Government and the Slow Jobs “Recovery”

Government finally starts to get out of the way of recovery. In an earlier post today on the good news of the January 2012 employment report, I observed that one of the major factors resulting in an improved (but not good enough) jobs report was that government employment numbers stopped dragging down the total.  I wanted to briefly expand on that idea here.

First, let’s make no mistake the “recovery” from this last recession has been very, very weak.  Private sector growth has been anemic at best. In employment, the recovery has largely been missing in action.  Today, 31 months after the supposed end of the recession, we have only recovered 1/3 of the jobs we lost during the 19 months of recession. As I’ve mentioned before, we are well on our way to a lost decade or more before we regain full employment.  A huge part of the weak recovery has been slow and at times negative growth in private sector employment.

But a bigger problem has been government.  Government has a three-fold impact on employment during a recovery.  Government spending by itself will create employment in the private sector.  For example, if the government chooses to react to a recession and high cyclical unemployment by increasing it’s spending it can create new private sector employment. This would be a classical stimulus program.  The government could embark on highway, bridge, or school construction.  The spending with construction contractors causes those contractors to hire employees. That’s direct private sector employment through government spending.  As long as there are significant unemployed resources (workers), such government spending will increase employment.  Arguments about crowding out do not apply when large unemployed resources exist.

The increased government spending then has a second effect, a “multiplier” effect.  The multiplier effect reflects the idea that workers who got jobs in the initial round of spending themselves spend their incomes and create more demand for more goods. This increased demand for goods results in even more employment.  In other words, the construction workers hired to build the new bridges or schools spend their paychecks.  The firms selling those workers goods then have to hire in order to produce the goods/services the construction workers want.  The exact size of the multiplier effect is uncertain and subject to dispute depending on the econometric methods used to measure it.  However, it’s clear that as long there were substantial unemployed resources to begin with, there is a positive multiplier effect on private employment from increased government spending.

But what I want to draw attention to today is direct employment effect of government.  One of the greatest reasons why we have had a very slow employment recovery is because government in the U.S. has been aggressively cutting jobs for the last 2-3 years. Conservative critics of government have been partially right. Government has been part of the problem – but not in the way they think.  Let’s look at total government employment in recent years:

The data series can be a bit tough to read because government employment has a very seasonal pattern to it.  That’s shows up by the regular up-and-down pattern each year.  Let’s focus on the trend, smoothing out the ups-and-downs. There’s four patterns. Government employment was essentially flat in 2002 and 2003.  Then a period of employment growth in government began running form 2004 through early 2008.  During the recession itself government employment was essentially flat.  Since 2009, though, government employment has been declining.  Cutting government employment is contractionary.  It directly reduces retail demand for goods and services by reducing the incomes of what were formerly government workers.

The pattern is a little clearer if we look at the data in a slightly different way.  The following graph, courtesy of Menzie Chinn at Econbrowser.com, shows the a smoothed trend.  It does this by plotting the 12-month change in government employment (000’s of jobs) by month.

While private employment continues to grow, government employment continues to fall; the decline is most pronounced at the state and local level (Wisconsin is a good example of the contractionary impact of such measures [1] [2]). However, civilian Federal government employment is also declining.

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Figure 3: Twelve month change in government local employment (blue), in state employment (red), and government employment ex.-temporary Census workers (geen), 000’s, seasonally adjusted. NBER defined recession dates shaded gray. Source: BLS via FRED, NBER and 

One thing I particularly like about this graph is that it shows the relative contribution of federal, state, and local governments. What this graph shows is that before the recession (the grey zone), government was net hiring approximately 250,000 additional jobs per year. Of that, most was at the local level and some at the state. Very little was federal hiring.

Since the end of the recession in June 2009, government has been firing more workers than it hires.  It has been reducing employment.  The federal government, contrary to popular belief, began shrinking (in employment terms).  State governments were largely able to hold the line on employment until early 2011.  Then state governments began reducing employment in rapidly increasing numbers.  But the big impact again came from local governments.  For the last 30 months, they have been laying off large numbers of workers. The reductions have slowed in 2011, but they are still cutting workers at nearly the same rate that they added them in 2007 – hundreds of thousands of lost jobs each year.

There is a temptation among politicians and commenters to think of government employees as representing largely just some bureaucrats mindlessly pushing paper in large bland office buildings.  That is not true.  At the federal level, most federal government employees are either soldiers or part of some security forces (TSA, FBI, ICE, etc).  At the local level, the vast majority of local government employees are police, fire and emergency workers, and teachers. Reductions in local government employment directly translate into fewer services and less education for children.

Why are state and local governments cutting employment?  Simple.  It’s reduced taxes combined with balanced budget requirements.  State and local governments, unlike a sovereign national government, must balance their budgets.  They are budget constrained.  The recession and weak recovery have hit income and sales taxes hard.  Even more significant is that the collapse of home prices a few years ago has translated into lower property tax collections.  Either way, state and local governments have been pinched.  The response has been to reduce government employment – fire police, firefighters, and teachers.

Paul Krugman notes the how this reduction in state and local government revenue has translated into reduced spending, which in turn has translated into lower employment.  Despite the federal government embarking on a stimulus spending program in early 2009, a program which is over and done with now, it was not large enough to offset the reduction in state and local spending.

if you look at what’s being cut, it’s heavily focused on investment:

That is, we’re sacrificing the future as well as the present. Oh, and the cuts that aren’t falling on investment in physical capital are largely falling on human capital, that is, education.

It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.

What an utter disaster.

On this point, I have to agree with Paul.  Unless we reverse course and do it strongly, we are flirting with a long-term disaster.  We are under-investing in our future.

Where Are or Were The Jobs?

With the all the alleged concern in Washington now from both parties about job creation, there’s something that’s missing in much of the debate: facts.  So let’s take a look at some.  I really like graphics like the one below.  They’re complex and take quite some time to read and fully absorb what’s there, but they pack a lot of information into a small space.  They’re info-dense.

We hear from the left a lot of talk about “good” vs. “bad” jobs.  Often what they are referring to is the relative wage level of the jobs.  In general, manufacturing and government jobs are “good” because they tend to have slightly higher than average wages*.  Education and health services jobs are a mixed bag with a lot of variation.  Doctors, nurses, and admins do very well.  Home health aides and assisted living workers not so much.  Teachers are either good or bad depending on the state. Leisure and hospitality are generally panned as below-average.

From the right we hear claims that heavily unionized sectors like motor vehicles, parts and manufacturing are holding down growth and killing jobs.  We also hear political conservatives claiming that excessive growth of the government sector has somehow prevented the private sector from adding jobs.

We also hear from the left that it’s lack of demand that is keeping unemployment high.  The right like to claim the unemployment is structural – we have the wrong workforce with the wrong skills.

But what’s really happened?  How have the different policies of Bush and Obama (to the degree they’re different – they aren’t as different as some think) affected the employment picture?  Let’s look a this graph from David Altig, Senior VP at the Atlanta Federal Reserve Bank as posted at macroblog.  It helps to click and enlarge the graph in a new window/tab.

Click to Enlarge

First, let’s examine how the graph is structured.  As always, it’s important to make sure we understand a graph’s axes first.  Horizontally, we have the average monthly change in employment in percentage between Dec. 2001 and Oct. 2007.  This period covers all of the non-recession portion of the G.W. Bush administration.  Industries to the reader’s right grew strongly and thrived under the Bush administration’s policies.  Industries to the reader’s left shrunk. No growth is the zero or mid-line. Next, the vertical axis shows a similar measure, average monthly percent increase in employment, but it’s for the period of July 2009 through Aug. 2011.  This is the non-recessionary months of the Obama administration.  Industries located high up grew under the Obama recovery. Industries low on the scale shrunk and cut jobs during Obama’s recovery.  There’s no tricks here of cherry-picking time periods – both axes cover only the “recovery” portion of each president’s respective time in office.

So looking overall, we have the four quadrants.  The upper right shows industries that have added jobs under both presidents’ recoveries. The lower left are industries that have been cutting jobs under both presidents. Upper left would be winners under Obama but not Bush. Lower right are those sectors that have been cutting employment under Obama but were big growth sectors under Bush.  Finally, the size of each bubble indicates the relative importance of the industry in terms of jobs.

So what can we conclude?  First there are few items that aren’t so surprising.

  • Under Bush, a lot of the employment growth involved construction and financial activities.  Not surprising. This is the Wall Street driven housing and mortgage bubble. Frankly we don’t need that big of construction sector, at least not if it’s focused on housing as it was.  We have too much housing already.  We do have needs for more construction of infrastructure and to the degree that housing construction workers are either in the wrong location or don’t have the skills for infrastructure construction (I don’t know – it’s not my expertise), then the low employment growth under Obama here represents a  structural unemployment problem.  But notice that industry isn’t that big.  Also, we probably don’t want to have Financial Activities come back as big as they were before.
  • The big winners under Bush were Education and Health Services and Professional/Business Services.  In education and health, health dominated.  Not surprising, health care spending has been growing and the population is becoming older and/or sicker.   The growth in professional/business services is probably not really very productive stuff.  A very, very large part of the increase in that area was the huge increase in security personnel and related-security contracting that has arisen from an increasing paranoid insecure society since 9/11.
But there are some items here which are surprising, or at least surprising if you’re believe the normal political rhetoric.
  • First, it was Bush who grew government employment.  Under Obama, government employment has been negative since the recession ended. Shrinking government employment is clearly the single largest drag on the economy. That’s not ideology or belief talking. It’s facts and data.
  • Second, the big reason why the Bush recovery was such a slow recovery for employment, considering the 2001 recession was mild, is that throughout the Bush administration manufacturing shrunk dramatically.  This was the result of globalization policies that provided incentives for U.S. manufacturing firms to locate production overseas or to buy from overseas manufacturers instead of making their own.  Fast growing companies like Apple and other computer companies prefer to design it themselves but to contract with foreign firms for manufacture. Obama has not turned the corner on manufacturing employment, but he has stopped the bleeding. For the U.S. to recover, this sector needs to have positive growth.  Given it’s size, it’s not necessary to rise to the top in percentage terms, but it needs to be positive which it isn’t now.
  • “Manufacturing” does not mean “autos”.  Manufacturing is much worse than Motor Vehicles and Parts.  Too often when politicians talk “manufacturing” they conjure a stereotypical image of auto manufacturing.  In reality, motor vehicles and parts, while not being a source of growth under either, has essentially held it’s own as neutral.
  • The Information industry is the one industry that has shrunk under both recoveries, although it’s not that large.  This largely represents true sectoral, innovation-driven change as the World Wide Web changes information technology.
Finally, let’s see what this graph says about the controversy over is unemployment structural (in which case we need training and incentives to work) or is it a lack of aggregate demand (in which case we need more stimulus spending).  I think the graph is relatively clear in this regard.  We have three very, very large sectors where there is no increase in employment under the current recovery: Manufacturing, Retail Trade, and Wholesale Trade.  These are the three that represent basic total spending.  Retail and wholesale trade are driven by total consumer spending. Period. Retail and wholesale also are very flexible without widespread specialized skills requirements.  When demand exists, they hire. When demand doesn’t exist they don’t hire and may layoff.  To me, the data indicates it’s clearly a lack of demand story that is hurting jobs in this so-called recovery. Reducing government employment right now, like this graph shows is being done, has repercussions in stopping employment growth in retail, wholesale, and manufacturing.