How Philadelphia’s Economy Is Recovering

Overview

In June 2022, The Pew Charitable Trusts assessed the status of Philadelphia’s economic recovery two years into the pandemic, identifying five key questions likely to determine the city’s future performance. Those questions concerned jobs, the level of remote work, the size of the workforce, the strength of the housing market, and the implications for an equitable recovery.

This brief, part of a series on Philadelphia’s fiscal and economic future, provides updated answers to those questions, while also evaluating city government revenue. The results show progress in some areas—such as the amount of city revenue—and continuing concerns in others, including overall employment.

Will Philadelphia’s employment recovery continue to be sluggish?

The city’s recovery has been strong in some respects but lackluster in others. From the third quarter of 2021 through the same period in 2022, Philadelphia added about 31,000 jobs.¹ Even so, the employment total had yet to reach pre-pandemic levels. (See Figure 1.) In addition, the city continued to lag the nation as a whole and the rest of the Philadelphia metropolitan region—and by greater margins than earlier in the year.

In the third quarter, roughly 726,000 people held city-based jobs, down 4.1%, or about 31,000 jobs, from the fourth quarter of 2019, the last pre-pandemic period.² The rest of the region was down 0.6%, while the nation was down only 0.1%. Six months earlier, Philadelphia’s employment total had been 5.8% below pre-pandemic levels, the region off 3.6%, and the nation down 2.6%.

The pace at which the city’s economy has been recovering from the COVID-19 shutdown has been in keeping with that of other large mid-Atlantic cities, which also have underperformed the country as a whole.

In percentage terms, Philadelphia’s 4.1% drop from the fourth quarter of 2019 was identical to those in New York and Washington. And both of those cities, like Philadelphia, were outperformed by the rest of their regions. Baltimore, however, has fared somewhat better than the other three cities. (See Table 1.)

Table 1

Employment Change in Cities and Their Surrounding Regions, 2019-22

Numbers are in thousands

Note: The surrounding region is defined here as the metropolitan statistical area (MSA) minus the primary city in that area. As defined by the U.S. Census, the Philadelphia MSA includes Bucks, Chester, Delaware, Montgomery, and Philadelphia counties in Pennsylvania; Burlington, Camden, Gloucester, and Salem counties in New Jersey; New Castle County in Delaware; and Cecil County in Maryland.

Source: U.S. Bureau of Labor Statistics, Current Employment Statistics

By sector, the makeup of Philadelphia’s economy has changed little since pre-pandemic days. Table 2, which shows the changes in jobs by sector, compares the third quarter of 2022 with the third quarter of 2019 (rather than the fourth quarter, as in Table 1) to better control for the seasonal fluctuations in some parts of the economy. In education, for instance, employment is generally lower in the third quarter, when many schools are not in session for much of the time, than in the fourth. Overall employment is generally higher in the fourth quarter than in any other, due largely to seasonal increases in the retail sector.

Table 2

Employment Change by Sector in Philadelphia, Q3 2019 to Q3 2022

Job totals in thousands

Note: Sector employment numbers for Q3 2022 do not add up to 726,000 due to rounding. In the numeric change column, the sector numbers do not add up precisely due to rounding.

Source: U.S. Bureau of Labor Statistics, Current Employment Statistics

In terms of total jobs, most sectors were about where they had been three years earlier. But there were some exceptions. Leisure and hospitality declined by about 9,000; and professional and business services expanded by about 7,000 jobs, while health care and social assistance grew by 4,000.

Where will the level of remote and hybrid work settle?

Gradually, more people have been coming back to their offices—at least some of the time. But remote work in white-collar sectors of the economy has proved to be a lasting phenomenon, with many businesses adopting hybrid schedules that allow employees to work from home several days a week.

Data provided by a major office security provider indicated that office occupancy in the Philadelphia metropolitan area in late January 2023 was about 43%—up from 38% six months earlier.³ The Center City District estimated that office occupancy in Center City was just over 50% as of October, adding that current trends suggested “a slow but sustained increase” in that figure.⁴

Another indication of the remote work phenomenon’s staying power is SEPTA ridership, which relies heavily on commuters. In the second half of 2022, system ridership was 52% of pre-pandemic levels and Regional Rail was 46%.⁵ Over the longer term, these workers’ reduced presence may result in lower demand for commercial office space as leases expire and businesses seek to reduce their footprints.

How will city government revenue hold up?

As shown in Table 3, city revenue from most local taxes came in much higher for fiscal year 2022 than for fiscal 2021, helping to give Philadelphia an estimated fund balance of $775 million as of June 30, 2022. The high balance is the result of several factors, including the economy’s stronger-than-expected performance and a large number of unfilled city government positions.⁶

Table 3

Revenue Generated by Local Taxes in Philadelphia, Fiscal 2021 and 2022

Numbers in millions

Notes: Fiscal years in Philadelphia run from July 1 to June 30. Apparent discrepancies in the “Change” column are due to rounding. Numbers for fiscal 2022 are listed as preliminary and subject to revision.

Sources: City of Philadelphia, Quarterly City Managers Report for the Period Ending June 30, 2022, Table R-2 (fiscal 2021 data); City of Philadelphia, Quarterly City Managers Report for the Period Ending September 30, 2022, Table R-2 (fiscal 2022 data)

The wage tax, the city’s largest revenue source and the one potentially most vulnerable to the impact of remote work, came in at $279 million more than the previous year, an increase of about 14% from fiscal 2021. Compared with fiscal 2019, the last fully pre-pandemic year, it was up 6.2%, well below the rate of inflation over that period.⁷ It is hard to know how much higher wage tax revenue would have been had more suburbanites been coming into city offices more frequently—and how many jobs occupied by nonresidents have been reclassified by employers in ways that exempt them from the wage tax.

Two other taxes—those on real estate transfers and business income and receipts—each grew by more than $200 million while recording large increases in percentage terms.

Revenue from the real estate transfer tax was up $233 million, or 77%, year over year, because of rising home prices and a large number of transactions, while the business income and receipts tax rose by $208 million, or 38%.⁸ Both levies are considered volatile and relatively unpredictable. Although there is no guarantee that these revenue sources will continue to grow, both were running ahead of fiscal 2022 levels through the first three months of fiscal 2023.⁹

The city’s share of the sales tax, generally seen as a broad indicator of economic activity, rose 21% in fiscal 2022 and another 4% year to date through the first three months of fiscal 2023.¹⁰ Declines from fiscal 2021 to fiscal 2022 were recorded in the real estate and net profits taxes.

Has the decline in the workforce persisted?

In the initial stages of the recovery, economists expressed concern about a drop in the size of the workforce—the number of people working or looking for work—and the decline was somewhat greater locally than nationally. Although labor shortages still exist in some parts of the economy, the concern about the overall workforce appears to have decreased over time.

As of the third quarter of 2022, the U.S. Bureau of Labor Statistics estimated that about 727,000 Philadelphians were in the workforce, up from 718,000 six months earlier, although still roughly 11,000 below the figures for the fourth quarter of 2019, the last pre-pandemic quarter.¹¹ Nationally, the labor force had returned to 2019 levels.¹²

What about the city’s housing market?

Early this year, housing purchase prices and rents were rising relatively rapidly, adding to concerns that many Philadelphians were being priced out of the local housing market. Several factors, including the rise in mortgage interest rates, have come together to cool markets somewhat.

According to the Zillow Observed Rent Index, rents in Philadelphia, after rising sharply from January 2021 through the early part of 2022, leveled off in the three months ending in October. (See Figure 2.) Overall, the index shows rents rising 15% from October 2019 through October 2022, with nearly all of that increase coming since April 2021.

The average price of Philadelphia homes fell in the last two quarters of 2022, according to local real estate economist Kevin Gillen of Drexel University’s Lindy Institute for Urban Innovation.¹³

In addition, the city recorded a steep decline in the number of housing units for which residential building permits were issued—following a year in which pending changes to the city’s property tax abatement policy led to a spike in permits.¹⁴ The total for 2022 was 3,223; the 2021 figure was 26,116.¹⁵

What are Philadelphia’s prospects for an equitable recovery?

In our previous look at these questions, we noted that the economic trends raised questions about Philadelphia’s ability to achieve an equitable recovery. Those questions remain.

As noted above, the biggest drop in employment remains in the leisure and hospitality sector, and the biggest gain was in professional and business services. In an analysis conducted before the pandemic, those sectors both had wide variations in the racial and ethnic makeup of their workforces and in terms of whether employees were city residents or lacked college degrees. (See Table 4.)

Table 4

Philadelphia’s Pre-Pandemic Workforce

Demographic characteristics of two key sectors in third quarter of 2019

Sources: For change in jobs, U.S. Bureau of Labor Statistics, Current Employment Survey; for all other indicators, U.S. Bureau of Labor Statistics, Quarterly Workforce Indicators

The median salary in professional and business services ($58,700) was nearly three times as high as the median in leisure and hospitality ($21,100).¹⁶

And the persistence of remote work in white-collar sectors remains a central element on the equity front. Many of the lost jobs depended to some degree on having white-collar workers coming to their offices in the city—and then going out to lunch, having drinks or dinner after work, shopping at stores nearby, and so on.

In addition, having fewer nonresidents commuting into the city on a regular basis means that Philadelphians, including those with lower incomes, will be shouldering an increased share of wage and consumption taxes.¹⁷ An annual study of local taxes in the largest city in each state, conducted by Washington, D.C.’s chief financial officer, found that Philadelphians with annual household incomes of $25,000 already pay more in state and local taxes than their counterparts in all but one of those cities (Seattle).¹⁸

Conclusion

In the months ahead, we’ll continue to monitor these trends and others—the good, the bad, and the unpredictable—to see how they affect Philadelphia’s economic recovery. We’ll be paying particular attention to jobs data and City Hall’s ability to raise the revenue it needs to fund city services.

About this brief

This brief was written by Larry Eichel, senior adviser to The Pew Charitable Trusts’ Philadelphia research and policy initiative, and edited by Erika Compart, Pew’s senior manager, editorial.

Acknowledgments

This brief was funded in part by The Pew Charitable Trusts with additional support from the William Penn Foundation.

Endnotes

1. U.S. Bureau of Labor Statistics, “Databases, Tables & Calculators by Subject: State and Area Employment, Hours, and Earnings,” accessed Jan. 3, 2023, https://data.bls.gov/timeseries/SMU42979610000000001?amp%253bdata_tool=XGtable&output_view=data&include_graphs=true.
2. Ibid.
3. Kastle Systems, “Kastle Back to Work Barometer,” https://www.kastle.com/safety-wellness/getting-america-back-to-work/. For the Philadelphia area, the website shows only the two most recent weeks.
4. Center City District and Central Philadelphia Development Corp., “Center City Philadelphia Retail” (November 2022), https://www.centercityphila.org/research-reports/center-city-philadelphia-retail-november-2022.
5. SEPTA, “Passenger Revenue and Ridership: December 2022” (2023), https://planning.septa.org/wp-content/uploads/2023/01/RRDec22.pdf.
6. City of Philadelphia, Office of the Mayor, “City Releases Updated Projected Fund Balance,” news release, Oct. 28, 2022, https://www.phila.gov/2022-10-28-city-releases-updated-projected-fund-balance/.
7. Wage tax growth was from $2.077 billion in fiscal 2019 to $2.206 billion in fiscal 2022. For fiscal 2022 numbers, see City of Philadelphia, “Quarterly City Managers Report for the Period Ending September 30, 2022,” (2022): Page 5, Table R-2, https://www.phila.gov/media/20221117161849/Quarterly-City-Managers-Report-Septermber-30-2022.pdf; City of Philadelphia, “Quarterly City Managers Report for the Period Ending June 30, 2022,” (2022): Page 5, Table R-2, https://www.phila.gov/media/20220818093154/Quarterly-City-Managers-Report-June-30-2022-1.pdf.
8. City of Philadelphia, “Quarterly City Managers Report for the Period Ending June 30, 2022”; City of Philadelphia, “Quarterly City Managers Report for the Period Ending September 30, 2022.”
9. Pennsylvania Intergovernmental Cooperation Authority, “Monthly Tax Revenue Update, City of Philadelphia: September 2022” (2022), https://www.picapa.org/wp-content/uploads/2022/10/Monthly-Tax-Update-September-FY2023-FINAL-.pdf.
10. Ibid.
11. U.S. Bureau of Labor Statistics, “Economy at a Glance: Philadelphia City/County, PA,” https://www.bls.gov/eag/eag.pa_philadelphia_co.htm.
12. As of November 2022, the number of people in the labor force nationally was roughly 164.5 million, almost exactly what it had been three years earlier. See Federal Reserve Bank of St. Louis, “FRED Economic Data, Civilian Labor Force Level,” last modified Dec. 2, 2022, https://fred.stlouisfed.org/series/CLF16OV.
13. Drexel University, Lindy Institute for Urban Innovation, “Philadelphia’s Housing Market Continues to Decelerate in Q4,” Jan. 26, 2023, https://drexel.edu/~/media/Files/lindyinstitute/HousingReports/2022_Phila_HousingReport/2022Q4_MarketCommentary1.ashx?la=en.
14. J. Blumgart and R.W. Briggs, “Housing Permitting Cratered in 2022 After a Surge Last Year. Here’s What Happened,” The Philadelphia Inquirer, Dec. 7, 2022, https://www.inquirer.com/real-estate/housing/housing-development-permits-abatement-philadelphia-decline-20221207.html.
15. U.S. Census Bureau, “Building Permits Survey” (2022), https://www2.census.gov/econ/bps/County/co2212y.txt.
16. In the second quarter of 2019, median earnings for professional and business services were $58,700; for leisure and hospitality, they were $21,100. See The Pew Charitable Trusts, “How the Pandemic Has Affected Philadelphia’s Economy and Jobs” (2022), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2022/02/how-the-pandemic-has-affected-philadelphias-economy-and-jobs.
17. The Pew Charitable Trusts, “How Future Employment Patterns Could Put Philadelphia’s Operating Budget at Risk” (2022), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2022/05/how-future-employment-patterns-could-put-philadelphias-operating-budget-at-risk.
18. Government of the District of Columbia, Office of the Chief Financial Officer, “Tax Rates and Tax Burdens in the District of Columbia—A Nationwide Comparison” (2021), https://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/2019%2051City%20Study_Final.pdf.