Construction is an active sector in D.C., but not for jobs. Many construction companies are based outside the District and bringing workers in from the suburbs. (Marvin Joseph/The Washington Post)

In D.C., building booms but hiring fizzles

Cranes are the most obvious signs of economic activity in the District today. They seem to be everywhere, raising new commercial spaces and condo complexes, towering over a summer of construction that few other U.S. cities can match.

They are also masking a local labor market that is struggling, largely because of federal budget cuts. In the city, and the city only, the across-the-board federal cuts known as sequestration are dragging the economy down faster than builders can lift it up.

The District has lost about 2,600 jobs on net since October, even as the metropolitan area has added about 30,000. Wage growth has stalled for District residents, and economists predict that wages will fall over the rest of the year. City unemployment is not rising, but it remains well above the national average, especially east of the Anacostia River.

D.C. lawmakers gave final approval Wednesday to a bill requiring certain large retailers to pay their employees a 50 percent premium over the city’s minimum wage, a day after Wal-Mart warned the law would jeopardize their plans in the city.

Economic indicators, along with economists who follow the region closely, suggest that the weak job market stems mostly from government pulling back. The job losses and salary-sapping furloughs from sequestration, while still not as severe as initially feared, appear to have grown too powerful for the city’s still-growing private sector to offset.

In June, the District was down 6,000 federal jobs from the same time a year before, according to the Labor Department.

“The main driver of what’s going on in the job picture is that the federal government has been shedding jobs,” said Fitzroy Lee, the District’s deputy chief financial officer and chief economist. He added, “This might be the first glimpse of the likely effect of sequestration.”

The broader region’s economy remains relatively healthy, data show. Only in the District is the story more muddled.

Construction is humming. Washington has returned to its recent historical average for new building activity, while many U.S. metro areas remain only about halfway back to it, said Jed Kolko, the chief economist at real estate Web site Trulia. The three-month average for new housing permits in the city was up more than 20 percent in June from a year before. The vacancy rate for commercial office space in the District is 9.3 percent, well below the regional average.

Tourism revenue is rising in the city. Tax collections — sales, income and property taxes — are up from this time last year, suggesting continued economic growth.

That good news comes with some big and occasionally strange caveats. For example, the hot construction market has barely brought any new construction jobs to the city over the past year — a paltry 167 of them, according to the Labor Department. That is probably because most contractors are based in the suburbs and relatively few construction workers live in the District.

More broadly, federal budget cuts appear to be taking a growing toll on the city, even compared with its surrounding suburbs.

Wage growth has drooped among District workers and has lagged in the nation as a whole for nine straight quarters. Some economic forecasters expect wages to actually fall this year in the District — IHS Global Insight predicts a 0.4 percent decline, followed by a rebound in 2014.

And while revenue from sales taxes and income taxes is up from last year, the growth has slowed in recent months.

City and outside economists say the wage and tax-collection declines are probably a direct result of federal worker furloughs reducing take-home pay and consumer spending.

In the past, “what we saw was the federal government propping up the economy, acting as a pillow, if you will, for the decline” in the private sector due to the Great Recession, said Charles Dougherty, an economist for IHS Global Insight who studies the region. “What we see now is the opposite.”

The cuts have helped turn the District’s job growth negative, too. City employment is down about 0.4 percent from its recent peak in October, Lee and colleagues noted in a city report issued last month. That is largely because of a falloff in direct government employment. In that same period, the metro area recorded job growth of almost 1 percent.

The job trend has caught the eye of a major retailer tangling with city officials over its job creation plan.

Wal-Mart cited Lee’s July report, titled “Is the DC economy stalling?,” in an e-mail to reporters last week. In the message, a company spokesman accused city officials of jeopardizing new investment in the area by pushing a requirement that the retailer pay its workers higher wages.

Wal-Mart officials say that if the new wage law goes into effect, forcing Wal-Mart to pay workers wages and benefits worth at least $12.50 an hour, the retailer will not build at least three of the six stores it plans to add in the District. Each store is projected to employ 300 people. So the drop from six to three stores would add up to 900 fewer jobs created.

“To a person, I think people would say there’s not enough development, particularly on the east side of the river,” the Wal-Mart spokesman, Steven Restivo, said in an interview. “We feel like our stores can be part of the solution, not just in terms of jobs but of grocery choices in the city.”

Restivo said the stores would generate even more job growth indirectly by attracting new restaurants and other businesses that want to open nearby. He also said the wage bill could, perversely, reduce employment for District residents — because the higher wage could prove enough of an enticement to draw lower-paid suburban workers into town to compete for those jobs.

Economic research suggests that the net job-creation benefits of a new Wal-Mart usually prove minimal, at best. That is because when Wal-Mart opens a store, it often drives other retailers out of business, forcing their employees out of work.

A 2004 paper from economist Emek Basker of the University of Missouri found that the introduction of a Wal-Mart to a community usually raised retail employment by 100 jobs at first, but that number fell to a net gain of 50 jobs in the long run. A year later, a trio of economists from California and Massachusetts found that a Wal-Mart entry reduces employment by 150 jobs in the long term. A 2008 study of Maryland Wal-Marts found the stores reduced overall retail employment in the areas where they were introduced but pushed up retail wages.

But even if Wal-Mart’s planned hiring in the District did not result in a single layoff at a competitor, the new jobs still would not do much to fill the large-scale holes left by sequestration. That is because the government jobs being lost in the city appear to be fairly high-paying ones, particularly those of retiring employees who, because of budget constraints, are not being replaced.

No retail job comes close to paying as well as those positions — a fact that will be true whether the wage bill becomes law or not.