Fayette County’s unemployment rate in November 2021 was 2.4 percent, a near record low, and a substantial improvement from near-record high unemployment of 14 percent in April and May of 2020, when many businesses closed due to the outbreak of the coronavirus.
“But the unemployment rate only tells part of the story,” said Michael Clark, an associate professor of economics at the University of Kentucky Gatton College of Business and Economics.
The unemployment rate only measures who is looking for work, not who has left the job market. Clark, who helps the Lexington-Fayette Urban County Government predict revenues prior to writing its budget, said the number of people in the work force from November 2019 to November 2021 has shrunk, according to the U.S. Bureau of Labor Statistics.
Approximately 8,000 people in the Fayette County area who were working in November 2019 were no longer working in November 2021, Clark told the Budget, Finance and Economic Development Committee of the Lexington-Fayette Urban County Council on Tuesday.
“We don’t know why they have left the labor force,” Clark said. Some left because child care has become scarce during the pandemic. Others may have left because of health concerns during COVID-19. Others took early retirement. Some may have returned to school, Clark said.
Almost all areas of the country are seeing similar trends, Clark said. Sometimes dubbed “The Great Resignation,” people who were once working have tapped out of the job market. One recent study showed Kentucky ranked fourth of all states with the most people leaving the workforce.
Yet, Clark said there is indications that more people are starting to return to the workforce.
“Employment is starting to improve on the state and the national level,” Clark said.
A deeper dive into employment sectors shows the hospitality and tourism sector had the most dramatic decline in number of people working . Those jobs tend to be lower-paying jobs, Clark said.
Yet, Lexington’s payroll tax revenue, which funds the bulk of the city’s general services, is expected to increase by 7.6 percent by the end of the current fiscal year, which ends July 1. That translates to roughly $227 million in payroll taxes.
That’s largely because wages have increased due to a tight labor market, Clark said.
Higher wages means more payroll taxes being returned to the city, he said.
Department of Labor data shows on average, across multiple employment sectors, wages grew by about 4.6 percent over the past year in the Fayette County area. Typically average wage growth is between 2 and 3 percent, Clark said.
Clark said it’s unlikely that rapid wage growth will continue in the second half of 2022 and into 2023 for various reasons.
For fiscal year 2023, Clark predicted payroll taxes to grow by 3.8 percent over the previous fiscal year. That’s roughly $235.6 million in payroll taxes.
Corporate profit taxes are also a substantial source of revenue for the city. In 2022, the corporate profit tax is projected to be $54.2 million. In 2023, it will likely slightly decrease to $53.5 million. In 2021, the city saw a dramatic increase in corporate profit taxes —a 26.4 percent increase from 2020, when corporate profits were curtailed by the onset of the pandemic.
Corporate profit taxes are notoriously difficult to predict, Clark said. The country is starting to see more inflation due to supply chain and labor market crunches, which also factor into corporate profits.
Lexington currently has large surplus
Finance Commissioner Erin Hensley told the council committee Tuesday the city is currently running a surplus of a little more than $25.2 million six months into the current fiscal year, which began July 1. Much of that surplus is due to better-than-expected payroll tax revenues and tightening of expenses.
However, the city, to deal with a tight labor market and inability to fill key positions, has also increased various wages including a 3 percent raise for city employees not covered by a bargaining unit. The city has been able to absorb that cost due to attrition, or not being able to fill vacant positions, and bumps in revenue collections, Hensley said.
“We can’t provide services if we do not have staff to perform those services,” Hensley said.
Still, some of those wage increases and pay bumps will come online later this fiscal year, which will chip away at projected surpluses, city officials warned the committee Tuesday.
Hensley said the city has multiple outstanding collective bargaining agreements it needs to negotiate with fire and corrections. Those contracts typically come with pay raises. For example, a 2021 collective bargaining agreement with Lexington police will cost the city an additional $21.3 million over the next four years.
Hensley said the city used one-time money, including $7.9 million from a city’s savings account, to balance the current-year budget of $401 million. If revenues continue to beat expectations, the city will likely not have to tap that money to balance its budget.
Mayor Linda Gorton will present her budget proposal for the fiscal year that begins July 1 in April.