look at the current structure of the Florida economy—the Florida business model.

Florida Business Model:

Florida has, for the most part, evolved into a business model that is heavily reliant on retirees and tourism and the jobs that stem from these two industries. “Instead the transition from, agriculture was, relative to the nation, predominantly to employment in retail trade, the hospitality sector, finance, medical care, real estate, and construction,” according to UF economist David Denslow in Tough Choices: Shaping Florida’s Future.[10] Jobs that drive these two industries are disproportionately low-wage jobs. Many high-paying industries in Florida have not reached or even approached pre-recession employment levels, while lower paying industries have had substantial job growth since 2009. While Florida’s total employment levels may be approaching pre-recession highs, it is important to highlight that this job growth is disproportionately tied to lower-paying jobs.

Structural Employment Change in Florida

Using average annual wages adjusted to 2015 dollars, a classification of the highest- to lowest-paid non-agricultural supersector industries in Florida was created (see Table 1 in Appendix). The highest-paying non-agricultural industries include Information, Financial Activities, and Manufacturing, while the lowest-paying industries include Leisure and Hospitality, Other Services, and Trade, Transportation, and Utilities. For a description of each supersector and their subsectors click here. There is a high proportion of tourist-related jobs among the lower-paying industries such as retail, arts, entertainment, and recreation, accommodation and food services, and travel-related businesses. Trade, Transportation, and Utilities has the largest share of jobs in Florida averaging nearly 20 percent of all employment historically.

According to the monthly jobs report released by the Florida Department of Economic Opportunity, July 2016 marked the “72^nd consecutive month with positive over-the-year job growth” after the state lost jobs for over three years. Figure 5 shows the percent change in employment by industry during this period and the real annual average wages for each industry in Florida. During the period of “recovery” the increase in employment in the lower-paying industries is concerning for what it might mean for the average worker in Florida, as the top 4 highest-paying industries all had fewer employees in 2015 than they did in 2005. The general trend here is the decreased employment in high-paying jobs and the increased employment in low-paying jobs. Once adjustments are made to allow for the effects of population growth to be seen in the above net employment change, Other Services, Trade, Transportation, and Utilities, and others are seen to not keep up with population growth.

Florida has increased total employment across all industries, but while doing so it has increased employment in tourist related industries which are relatively low-paying. Figure 4 shows the contribution of industries to Florida’s employment growth rate by pay. Low-paying industries have a higher share of Florida’s employment growth rates following the Great Recession. At first glance, strengthening Florida’s business model’s key industries seems like a sound strategy. Unfortunately, Florida has increased employment in the lowest-paying jobs of these industries. It is important to note that middle-paying industries have the highest proportion of total employment across all Florida industries—followed by low-paying then high-paying industries—but gaps between the number employed in low- and middle-paying industries has shortened because employment in low-paying industries is now growing faster than middle-paying industries.

During 2002-2009, the average employment growth rate of low-paying industries was only 0.1 percentage points higher than middle-paying industries, and had about 1.1 million fewer workers on average.  Since 2010, employment in lower-paying industries have grown on average 1.4 percentage points more than middle-paying industries, now only averaging roughly 800,000 fewer workers. In other words, the gap between the number of employees in low-paying industries relative to middle-paying industries has closed by approximately 300,000 jobs.

The construction industry is an integral part of the Florida economy because people continue to move here, increasing the demand for homes. It pays more than the Leisure and Hospitality industry by more than $22,000 and the Trade, Transportation, and Utilities industry by $4,700 (see Table 1 in Appendix). However, the high growth rates during recovery shown in Figure 4 are deceptive because Florida‘s construction industry was hit harder than almost any other state.

The construction industry has played an important role in Florida’s business model as there is a high demand for vacation homes and homes for retirees. During the 2005-2006 housing bubble, housing starts skyrocketed in expectation of future demand, leading to all-time highs in construction employment.

As housing prices ballooned in 2005, employment across all industries grew 3.8 percent, the highest growth rate since 1997. The rise in employment growth rates was predominantly driven by the construction industry which flourished with all-time highs in housing starts and building permits issued.

After the housing bubble burst, there were fewer buyers, and housing starts decreased dramatically along with employment in construction. The construction industry saw an average 18 percent decrease in employment between 2008 and 2009. The 14 percent decrease in 2008 was second only to Arizona for the largest decrease in construction employment in the U.S. This was followed by a 23 percent drop the following year, with Florida ranked fifth lowest in the United States and double the second largest decrease in employment among upersectorsin Florida (Manufacturing employment fell 17.1 percent). Also in 2009, employment in the Leisure and Hospitality industry and the Trade, Transportation and Utilities industry only fell 3.5 and 6.8 percent respectively.

As of 2014, the construction industry was nowhere near its pre-recession highs of over 600,000 jobs in 2006. However, this is misleading because the construction industry in 2006 was boosted by a housing bubble which created artificial employment growth. When comparing construction employment currently to pre-housing bubble levels seen between 2000 and 2004, it is below the 437,616 average, just hovering at 431,311 in 2015.[11] However, employment in this industry is trending upwards. According to Florida Department of Economic Opportunity, Construction of Buildings is projected to be the fastest growing industry at 32.8 percent growth from 2015 to 2023, and ranks 10th among industries expected to gain the most jobs at 28,613 jobs in the same period.[12]

This past recession hit Florida harder because it followed the height of a booming housing market. Florida’s construction industry had far to fall. In 2005, Florida’s construction industry was ranked first in employment growth in the U.S..[13] By 2008, Florida had one of the lowest growth rates in construction only second to Arizona.

With evidence of a structural change in the Florida business model, two questions to consider are What are the areas of weakness in the Florida business model? What are potential solutions to mitigating the impact of future recessions?

Budget Concerns in the Florida Business Model

In addition to an increase in low-wage tourism and retiree related jobs, analysis of taxes collected in Florida also shows an increased role of the tourism and retiree industries in Florida state revenue after the recession. As one of seven states without a personal income tax, Florida legislature’s budget is funded primarily by sales taxes.  Table 1 displays the top 10 kind codes for taxes collected before and after the start of the Great Recession.[14] Taxes collected in Florida are predominantly from businesses related to the Leisure and Hospitality, Construction, and Trade, Transportation, and Utilities supersectors before and after the recession. The portion of taxes collected originating from several tourism-related businesses have risen in the rankings since 2008. Sales taxes from manufacturing business has fallen out of the top ten altogether. While expanding these tourism-related businesses supplies a steady source of revenue in general, during the course of a recession these businesses are typically affected first and state revenue in turn declines. Hence, state revenues in Florida are more affected than in other states during an economic recession. As consumer spending falls, the available amount tax revenue diminishes.

In relation to Florida’s business model, the net impact of retirees on Florida’s state and local budget changes with the state of the economy. In a research report by David Denslow and Ray Schaub, it was concluded that retirees in the long-run are “a net fiscal benefit” to state budgets.[15] Highlights from the report show that retiree per capita expenses are significantly lower than other adults—spending a smaller proportion of their incomes on taxable goods, but this is countered by higher valued homes. In other words, retires contribute less to sales tax revenue but more to property tax revenue (which is reserved to local governments by the state constitution). As the percentage of sales tax contribution to state revenue increased during the recession—from an average of 73 percent between FY 2005-2007 to 76.5 percent between FY 2007-2009—in combination with falling home values, retirees contributed very little to state revenue.[16]

On a brighter note, Denslow and Schaub’s report also highlights that while retirees may not provide a significant amount of revenue into Florida’s state coffers, neither they do they place a heavy burden on government expenditures.[17] According to the report, the retiring 1960s baby boomers who currently live here and those who follow “will ease state and local fiscal stress.” Though retirees are a burden on the federal budget through the provision of Social Security, Medicare, and Medicaid, on a local/state government level the cost of Medicaid is balanced by retirees’ absence of children and higher property tax payments due to their higher valued homes.

Diversifying the Florida Economy:

To alleviate some of the potential risks from overreliance on retirees and tourism from the current business model as described above as well integrate more high-paying jobs into the Florida economy, there is a need to further diversify Florida’s business model. This diversification could potentially include more jobs in high-paying industries like Information and Financial Activities or even higher-paying occupations within the Trade, Transportation, and Utilities industry.

Texas is similar to Florida in many ways that make it an interesting model for comparison. Employment is more diversified in Texas than Florida, with Florida becoming more invested in the Leisure and Hospitality supersector. This may be one of the reasons that Texas was not as heavily impacted by the Great Recession as was the case in Florida.

Figure 6 shows the unemployment rate for Florida and Texas from 2000 to 2016. Leaving the 2001 recession, Florida and Texas shared similar unemployment rates. During the honeymoon period between the two recessions, Florida had a lower unemployment rate than Texas. However, during and after the Great Recession, Texas’ unemployment rate became lower than Florida’s. One explanation could be that Florida benefitted from large employment figures due to a booming housing market in the mid-2000s but the market crash impacted Florida more than Texas.

There has already been a push for needed diversification in the Florida business model. Here are two examples: 

Panama Canal:

The Panama Canal is a 48-mile waterway that connect the Atlantic to the Pacific Ocean. Within the last several years, Panama has been widening and deepening its canal to allow for the transportation of larger ships. In the ports of Miami and Jacksonville, investments have been made to deepen these ports in order to service the new larger ships that will traveling along the east coast. Currently, the ports of Miami and Jacksonville already have competition with ports in Savannah, GA and Norfolk, VA that already have the infrastructure for the increased ship volume. It is easier for these competitors to offload and transport cargo around the country than ports in Miami or Jacksonville. In an article by UF economist David Denslow, he comments that, “The opportunity to create infrastructure improvements through finding and support of our ports is a very real option.”

Bio Tech Company Sanford-Burnham:

Sanford Burnham Prebsy Medical Discovery Institute (in Orlando, FL) is a bio tech company from California in which the state has invested over $300 million to come to Florida and spark the high tech industry. But the company has not been able to generate enough revenue to sustain itself. The University of Florida is making plans to take over this bio tech company. The Florida High Tech Corridor Council was established by the Florida legislature in 1996 to "attract, retain, and grow high tech industry and to help develop the workforce needed within the state to support this industry." This is also an attempt to incorporate the high tech industry into Florida. The Sanford-Burnham Institute is only one of many members of the Florida High Tech Corridor.

Conclusion:

A conclusion that can be drawn from the Great Recession is that Florida’s dependence on retirees and tourism—somewhat volatile industries that ebb and flow with the economy—leaves the economy vulnerable. While Florida’s major employment indicators are showing positive trends, the underlying change in structural employment will result in more Floridians with lower-paying jobs and Florida’s business model itself makes it more susceptible to huge economic shocks than other states.

The magnitude of the kind of boost that allowed Florida’s economy to flourish as it did in the mid-2000s proved to be unsustainable because it was on the shoulders of record high housing prices.

After the Great Recession, there has been a change in the structure of Florida’s labor force with a stronger emphasis on industries related to retirees and tourism. “An interesting issue is whether the change in the structure of the labor force was more demand (aging of baby boomers, industry competition from China, technology and polarization) or supply (relatively less educated and less skilled labor force) or a mixture,” Denslow said. Although the exact cause for this structural change is difficult to pinpoint, its impact is easier to measure.

Boosts in Leisure and Hospitality, and Trade, Transportation, and Utilities industries—which accounts for 35 percent of all employment in Florida in 2015—may be the easiest industries to fortify during an economic downturn for Florida. However, the return on investment is not where Floridians would like it to be. Even though, adding more low-skill, low-wage jobs will decrease unemployment, it does not necessarily lead to a higher standard of living. Florida per capita disposable personal income has historically been relatively equivalent to with the U.S. since 1948. However, after taking a brief lead in per capita income in the mid-2000s, the gap between the U.S. and Florida real per capita disposable personal income has only increased since the end of the recession (see Appendix).

Appendix: