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

Posted July 6, 2012 
by Josh Bivens and Heidi Shierholz

Economic Policy Institute 

[Mod: Please go to the link to see the significant charts and graphs]

http://www.epi.org/blog/years-recovery-state-local-austerity-hurt/

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.

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