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June 10, 2011

State and Local Job Cuts Offset Private Sector Gains

June 10, 2011

The Bureau of Labor Statistics May employment figures, released last week, show that nonfarm payroll employment is basically flat (up by just 54,000 jobs).  These numbers disappoint, since employment gains in the prior three months had averaged 220,000. However, it’s important to understand what’s behind the current stagnation in employment, as the private sector is still growing.

In May, 83,000 private sector jobs were created.  That uptick is smaller than it was in the prior three months (when it was almost 250,000) but still going in the right direction, though manufacturing and construction looked especially weak.

Private, State and Local Employment in the Current Recession

Private, state and local job losses

However, not as weak as state and local governments. Local governments shed 28,000 jobs last month and have lost 446,000 jobs since an employment peak in September 2008. State governments cut just 2,000 jobs but have shrunk by 98,000 since August 2008.

While the private sector has shed many more jobs (6.7 million or 6 percent below the peak employment level in January 2008 of 115.6 million), it’s on an upward swing. It has added 2 million jobs since February 2010.

In contrast, state and local employment kept growing at the beginning of the recession, thanks in part to the Federal stimulus program and pretty large rainy day funds.  However, after three tough years, state budgets are still below pre-recession levels and employment is falling.   There is also little evidence suggesting that things will be looking up for state and local employment in the next few years. More likely, local job numbers will keep falling as Federal stimulus aid ends, states keep cutting local aid and property tax revenues have started following house prices down.   While a recession’s effects often hit state and local government budgets and employment after the worst is over in the private sector as noted by Donald Boyd and Lucy Dadayan of the Rockefeller Institute last summer, the employment declines during this recession have been more dramatic than earlier downturns.  Local employment has fallen in only two of the past five recessions: this one and 1980. While jobs in both education and other parts of local government have been falling, the cuts in state employment have been in jobs other than education.  Non-education state employment is down 3.6 percent since the recession’s start and 4.3 percent from the employment peak.

State and especially local budget cuts translate into employment changes because they spend most of their general fund money on people rather than raw materials or buying things.   About half of local spending goes to wages and salaries (more if pensions and other benefits are included) so cuts in local spending mean either lower compensation or fewer people employed.   Not surprisingly, the places where public employment dropped the most are those where revenues have fallen the most (and where the recession’s toll was greatest). For example, between first quarter 2008 and first quarter 2010, Nevada, Michigan, Rhode Island, and Florida all experienced a decline of over 4 percent in local government employment and California, Arizona and Ohio experienced a 3 percent decline. Georgia, Vermont, Arizona, and Rhode Island experienced a 4 percent decline in state employment over the same period.

So there’s more than meets the eye in employment figures – in this case a troubled public sector that might be offsetting private sector job creation for the foreseeable future.  

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