Three years into recovery, just how much has state and local austerity hurt job growth?

This morning’s release of the June 2012 employment situation report by the Bureau of Labor Statistics marked three years since the official start of the recovery from the Great Recession in June 2009.  That makes this a useful moment to assess how this recovery stacks up against earlier ones, and to identify obvious policy measures that could ameliorate glaring weaknesses in the current recovery.

The figure below shows that while jobs fell much further and faster during the Great Recession than in the previous two recessions (marked by the lines to the left of the zero point on the x-axis), job growth in the current recovery is similar to job growth by this point in the previous two recoveries, just slightly lagging job growth following the recession of 1990-91 and outpacing job growth following the recovery after the 2001 recession.1

Public Fig A

Of course, three years into recovery from those recessions, unemployment was not stuck at levels anywhere near as high as today’s 8.2 percent. But it is important to note that it is the historic length and severity of the Great Recession that explains why the economy is so much worse three years into the current recovery than it was three years into the recoveries of the early 1990s and 2000s, and that there is not something atypically weak about the current recovery relative to those earlier ones.2

Further, the most glaring weakness in the current recovery relative to previous ones is the unprecedented public-sector job loss seen over the last three years. The figure below shows that private sector job growth in the current recovery is close to that of the recovery following the early 1990s recession and is substantially stronger than the recovery following the early 2000s recession.

Yet, as the figure below shows, the public sector has seen massive job loss in the current recovery—largely due to budget cuts at the state and local level — which represents a serious drag that was not weighing on earlier recoveries.

How many more jobs would we have if the public sector hadn’t been shedding jobs for the last three years? The simplest answer is that the public sector has shed 627,000 jobs since June 2009.  However, this raw job-loss figure understates the drag of public-sector employment relative to how the economy functions normally.

Over this same period, the overall population grew by 6.9 million. In June 2009 there were 7.3 public-sector workers for every 100 people in the U.S.; to keep that ratio constant given population growth, the public sector should have added roughly 505,000 jobs in the last three years. This means that, relative to a much more economically relevant trend, the public sector is now down more than 1.1 million jobs. And even against this more-realistic trend, these public-sector losses are dominated by austerity at the state and local level, with federal employment contributing only around 6 percent of this entire gap.

It should be noted that this counter-factual of 1.1 million additional public sector jobs is a perfectly reasonable benchmark. Before the Great Recession, the number of public-sector workers per 100 people had averaged right around 7.3 since the late 1980s. In other words, having 1.1 million more public-sector workers, which would put us back at 7.3 public-sector workers per 100 people, would simply restore our economy to a normal level of government employment. Further, if the public sector had simply grown in this recovery at the average rate of the last two recoveries, the labor market would currently have 1.2 million more public-sector jobs, so public-sector job growth of this pace is clearly in line with past history.

However, even that 1.1 million public-sector jobs gap leaves out an important component: public-sector job cuts also cause job loss in the private sector, for a couple of reasons. First, public-sector workers need to use inputs into their work that are sourced by the private sector. Firefighters need trucks and hoses, police officers need cars and radios, and teachers need books and desks. When public-sector jobs are lost, it stands to reason that the inputs into these jobs will fall as well, and indeed research shows that for every public-sector job lost, roughly 0.43 supplier jobs are lost.3

Second, the economic “multiplier” of state and local spending (not including transfer payments) is large – around 1.24.4This means that for every dollar cut in salary and supplies of public-sector workers, another $0.24 is lost in purchasing power throughout the rest of the economy. Teachers and firefighters stop going to restaurants and buying cars if they’re laid off, which reduces demand for waitstaff and autoworkers and so on. Add these two influences together (supplier jobs and jobs supported by this multiplier impact) and roughly 0.67 private sector jobs are lost for every public sector job cut.   This means that the public sector being down 1.1 million jobs has likely cost the private sector 751,000 jobs (1.1 million*0.67).

Further, it should be noted that this 0.67 figure only accounts for private-sector job loss that is due to direct public-sector job loss. But state and local austerity has components besides cutting direct jobs; when these governments cut back, they often don’t just cut jobs, they also cut transfer payments (generally safety-net programs like Medicaid and unemployment insurance which are not associated with much direct public-sector employment, but instead transfer money straight to distressed households).

A rough estimate of this additional impact of jobs lost due to cutbacks in transfer spending can be constructed using the fact that that transfer payments constitute roughly a quarter of state and local spending, and tend to have slightly higher economic “multipliers” than the direct state and local spending. If we assume that the labor intensity of jobs supported by these transfer payments are the same as that spending undertaken directly by states, this implies that the 1.1 million in state and local job losses is likely matched by 275,000 jobs lost due to reduced transfers as well. Applying a standard multiplier to this number (the 1.52 multiplier for unemployment insurance benefits, for example), yields another 412,500 jobs likely lost as states cut back on transfer payments as well as direct jobs.

This estimate of reduced transfers actually is conservative—the gap between transfer spending at this point following a recession’s trough in 2012 is actually at least as large compared to the 1990s and early 2000s recoveries as the gap between direct government consumption spending in those periods.

Putting our four components together—the jobs lost in the public sector, the jobs the public sector should have gained just to keep up with population growth, the jobs lost in the private sector due to direct public-sector job declines, and the jobs likely lost when state spending cutbacks on transfer programs were made—we find that if it weren’t for state and local austerity, the labor market would have 2.3 million more jobs today; half of these jobs would be in the private sector.

This is more than one-fifth of our 9.8 million “jobs gap,” the number of jobs needed to bring the economy back to full employment. If all of these 2.3 million jobs had been filled, it is likely that the unemployment rate would now be between 6.7 percent and 7.5 percent instead of 8.2 percent, and the labor force participation rate (which has dropped dramatically in recent years due to weak job opportunities) would be up to three-tenths of a percentage point higher than it is.

The public sector continues to shed jobs, causing job loss throughout the economy and creating an enormous drag on the recovery.  To reduce these job losses and the suffering for American families they cause, Congress should provide aid to state and local governments to keep austerity in that sector from continuing to weigh down the recovery.


Endnotes

1. All three of the last economic recoveries—following the recessions of the early 1990s, early 2000s, and the current one—have seen much slower progress in making back employment losses experienced during the preceding recession than was seen during the business cycles between 1947 and 1989.

2. It should be noted that measuring economic performance relative to a business-cycle trough (i.e., starting only at the beginning of the official recovery) is non-standard, and that for most economic debates it is more illuminating to measure performance relative to the previous business cycle peak. But nobody denies that the employment losses caused by the Great Recession were historically large and long lasting, or that most of them occurred before the current group of macroeconomic policymakers was in place. What has become a contested political point is whether or not economic policy during the official recovery (which largely overlaps, not just coincidentally, with the Obama administration) has been uniquely detrimental to job growth or not. Given this (admittedly less-illuminating) political debate, we do think measuring performance from the trough is useful, particularly so long as we keep the extraordinarily large employment losses from the recession phase visible throughout.

3. See Dire States by Ethan Pollack, 2009. Table 1 shows that of jobs lost when state and local governments cut spending, roughly 30 percent are lost in supplier industries.  This means that for every 70 state and local jobs lost, roughly 30 jobs are lost in supplier industries.  In other words, for every one state or local job lost, roughly 0.43 (=30/70) supplier jobs are lost.

4. See Table 3 of An Analysis of the Obama Jobs Plan by Mark Zandi, 2011 for recent estimates of fiscal stimulus multipliers. General aid to state governments has a multiplier of 1.31.  We calculate that the multiplier for direct government spending (i.e., excluding the effect of government transfers) is 1.24 by assuming that a quarter of state spending is transfer payments and that transfer payments have the multiplier 1.52, which is the multiplier for Extending Unemployment Insurance Benefits.


  • http://www.facebook.com/clarence.swinney Clarence Swinney

    Leadership like this is needed

    CLINTON PRAISE-WITH PLEASURE
    GDP–rose from 6300 to 11,600
    NATIONAL INCOME-5,000 to 8,000 Billion–took 20 years to grow 2500B before Clinton
    JOBS CREATED–over 22 million–record by far
    AVERAGE WEEKLY EARNINGS–$360 to $478
    AVERAGE WEEKLY HOURS WORKED–never hit 35.0–hit that  mark 4 times in 80′s
    UNEMPLOYMENT–from 7.2% down down down to 3.9%
    WELFARE TO WORK—11,533,710 on federal roll in 1996 and 3,880,321 in 2007.
    MINIMUM WAGE–$4.25 to $5.15
    MINORITIES–did exceedingly well
    HOME OWNERSHIP–hit all time high
    DEFICIT–290 Billion to whoopee a SURPLUS
    DEBT—-+28%—300% increase over prior12 years
    FEDERAL SPENDING–+28%—80% under Reagan- who da true conservative?
    DOW JONES AVERAGE–3,500 to 11,800  all it’s history to get to 3500 and Clinton zooms it
    NASDAQ–700 to 5,000—all of it’s history to get to 700 and Clinton zooms it
    VALUES INDEXES– almost all bad went down–good went up in zoom zoom zoom
    FOREIGN AFFAIRS–Peace on Earth good will toward each other—Mark of a true Christian–what has Bush done to Peace on Earth?
    POPULARITY—highest poll ratings  in history during peacetime in  AFRICA, ASIA AND EUROPE even 98.5% in Moscow–left office with highest gallup rating since it was started in 1920′s.
    STAND UP FOR JUSTICE–evil conservatives spent $110,000,000 on hearings and investigations and caught— ONE— very evil man who took a few plane rides to events.
    BOW YOUR HEADS–Thank you God for sending us a man of Bill Clinton’s character, intelligence, knowledge of governance, ability to face up to crises without whimpering and a great leader of the world.
    THANK YOU GOD FOR THE GOOD TIMES THE CLINTON YEARS.

    • http://profile.yahoo.com/DEDCEADME6MG4QN5MR3K5JBS4M Jon

      Amen Bro’. Clinton was the best. A real leader.

      • Matt

        Rwanda and Bosnia were not peaceful. Clinton had the good fortune of a Tech bubble that burst in 2001. Clinton also slashed many defense jobs. Those people did not do well. We remember Clinton as if he actually did anything. I remember him courting Monica Lewinsky during the government shutdown, instead of being presidential.

  • J_pottenger

    Thanks for this helpful and persuasive analysis. 

    I wonder, though, if the housing trough isn’t equally (if not more) of a factor in the slow recovery.  Construction, in particular, has always been a highly cyclical sector, and the painful, precipitous crash in the  housing sector has surely held back the rest of the economy in a pretty profound fashion.

    How would you compare that factor to the public employment problems you have so meticulously analyzed here?

  • Azleader

    It seem to me that all the same secondary benefits to the economy would be realized by stimulating private-sector job growth instead of public-sector.

    The public-sector is funded by tax revenues which go up or down due to economic fluctuations and population growth. Any increase in tax revenues generated by private-sector growth can be used to hire back lost public-sector workers as the economy recovers.

    Shouldn’t we concentrate on private-sector job growth instead?

    • useless fool

      I might be a useless old fool. But really Azleader you made me crackle and  chuckle with your talking points. Please read the post again and get off the Fox propaganda.  You and I both know that the private sector is being spoiled rotten in the USA.
      - Lowest tax rates in generations.
      - Lowest interest rates in generations.
      - Private sector has high corporate profits while wages have been stagnant.
      - Profitable companies continue to layoff workers (to game stock prices).

      Supply side econ does not work; the truth is that we lack demand in the USA.  Austerity is a penny-wise and a pound foolish policy; one we simply cannot afford to indulge since the opportunity cost are too high.  Shedding public sector workers decreases demand, and collapses the national economy.

      If you want to Profit-ize the public sector jobs by swapping them with the private sector then you end up limiting access to basic services.
      The US citizen loses access to basic services (firefighters, and emergency service) with increased fees and higher prices since you have to monetized services to payoff investors.

      Also the stake-holder (the end boss) shifts from the US public to an elite few (the investor) and that is not a democracy.  Please educate yourself and at least read the “Preamble to the United States Constitution”; the simple fact is that the private sector and free market cannot replace the US government.

    • http://profile.yahoo.com/DEDCEADME6MG4QN5MR3K5JBS4M Jon

      So what would stimulate private sector job growth? People buying stuff. You talk like all you have to do to stimulate private job growth is like, by just saying it, it will happen….. simply by saying it. When people have no money, they can’t buy things. They can’t buy things, the economy slows down. I hope you understand economics, it is quite simple in its base principal. The more people spend, the more the economy grows. It really doesn’t matter where the money comes from. Remember, during the Reagan administration, Dick Cheney said defecits don’t matter. Not that I would trust him as an economic advisor but he did say it when Reagan, (the great republican God) was liberally spending his way out of a recession. There are those on the “supply” side that say taxes on the wealthy should be lowered further. Well, taxes have been lowered on the wealthiest for 30 years. In that time the weath they have accumilated has not ”trickled” down to the middle class. It has only served to make them wealthier all the while the middle class’ income has remained flat for 30 years. By looking at a simple graph, it shows where the middle income’s wealth has been going, up the finacial ladder to the wealthy. So, while federal income taxes on the middle class are at the lowest since 1951, in fact, most of the taxes that have supplied the local and state governments with finances has come from the middle class with growing fees (AS OPPOSED TO “TAXES”) as well as other finacial machinations to make it seem like they are not raising taxes but in fact are increasing them.  My auto taxes have gone up 100% in the last few years and we have a republican “no new taxes” state and local government.  Add to thast a slew of new “fees” all passed by our republican, “no new taxes” politicians.

      As has been experienced in all recessions , government spending to stimulate the economy has been the one thing that has helped the economy improve, even under the great republican president and God  Ronald Reagan. George H.W. and George W. Bush used government spending as a stimulus as well. So much for your right wing conservative politicians. In fact, the republicans ahve been far and away the finacial spenders in far excess of even our current president.  As has happened ever since the great depression, government spending has allowed the economy to keep going and improve by putting cash in peoples pockets to spend and by doing that, into the economy. Every dollar that is spent generates another 2/3′s of a dollar in economic growth down the money chain.   

      So where does the elusive private sector job growth come from if no one is spending money? Like I said, no buisness, no hiring and no growth. Maybe the rich can spend some more to get things going, eh? 

    • useless fool

      I might be a useless old fool. But really Azleader get off the  talking points. Please reread this post and get off the Fox propaganda.  WE ALL know that the private sector is being spoiled rotten in the USA.
      - Lowest tax rates and Lowest interest rates in generations.
      - Private sector has high corporate profits while wages have been stagnant.
      - Profitable companies continue to layoff workers (to game stock prices).

      Supply side econ does not work; the truth is that we lack demand in the USA.  Austerity is a penny-wise and a pound foolish policy; one we simply cannot afford to indulge, the opportunity cost are too high.

      Shedding public sector workers decreases demand, and collapses the economy.

      If you want to Profit-ize the public sector jobs by swapping them with the private sector then you end up limiting access to services.The US citizen loses access to services with increased fees and higher prices since you have to monetized services to payoff investors.The stake-holder (the end boss) shifts from the US public to an elite few (the investor) that is not democracy.Please read the “Preamble to the United States Constitution”; the simple fact is that the private sector and markets cannot replace the US government.

  • SMIA1948

    Ah, the Keynesian Superstition in full bloom.  

    So, the “multiplier” for extending unemployment benefits is 1.52?  Here is the multiplier that you need to calculate.  Assume that we decide to increase unemployment benefits by $50 billion.  The first thing that would happen is that the Treasury would go into the markets and sell $50 billion in bonds.  Now, assume that we just stop there, and we don’t send out the unemployment checks. What is the “multiplier” of taking the $50 billion out of the economy?

    Obviously, the multiplier of selling the bonds will always cancel out the multiplier of spending the money.  This is why Keynesianism always fails in practice–it never delivers the results promised at the time.

    • TheGlobalizer

      Multiplier in, multiplier out, with a friction coefficient arising from the government shuffling dollars to and fro.

  • KentCrawford

    Nonsense!

    First, a study done in France a few years ago demonstrated that each government job cost the private sector 1.5 jobs.  So putting two people to work for the government means putting three people in the private sector out of work.

    Second, state and local governments are limited to what they can afford, as in what their tax base can afford. 

    Third, the Federal government ignores the fiscal limits that state and local governments must live with; they can just print or borrow money.  But therein lies the economic burden.  By printing money, they dilute the value of the currency, which is inflationary and just increases the burdens of the private sector; there is more money, but it does not buy as much.  Raising taxes and/or borrowing the money takes that asset out of the private sector, decreasing its ability to provide jobs, goods and services.

    And finally, government workers, and government in general, do not produce anything.  They are a burden on the economy.  Increasing that burden is counter-productive.

    In conclusion, enhancing the public sector is not good for the economy.  It is a fallacy akin to government being able to borrow and spend our way to prosperity.  And if you do not understand that, than you need to study the economics of the Soviet Union!

    • useless fool

      @KentCrawford:disqus are you delusional?  Did you study any US history or basic civics?  You clearly DO NOT hold with American values and the traditions of our founding fathers.  Clearest example: Neo-cons would stand against our 1st president and 1st congress on the paying off of our war dept (read about 
      Whiskey Insurrection).   Most Neo-cons resent paying any dues to the US and would not invest a penny into the welfare of this country; which is just sad.  But the fact is that the private sector has been spoiled rotten; and supply-side is a pathetic failure.If you want to Profit-ize the public sector jobs by swapping them with the private sector job then you will end up limiting access to services.The average US citizen will loses access to service with increased fees and higher prices since you have to monetized services to payoff investors.  Simply put if you are privileged with access then you will be pampered but the rest of us will not get our money’s worth.Also the stake-holders (the end boss) shifts from the US public to an elite few (the investor); that is not democracy, that is a caste system which would be an insult to the founding fathers.Please read the “Preamble to the United States Constitution”; the private sector and markets fail to uphold the ideals of our founders (establish justice or provide for the common welfare) so they cannot replace the public sector.

      • KentCrawford

         I believe you will find that the Preamble to the Constitution says “…PROVIDE for the common defence, PROMOTE the GENERAL welfare…” [emphasis mine]  Promoting and providing are two wholly different things. 

        The term “delusional” more aptly applies to those who espouse the “beneficial” power of government.  And the best example of this fallacious reasoning is Keynesian theories of economics.  Liberals/Progressives adhere to those theories because they sound so reasonable, empower government and glorify the public sector.  However, the historical record is quite clear; those theories do not work in reality!  Never have and cannot!  What is the definition of insanity?  Doing the same thing over and over expecting a different result…

        Liberals/Progressives believe in “progressively” growing the central government and expanding its power and control, as only a Big Government can guarantee “fairness” and equality.  If you take this desire to its logical conclusion, you wind up with something akin to the Soviet Union, which certainly provided the fairness and equality of mass poverty, excluding of course the Party elites.  The ‘Dictatorship of the Proletariat’ inevitably becomes the tyranny of the political class.  I believe that is a fate worth avoiding.

        So too did the Founding Fathers, though they could not imagine the Soviet Union, they were certainly were familiar with the tyranny of the elites.  This leads us back to the Constitution, and specifically the 10th Amendment, which was crafted to limit the expansion of the central government, and make the various States the democracies. 

        In short, I believe the Constitution means what it says.  If it can be twisted and ignored in the manner it has in the last 90 years or so, than we have no Constitution, and have no alternative but to rely on the mercy and good intentions of Big Government.

        Hence, the proposal for the central government to expend assets to beef up the state and local governments is not only bad policy but stupid economics.

        • useless fool

          You got me; it is a clear WIN; you have Bested this sad old man. I am getting into my dotage and late at night I swapped two words.  While you the young whippersnapper still missed the entire spirit of the Preamble.
          Over these long decades where was your mystic market force that establishes Justice over bribery, corruption and graft?  Why in the last few decades of supply-side policies have they been such pathetic failures by every measure?  Really I will trust civics and my fellow citizens (warts and all) over your Wall Street idolatry.The US government is we the people; if you are scared of government doesn’t the mean you are really scared of your fellow citizens.  Personally I think Neo-con are just so spoiled; they play the game of life on the lowest difficulty level.  But when the adults in the room don’t indulge the latest flimflam they have fits.  Neo-cons time and again talk of insurrection, secession or gov shuts down anytime they feel imposed on. O the theatrics when really all we are asking is that you grow up and take some adult responsibility; to stop being such a bunch of useless freeloaders.  For example what is so offensive about raising a Patriot tax where the wealthy help pay off the war debts; like we did after every other war?  Also why haven’t you resolved a single social issue in generations?But if you still want to whine and moan about taxes, put your money where you mouth is.  Post your person budget and tax returns and prove with the numbers that you have such an unfair burden.Please stop with your Cold war hysterics: it is embarrassing. We keep checking under your bed for the ghost of Stalin, but there is nothing there. Your night terrors about the Red Commies really should be treated.

          When in the modern era has the10th amendment prevented the Neo-cons from imposing BIG brother measures over my personal liberties.  That argument just doesn’t hold water.
          But keep those useless talking points coming.

          • KentCrawford

             Hardly a “young whippersnapper” but rather a retired History professor.

            We must agree to disagree.  I will never support Big Government, while you seem to have faith in it.

          • http://twitter.com/BetNot Bet Not

            Tenured, Kent?

          • http://twitter.com/BetNot Bet Not

            Tenured, Kent?

  • http://www.facebook.com/profile.php?id=1528940071 Fiona Mackenzie

    Republicans are making good on the threat to cause the U.S. economy to fail, in retaliation for electing Obama and to assure he won’t be re-elected.  When he is gone, we’ll all (they think) settle quietly into our places in the sub-poverty work world.