Labor Pains: The Recovery of the U.S. Labor Market is about to be Pushed Back
The labor market recovery is more uncertain than past rebounds because government deficit-reduction programs will lead to layoffs and dampen future employment growth.
While the current debt ceiling debate offers different views on how much government spending will be cut and if tax increases will be in the package, deficit reduction means reductions in government services and layoffs of public sector employees. The National Bureau of Economic Research declared that the 2007-2008 Global Financial Crisis (GFC) ended in terms of declining Gross Domestic Product (GDP) in June 2009. In past recoveries, private and public sector employment have both risen to regain lost jobs from the recession. But in this recovery, large private sector (Fortune 500) companies are not increasing employment and small business employment growth is sluggish because needed financing is unavailable. This article explains how decreases in public sector employment will push back the recovery of the U.S. labor market even further. Practitioners planning for job recovery are advised to consider current projections of public sector job losses as a worst-case option and to find ways to cope with a six- to seven-year (rather than four- to five-year) recovery cycle.
Job Losses and the U.S. Labor Market
A key difference in the labor market today and where it was in December 2007 is the sheer magnitude of the job losses recorded since then. In general, the bigger the employment losses in a recession, the longer the time needed for recovery. As shown in Figure 1 below, the largest job losses recorded in the United States since World War II occurred between December 2007 and March 2010. The losses shown to date do not include large-scale public sector employment decreases from deficit-reduction programs.
The Bureau of Labor Statistics (BLS) collects and publishes U.S. labor market data. Both private and public sector employment is included. Figure 1 compares job losses for the current recession with past economic downturns. Monthly job losses are tracked as a share of employment from the start of each of the last six recessions. The previous record for job losses was the 1981-1983 recession when job losses occurred over a 15-month period. The current job-loss pattern was still active after 27 months. Since this recession started in December 2007, the U.S. economy lost 6.1 percent of its non-farm jobs. Using a non-farm employment base of 138.1 million, this means 8,424,000 private and public sector jobs have been lost since the recession started. Of these losses, 125,000 (or 1.5 percent) were from the public sector.
In 2011 reasonable people are asking—can these jobs be recovered and if so when? Economists identify three employment sources to recover jobs: large corporations, small businesses, and public sector organizations. On the large company level, Fortune 500 companies like General Electric are adding jobs, but not in the United States. Their employment initiatives are focused in emerging economies like China. In November 2010, Chief Executive Officer Jeffrey Immelt from General Electric announced a $2 billion dollar investment in technology and financial service ventures and research, adding 1,000 jobs in China. The role of large corporations with regard to job recovery in the United States is questionable.
Although large corporations are significant contributors to job creation in the United States, data from the U.S. Small Business Administration (SBA) indicates that small businesses with less than 500 employees accounted for almost 65 percent of the net new jobs created between 1993 and 2009. This means that, of the 17.1 million jobs created, small businesses contributed 8.9 million jobs. Small business growth relies on SBA financing and support from state and federal government programs. In this period of deficit reduction, crisis management of the debt, and increased scrutiny by banks, the growth of small businesses and their contribution potential to job recovery is also questionable.
The third contributor to new jobs is the government or public sector. According to the BLS, 3.4 million new jobs were created between 1993 and 2009 in the public, non-military sector. But with government deficit reduction required at the federal, state and local levels, public employment layoffs are expected, eliminating any contributions to job recovery.
So how long with it take for employment to return to pre-recession levels? Using the average annual growth in employment for the pre-GFC period, it will take at least four years of average growth in employment to get back to the employment levels in 2008. Average job growth in the U.S. from 1970 to 2007 was 375,000 jobs per month. But so far, even in the best months of the recovery, job growth has been 50,000-60,000. At 375,000 it would be 2015 before the lost jobs from the recession were recovered. Using the best recovery rate recorded so far (60,000) it would take the labor market until 2023 to reach 2007 job levels.
But even the 2023 rate of recovery does not take into account labor market declines in public sector employment associated with deficit reduction programs being considered and implemented at the federal, state and local government levels.
Public Employment’s Contribution to Past Job Growth
To understand the importance of public employment it is useful to review how the United States’ labor market has changed. Comparing the ratio of jobs in different sectors from 1970 to 2008 shows how different the U.S. labor market is. Employment in agriculture is down 41 percent, in manufacturing it is down 32 percent, and in services it is up 131 percent. The U.S. is a services economy and public employment is included in the services sector. In 2010, public employment was approximately 20 percent of services employment and 16 percent of total employment.
From 1970 to 2008 public employment growth was positive but not as high as private sector employment growth. Public sector employment grew 63 percent compared to 85 percent for the private sector, which means that public sector employment, as a percentage of total employment, declined from 22 percent to 20 percent. When public and private employment changes were compared on an annual basis for years when GDP grew versus when GDP declined, an interesting pattern emerged. The correlation between private and public sector employment growth is 0.985, which means that when private sector employment changes, 98.5 percent of the time public sector employment changes in the same direction.
In the past, private sector employment and public sector employment in the United States have both responded to movements in the economy in the same direction. Specifically in periods of job recovery, both added jobs. However, as discussed earlier and documented in the next section, in this job-recovery period, public sector employment is likely to fall as private sector services employment slowly increases. This is a structural difference with potentially significant effects on job recovery. The reason for this change started back in the 1980s and has re-emerged today because of the debt-financing solutions used to offset the effects of the GFC in the United States.
Public Employment Decreases Ahead
When the Reagan administration took office in the early 1980s, the U.S. debt was just below $1 trillion. Each administration since then has increased deficit spending and today, with a $2.5 trillion dollar increase during the Obama administration to bailout the economy after the GFC, the total is now approximately $14.4 trillion. The U.S. national debt is now about 95 percent of the GDP. The Government Accountability Office (GAO) recently provided a listing of 300,000 federal jobs that it concluded were added in this period of excess spending, were redundant or duplicative and should be eliminated. Eliminating 300,000 federal jobs at an average cost per job of $120,000 would reduce spending by $36 billion, or only 2 percent of the $1.5 trillion federal deficit. While the spending effects may be small, adding 300,000 to the ranks of the unemployed would increase the unemployment number by a similar 2 percent and would push back the labor market recovery by six months alone if monthly job-creation numbers are 50,000 per month.
But it is not just the current deficit-reduction programs at the federal government level that will affect public employment. It is the combination of deficit management and escalating pubic employee benefit program costs that dominate future spending gaps and the need for additional layoffs at all levels of government.
David Kiff, who is the city manager in Newport Beach, California, recently noted that his city pays about $20 million annually to the California Public Employees System. In two years he estimates that the figure will increase by $8-$10 million. The answer in the City of Newport Beach is to lay off 25 public employees and eliminate 30 vacant positions. Earlier this year in another California city, Costa Mesa, public employees were stunned when six-month termination notices were given to 213 of 472 full-time public employees. The reason given for the layoffs was a projected $10 million increase in the amount owed to retirees. The current amount is $15 million of the city’s $93 million dollar a year budget. Joe Nation, a professor of public policy at Stanford, called Costa Mesa’s plan a “nuclear option.” He went on to say “cities are being forced to look at things that would have been unthinkable before.” The BLS reported that local governments have already lost 180,000 jobs since 2008.
Losing 300,000 federal jobs and 180,000 local and state public sector jobs would not only increase the jobs lost by 6 percent, but it would signal the loss of future job growth from public sector jobs. As shown above, public sector job creation contributed 7 percent of the total new jobs to the U.S. economy. Based on simple math, this would add 18 months to the job recovery cycle if all else remained stable.
Practitioners should consider such public employment losses as a worst-case view because at least three factors could reduce the numbers of currently estimated public employment job losses. The three factors are:
- The economy will recover and taxes will increase faster than income. This is because of the progressive structure of income and wealth taxes. In California a $2 billion tax surplus has already opened with the slowly growing economy in 2011. If recovery continues, deficit reduction will occur automatically. Some politicians are already calling for fewer reductions and job losses.
- Recently, the City of Los Angeles announced an agreement to reduce costs and save city jobs. Bargaining has a role to play in the employment outcomes. If unions support pension reductions, future expenditure burdens will decrease and layoffs can be reduced.
- Excessive cuts are being publicized by some politicians to put pressure on voters to agree to higher taxes. In California, Governor Jerry Brown has proposed a deep cut in education and other key state programs if tax increases are not approved. If such tax increases are approved, services can be maintained and public sector jobs will not have to be eliminated.
While the number of public employment losses is likely to be less than current estimates, the fact remains that public job growth will not be contributing to job recovery as it has in past recoveries. If large corporations continue to focus on international job growth, job recovery in the United States will fall squarely on the shoulders of small businesses.
In conclusion, although things seem to be improving in the private sector labor market, a complete recovery is still distant and uncertain. The labor market recovery is more uncertain than past rebounds because government deficit-reduction programs will lead to layoffs and dampen future government employment growth. Practitioners should not be surprised by public unions restructuring benefits to avoid membership declines. The GFC’s legacy may be that it was as a catalyst to force cost improvements in the current government structure rather than nuclear public employment reductions. But the loss of public sector employment growth brings with it one clear outcome—the jobs recovery process will be extended. We are no longer looking at three to five years before we reach the levels of employment recorded in 2008.
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About the Author(s)
Donald M. Atwater, PhD, is a practitioner faculty of economics at the Graziadio School of Business and Management. Previously, he served as chief executive for a southern California technology company, the chief financial officer of an international, value-added software company, a principal in the human resources and compensation practice at William M. Mercer, and a director and co-founder of several start-up companies. He has created decision-support technologies and implemented them in a number of Fortune 100 companies, including AT&T, Intel, Dell Computer, Apple Computer, and Nestle USA. Dr. Atwater has also worked with many public organizations, including the U.S. Navy, the General Accounting Office, the state of California, and both the county and city of Los Angeles. His work has been published in the Monthly Labor Review and he has co-authored numerous papers. Today he owns and operates a company dedicated to building goal-driven communities.