Perspectives on How Boeing Company Layoffs May Affect State Revenue

Washington State Office of Financial Management
September 25, 2001

The Sept. 11 terrorist attacks in New York City and Washington, D.C., had an immediate impact on the nation's airline industry and the national Economy in general - apparent in the steep fall in stock prices.

A related development that will have a significant impact on Washington State government's revenue outlook was the Sept. 19 announcement by The Boeing

Company that it intends to lay off over the next two years about 20,000 to 30,000 employees in its commercial aircraft division - a major employer in the Puget Sound region.

The state Office of the Forecast Council (OFC) did not include impacts of the terrorist attacks in the quarterly state revenue forecast it issued Sept. 19 because those impacts were not possible to measure accurately within the time available to that office. Nor did the Forecast Council take into consideration the impact of Boeing layoffs, which were announced after the forecast was issued. The OFC will make its next official revenue forecast in mid-November.

The state Office of Financial Management (OFM) has undertaken a preliminary examination of the state's revenue situation in the wake of the attacks in order to provide some idea how projected Boeing layoffs may affect the state Economy and state-government revenue. Initial findings do not constitute an official forecast, which is the responsibility of the Forecast Council and which requires a broad analysis of state Economic conditions.

It Depends

The impact of a Boeing layoff depends on other events going on in the Economy at the time they occur, and how the Boeing situation interacts with those events.

The 1969-71 and 1981-83 Boeing downturns were part of - and accompanied by - major national recessions. The effect on Washington's Economy and state revenue was devastating in those cases.

In the 1981-83 Biennium, when Boeing jobs fell by 19,000, state revenue dropped 20 percent below expected levels, based on growth patterns of prior budget periods. This revenue loss is equivalent to a revenue loss of about $4.5 billion in the 2001-03 Biennium.

An impact of this magnitude is not likely in the current situation for three reasons:

• Any national downturn is likely to be less severe than the 1981-83 recession.
• The Washington Economy is today less dependent on the aerospace sector.
• The present revenue forecasts already reflect a slowing Economy.

In the spring of 1993, after Boeing announced a layoff of about 20,000 jobs, the state revenue forecast was reduced by nearly $600 million. Although the actual job loss was close to what was announced in the spring of 1993, the revenue loss was only about $200 million. The relatively small revenue loss was due to the fact that the US Economy was rebounding from a recession and helped offset the effects of the Boeing downturn. By 1993, the Washington Economy was also less dependent on the aerospace industry than it was in the early 1980s.

A Lot of Ways to Look At It

There are several ways to think about - and estimate - the likely effects of a Boeing layoff:

Estimate 1. The Boeing layoff as an "isolated" Economic event - impact on personal income and loss of revenue based on the "effective" General Fund tax rate, with revenue elasticity held constant. Estimated loss: $185 million

If Boeing lays off 20,000 workers by the end of 2002, an additional 25,000-job loss can be expected in the Economy by the end of the 2001-03 Biennium. (Additional sEcondary job losses of 15,000 would be felt in the 2003-05 Biennium.) This is based on a "multiplier" of 3.0 - meaning that for every Boeing job loss, two additional jobs are lost in the Economy over a two- to three-year period. (Some Economists use a higher multiplier of nearly 4.0). OFM estimates total job loss of 45,000 by the end of the 2001-03 Biennium. (The Office of the Forecast Council [OFC] has also estimated a loss of 45,000 jobs).

Using an average wage of $65,000 for Boeing production workers and an average wage of $33,000 for other job losses (and making further adjustments for other income losses),

the state Economy would lose about $3.5 billion in personal income in the 2001-03 period. (OFC has estimated $4.0 billion).

The "effective" General Fund "tax rate" - that is, General Fund revenue as a percent of total personal income - is about 5.4 percent. At this rate the General Fund revenue impact in the 2001-03 Biennium would be $185 million. (The OFC has not estimated a revenue impact).

This estimate assumes that personal income falls as a result of a Boeing layoff, but that revenue growth relative to income growth - "elasticity" - is unaffected.

Estimate 2. The Boeing layoff including effects on revenue elasticity: $430 million

Estimate 1, above, assumed no accompanying national recession and made no provision for any extraordinary impacts that a large Boeing layoff would likely have on consumer confidence and behavior, and overall business investment activity. A loss of consumer and business confidence in the Puget Sound area resulting from a sudden and large Boeing layoff would have additional impacts on revenue.

The impact would be reflected in a drop in revenue elasticity - the rate at which revenue grows relative to income. Revenue elasticity in the September OFC forecast for Fiscal Year (FY) 2002 already is associated with slow Economic growth (0.6 for the sales tax), while elasticity for FY 2003 in the September forecast (0.9 for sales tax) is associated with "average Economic growth."

A sudden and large Boeing layoff extending through Calendar Year (CY) 2002 would very likely cause at least a small, further reduction in elasticity for FY 2002 and a larger one for FY 2003. A small reduction of 0.1 for FY 2002 and a 0.3 decline in elasticity for FY 2003 would result in sales tax elasticities of 0.5 and 0.6, respectively, for the two years of the 2001-03 Biennium. These elasticities are typical of "slow Economic growth," but not a recession - when elasticity can fall to 0.2, or even below zero.

Under this "slow growth" scenario, revenue losses from 20,000 Boeing layoffs would result in an additional loss of $245 million in state revenue. Together with the $185 million revenue loss from Estimate 1, which is related solely to income loss, the total revenue loss would be about $430 million.

Estimate 3. The Boeing layoff accompanied by a moderate national recession:

$900 million

The OFC "pessimistic" Economic scenario includes the combination of a significant Boeing layoff and a moderate national recession This would result in a revenue loss of about $900 million. In a severe recession, the revenue loss would be higher

Estimate 4. The "average" loss from a 20,000 Boeing layoff: $600 million

OFM staff performed a simple, "two variable" statistical analysis to establish a correlation between Boeing layoffs and state revenue losses. Using data beginning with the 1969-71 Biennium, a Boeing job loss of 20,000 (over the course of a biennium) is associated with a state revenue loss of about $600 million (after adjusting for inflation).

A note of caution about Estimate 4: This analysis covers periods in which Boeing downturns were accompanied by a wide range of other conditions - major recessions, no recessions, slow growth in the rest of the Economy, and strong growth in the rest of the Economy. Therefore, it can be said that "on the average," a loss of 20,000 Boeing jobs over the course of a biennium results in a revenue loss of $600 million. The actual loss will depend on the specific context of the layoff and related Economic conditions.

Contact: Irv Lefberg, Office of Financial Management, (360)-902-0590, or irv.lefberg@ofm.wa.gov