Written by Gavin Kakol, GEI Associate
After each recession since 1990 the economy has recovered at a rate outpacing employment, but the difference between this recovery from the previous ones has been the continuous down-trend of public sector employment. The reduction of unemployment from its peak in October of 2009 (10.2%) to June 2012 (8.2%) has been mostly a result of private sector gains, whereas previous recessions have had a balanced recovery that included the public sector. While any growth is celebratory, the lack of employment in the public sector may be a dead weight to further economic recovery this time.
The June 2012 Bureau of Labor Statistics (BLS) report on employment marks three years since the great recession officially ended. From this report, comparisons can be drawn between The Great Recession and the recent recessions of 1990 and 2001. Overall, the current job growth is at pace with the two previous recoveries. Unlike past recoveries, the public sector is losing market share as the private sector makes gains. This has been analyzed by Heidi Shierholz and Josh Bivens of the Economic Policy Institute.
Between May and June unemployment stayed at 8.2 percent. The reason that this figure is as high as it is may be attributed to the loss of 627,000 public sector jobs over the last three years due to contractionary budget policies totaling $469 billion. Research shows that, for every public sector job lost, 0.43 private sector jobs follow because private suppliers loose business. To give an example, a reduction of firefighters in response to budget cuts lessons the need for new equipment such as trucks, hoses, and ladders and supplies such as clothing and food. In response, companies supplying these goods must in turn reduce their supply and lay-off workers. Presumably the missing firefighters are still eating so that may not be a total loss. But they may not be eating as well or spending as much money on food.
Escalating the problem, public sector employees have a multiplier affect of 1.24 on spending. For every dollar lost from their pockets, 24 cents of purchasing power is lost from the overall economy.
Another consideration is the ratio of 7.3 public sector jobs for every 100 private sector jobs that had been present from the late 1980s to start of the recession in 2007. To meet budgetary demands, state and local government did not factor in the 6.9 million person population increase. Now at 6.9 public workers for every 100 private employees, we face a shortfall of nearly 505,000 personnel.
Adding the multiplier affect ($ .24) to the supply affect (.43), and then multiplying by the combination of deficits (1,132,000) comes to roughly 758,000 employees out of the private sector. This figure added to estimates of jobs lost to reductions in transfer payments (275,000) and the overall employee deficit (1,132,000) comes to 2,165,000 employees who either lost jobs or were never hired as a result of budget reductions. Adding these employees to the workforce would have brought the unemployment rate down as low as 6.75 percent.
Note: The numbers summarized above are from the Shierholz and Bivens Economic Policy Institute report.
The negative results that accompanied austerity measures to the state budgets were anticipated before the end of the recession. The Economic Policy Institute’s Ethan Pollack noted in a 2009 briefing paper:
State and local governments have already begun adopting contractionary fiscal policies in response to budget gaps, but shortfalls will be much larger – indeed, they will be enormous because these shortfalls tend to grow two years after a recession, they will continue to drag on the economy at least through 2012
Unemployment figures from both the 1990 and 2001 recessions show that unemployment returned to its normal levels five years after the start of recession. In the five years since the recent recession, unemployment is still 3.6 percent higher than it was at the start. A likely explanation for the unusually high figures compared to previous recoveries is the length of the recession – 18 months compared to 8 months associated with the previous two.
One solution to speed up the recovery is to focus on the public sector. According to Heidi Shierholz and Josh Bivens of the Economic Policy Institute, in order to help ease the public sector drag on economic growth, congress needs to fund the local governments to stimulate employment.
- Dire States (Ethan Pollack, Economic Policy Institute, 19 November 2009)
- Three Years into Recovery, just how much has state and local austerity hurt job growth (Heidi Shierholz, Josh Bivens, The Economic Policy Institute, 6 July 2012)
- US Business Cycle Expansions and Contractions (the National Bereu of Economic Research, 10 July 2012)
- National Unemployment Update (National Conference of State Legislators, 6 July 2012)