The biggest downsizing of state and local government in modern history has proved to be a big drag on the U.S. economy since 2009 and a primary reason the four-year-long recovery is more sluggish than other recoveries since World War II, economists say.
While the private sector has generated 7.4 million jobs since the recession and is approaching its pre-recession levels of overall employment, government at the federal, state and local levels continues to shed jobs, diminishing the performance of the job market. Overall, federal, state and local governments have eliminated more than 750,000 jobs since the recession ended in June 2009, with no end in sight to the trend, according to figures from the Bureau of Labor Statistics.
The job losses and sluggish growth caused by the historic wave of fiscal austerity unleashed by the Great Recession promise to persist or worsen this fall as Congress debates another round of spending cuts.
Some analysts hoped that a recent revival in state revenue as a result of the reviving housing market and rising retail sales would enable state and local governments to start hiring again. But state and local governments appear to be keeping their budgets lean in light of big cuts in federal grants, which started this year under a round of across-the-board budget cuts and are expected to continue next year.
“For all the people discussing how bad the job market is, well, here’s one of your primary reasons,” said Cullen Roche, founder of Orcam Financial Group LLC. “If the government had done what it normally does and employed more people during the recovery, then the unemployment rate would be a lot lower, we’d be above our all-time highs in non-farm payrolls, and there’d be a lot less talk about food stamps and how miserable the recovery has been.”
Government job losses played a big role in downward revisions this month to the Labor Department’s job estimates for June and July. The revisions disappointed global markets when they were announced Sept. 6.
“The bulk of the downward revisions was driven by changes in public-sector payrolls, as government payrolls in June and July were revised down a net 38,000,” accounting for about half of the 74,000 fewer jobs reported by the department in its updated numbers, said Michael Gapen, an economist at Barclays Research.
“Sequestration is likely to have played some role in the heavier-than-normal revisions to government payrolls, and tempers somewhat the negative signal from the downward revisions” because it indicates the softness was in government rather than the much larger private sector, he added.
Mr. Gapen said the fact that the slowdown in job growth was concentrated in government is one reason the Federal Reserve on Wednesday is likely to announce a minor tapering of easing programs it launched a year ago, which had been aimed at accelerating job growth. Members of the Fed’s rate-setting committee are likely to conclude after a two-day meeting that there is little they can do to counter congressional efforts at fiscal austerity, while private job growth has remained strong enough to justify the eventual ending of the bond-buying programs, he said.
Mark J. Perry, an economics professor at the University of Michigan, said the historic downsizing of government nationwide, while desirable to small-government advocates, nevertheless has played an important role in holding back the recovery. He said the number of government layoffs has been a key factor behind growth averaging 2.2 percent since the recovery started in June 2009, the slowest of any postwar recovery.
“Most of the ongoing weakness in the U.S. labor market, the stubbornly high jobless rate and the disappointing rate of overall job creation can be traced to one major factor: the ongoing decreases in government jobs,” he said.
“The contraction of government jobs starting in 2009 is the largest contraction in public-sector employment since the 1945-1947 period following World War II, when government jobs contracted by 770,000 jobs,” he said. Moreover, government job losses are nearly twice as big as those seen in the 1981-1982 recession, the largest previous postwar recession, when 392,000 government jobs were slashed, he said.
The steady loss of government jobs since 2009 has cut the average rate of job growth from about 126,000 a month to 111,000 a month, Mr. Perry said.
The biggest job losses have been at the local level, where more than a half-million teachers, firefighters, librarians, policemen and other local public employees have lost their jobs in the past four years, he said. State employment also was hit hard with the loss of 184,000 jobs.
State and local government were depressed by the cratering of the housing market and loss of more than one-third in housing values since 2006. The unprecedented drop in property values cut deeply into property tax revenues, a major funding source for schools and other local priorities.
While some raised taxes to try to plug the big gaps in their budgets, most were forced to cut spending deeply to reflect the reality that property tax revenue would be much lower for years to come.
At the federal level, the U.S. Postal Service has slashed thousands of jobs in what appears to be a slow death spiral, but net federal job losses since 2009 have been comparatively small, at 36,000. Still, layoffs at the federal level are expected to continue or even accelerate as Republicans in Congress appear bent on chipping away at the bureaucracy by maintaining across-the-board spending cuts in defense and domestic programs next year.
Federal contractors have taken some of the brunt of federal cuts, laying off thousands of employees. Even so, the number of private-sector jobs created — the economy is averaging about 125,000 monthly — has been robust compared with the rate during the recovery from the recession in 2001, when 72,000 jobs were created on average each month, Mr. Perry said.
“We should recognize that this recovery is different” than anything seen in the postwar era because of the dramatically changed role of government, he said.
“Perhaps the significant downsizing of government at the state and local level is a positive development for the future growth of the U.S. economy, and one benefit of the Great Recession,” he said. “But we should also pay some attention to the fact that one of the reasons for the disappointing monthly employment reports is the persistent weakness in public-sector employment.”