Category Archives: Labor

Government Jobs Have Been Cut in This Recession: This Has Hurt, Not Helped, the Recovery

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I.  Introduction

A Republican theme in this Presidential campaign, asserted repeatedly by Mitt Romney and other Republican leaders, is that a sharp expansion of government under Barack Obama is the cause of the weak job growth in the recovery from the 2008 collapse.  Romney laid out this theme most clearly in his policy address on economic issues last March (see here for a transcript).  I noted in this blog entry that the address was confused and full of factual errors, but it does represent what Romney said he believes.  More recently, in remarks in Iowa earlier this month, Romney said of Obama that, “he wants another stimulus, he wants to hire more government workers.  He says we need more fireman, more policeman, more teachers.  Did he not get the message of Wisconsin?  The American people did.  It’s time for us to cut back on government and help the American people.”

As I have noted in a number of entries in this blog, government has in fact been contracting rather than expanding during this economic recovery, and that indeed the resulting fiscal drag can account for the weakness of the recovery.  See, for example, the posts on fiscal drag during the recession (here and here); the reduction in total government employment (including state and local) during the period Obama has been in office (here and here), with federal government employment flat and non-defense federal employment falling (here); and on federal government spending that has in fact been close to flat during the Obama term, in contrast to the sharp increases under recent Republicans (here).

Given the importance and centrality of this issue in the weak recovery, it is important to get the facts right.  While the previous blogs have looked at the relationship of government spending in recent US economic downturns to the pace of recovery of GDP, they have not explicitly examined the assertion Romney and his Republican colleagues have now raised that higher government employment accounts for the slow recovery in jobs.

This can be done quickly, through a series of graphs.  The analysis here complements and extends the earlier blog post on fiscal drag as the principal cause of the weak recovery from the 2008 collapse, and the blog post on the path of employment during these downturns.

II.  The Data

First, total employment (both public and private) has fallen more in the current downturn than in any other in the US over the last four decades, and the recovery once it bottomed out has been relatively weak:

Recessions, index of total employment before and after peaks, US, 1970s until 2012

Total employment was falling at a rapid rate when Obama took office (and at that point, had fallen by more than had been the case in any other US downturn of the last four decades).  Actions taken by Obama at the start of his administration (as well as aggressive actions by the Fed) started right away to bend this curve, and within a year it had bottomed out.  Since then there has been positive and remarkably steady employment growth, but at too slow a pace given the depth to which employment had fallen to make up for the initial decline.  The path has been the weakest seen in any of the recoveries from the downturns the US has faced over the last four decades.

(Note:  The figure above, and the ones below on employment, go out for 18 quarters.  This carries the data to the second quarter for 2012 for the downturn that began in December 2007.  The employment figures are the averages for the periods, and the June 2012 figure, not yet published by the BLS, was estimated based on the April and May figures.)

The graph for total private employment is similar, although with a somewhat stronger fall initially, until it bottoms out following the measures early in Obama’s term, and then a somewhat stronger recovery.  Private employment is now above where it was when Obama took office, but it still has not made up for the sharp fall in the last year of the Bush administration:

Recessions, index of total private employment before and after peaks, US, 1970s until 2012

In contrast, total government employment (including state and local, as well as federal) has followed a different pattern.  In contrast to private employment, it did not fall initially (during the last year of the Bush administration).  But once Obama took office, it has fallen steadily except for the temporary blip seen in the 10th quarter after the onset of the downturn, due to the temporary hiring for the decennial census in the Spring of 2010:

Recessions, index of total government employment before and after peaks, US, 1970s until 2012

The fall in government employment was particularly sharp once Obama took office, as can be seen more clearly in a graph which re-bases the data to equal 100 in the fifth quarter following the business cycle peak:

Recessions, index of total government employment starting fifth quarter after peaks, US, 1970s until 2012

In no other downturn has the US had such a cut-back in government employment.  Yet Romney and his Republican colleagues are arguing for even greater cut-backs, including for firemen, policemen, and teachers, as Romney stated in the quotation copied above.

Looking closely at the two graphs above on government employment, one might note that while the reductions in government employment were greater under Obama and in the most recent downturn than in any other, the second smallest was in the recovery following the January 1980 downturn.  This period was initially under Carter (for four quarters) and then under Reagan.  Since I have noted before in this blog that had government grown under Obama at the pace seen under Reagan, the economy would now be at close to full employment, is there a contradiction here?

The answer is no.  First, one should note that the “recovery” from the January 1980 downturn merges into that from the July 1981 downturn (but leading by six quarters), as the economy went into a new recession a half year after Reagan took office.  Reagan did cut back on government employment initially, before allowing it to grow.  Hence the paths followed by the green (July 1981) lines in the graphs above are more directly related to Reagan’s policies than those indicated by the blue (January 1980) lines.

Second and more fundamentally, the importance of the government sector to the economy and its recovery is more related to overall government expenditures than to simply the number of government employees.  Romney and his Republican colleagues are simply missing this point when they focus their criticisms on the number of government workers.  Reagan expanded government spending, but the focus was on things like defense expenditures rather than the number of school teachers.  Defense expenditures are done under contract to private companies (much of it to a few giant companies such as Boeing and Lockheed).  Building modern jet fighters and naval ships can be very labor intensive, but these are employees of private contractors, and are not directly classified as government workers.

The paths can be seen in the following graphs, similar to ones presented in the earlier blog, but now with 17 quarters shown rather than 16 (as there is now one quarter of additional GDP data available):

US recessions 1970-2012, total government expenditures before and after business cycle peaks

US recessions 1970-2012, total government expenditures from fifth quarter after business cycle peaks

Growth in government spending during the Reagan periods (the blue and green paths) is the highest of all, especially when one starts five quarters from the cyclical peaks (when Obama took office).

III.  Conclusion

In summary, if there was any basis for the belief of Romney and his Republican colleagues that cut-backs in government employment and spending would lead to strong growth, then the economy would be booming right now.  Government employment and spending in the current downturn, especially once Obama took office in January 2009, have been below the paths followed in each of the other downturns the US has faced over the last four decades.

The recovery has been weak because there has been weak demand for the goods and services that business could produce.  There is no point in hiring a worker to make something if you cannot then sell it.  Government demand has been weak, as seen in the graphs above, due to strong Republican opposition.  Investment demand has been weak, despite record low interest rates and high cash balances on corporate balance sheets, since there is surplus production capacity.  There is little point in investing to build even more capacity when what you have is not being fully utilized.  Consumer demand has been weak, both because of weak incomes (the high unemployment and depressed wages for those who are employed) and because of the collapse of the housing bubble, which wrecked household wealth.  And global demand has been weak, due to crises in Europe (with its own mis-guided policies focussed on austerity) and elsewhere.

The cause of this weak recovery is not that government has grown rapidly, but rather that is hasn’t.

Employment is Deteriorating

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US weekly initial claims for unemployment insurance, June 18, 2011, to June 16, 2012

The Bureau of Labor Statistics released this morning its regular weekly report on the number of American workers who had filed initial claims for unemployment insurance.  Although there is a good deal of noise in this weekly data (so some analysts focus on the four-week moving average rather than on the weekly figures themselves), the report provides a useful early indication of developments in the labor market.

It is now clear that the labor market situation is deteriorating.  The graph above shows the figures (for both the weekly initial claims and for the four-week moving average) for the last year.  The trend was improving (weekly initial claims were falling) until mid to late March of this year.  But it is now clear that there was a turn at that point, with the employment situation since then worsening.  Using the four-week moving average, initial claims for unemployment insurance rose from 363,000 in late March, to 386,250 in the most recent figure.

Keep in mind that with normal churn in the labor market, there will always be initial claims for unemployment insurance.  Even with the economy at full employment, weekly initial claims will be at about 310,000 to 320,000 given the size of and extent of turnover in the US labor force (see the figure below for the numbers in 2006 and early 2007, before the downturn).  And the rise in the weekly rate of initial claims for unemployment insurance could still be consistent with positive net job growth each month.  The labor force is growing over time, although with significant month to month fluctuation in the number of people entering and leaving the labor force.

Nevertheless, the turnaround and sustained increase in the weekly figure on initial claims for unemployment insurance is likely to be a signal that the unemployment rate may now start to rise for a period.  This can be seen by looking at the initial claims figure in a longer term context, and correlating that with the overall unemployment rate.

US weekly initial claims for unemployment insurance, July 1, 2006, to June 16, 2012

US unemployment rate, July 2006 to May 2012

The first figure shows the weekly initial claims figure (four-week moving average) for the period from July 1, 2006, to now.  The second shows the unemployment rate.  The sharp rise in the initial claims figure in the last year of the Bush Administration is clear, with a peak reached just after Obama took office.  With new measures such as the Stimulus Bill (passed in February 2009) and other actions (such as continued aggressive measures by the US Federal Reserve Board), the economy started to turn around, and new claims for unemployment insurance began to diminish.  But while the weekly pace was reduced, it was still high, and the overall rate of unemployment continued to rise for a period before starting to fall.

The recovery has been weak, however.  As noted previously in this blog (such as here, and here), fiscal drag from falling government expenditures (mainly at the state and local level, but also weakness at the federal level) can by itself account for this slow and weak recovery.  And as seen in the figure above, in this weak recovery there have been two periods (between May and August 2010, and between March and June 2011) when initial claims reversed its downward path and began to rise for a period.  In each of these times, the unemployment rate also then started to rise for about half a year (from June to November 2010, and from March to June/July/August 2011).

The blip upwards of the unemployment rate last month to 8.2% from the earlier 8.1%, might therefore not be a fluke, but rather a signal of further weakness to come.  Such a rise in the unemployment rate in the half year before an election should be particularly worrisome to any incumbent seeking re-election.  And all this is unfortunately also consistent with the prediction made in this blog in January (see posting here), that despite what looked like an acceleration of growth in the second half of 2011, growth in 2012 could be weak.  It appears that is what is happening.

Fiscal Drag Continues to Pull Down the Economy

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Private employment, government employment, December 2010 to May 2012

A pair of disappointing reports, from this morning (June 1) and yesterday (May 31), indicate that the economy continues to grow only slowly, with consequent slow growth in employment and indeed a small rise in the rate of unemployment to 8.2% from 8.1% last month.  Posts on this blog in January, on GDP growth and on employment, had flagged that growth, which at that time appeared to be improving, could well fall back in 2012.  Unfortunately, that appears to be happening.  Cut-backs in government spending account for a major part of that disappointing growth.

The Bureau of Labor Statistics, in its June 1 release this morning on employment, found that total US employment grew in May by a net 69,000 jobs, with an increase of 82,000 private jobs and a fall of 13,000 government jobs.  Based on the growth rate of the labor force over the ten year period of 2002 to 2012 (there is a good deal of fluctuation in monthly figures), the labor force is growing at about 83,000 workers per month on average.  Employment growth in May of just 69,000 jobs does not keep up with this, much less make a dent in the still high unemployment.

The figures released this morning were also disappointing in the revised numbers they showed for April.  Last month, the initial estimates were that April total employment had risen by 115,000 jobs, with private jobs growing by 130,000.  These were already not good, but the revised estimates issued this morning based on more complete data indicate total jobs in April grew by only 77,000 jobs, with private jobs growing by just 87,000 jobs.  With the May numbers of 69,000 and 82,000 for total and private jobs, respectively, we now have two months of disappointing job growth.  Unless the May numbers are significantly revised when more complete data becomes available, we cannot say that this is only a one month fluke.

As one can note from these numbers, private job growth has been consistently above total job growth.  That is because government continues to cut back on the number of workers it employs, despite assertions by Mitt Romney and other Republicans that government has been growing.  The graph above shows the monthly changes in employment of both private and government employees over the last year and a half, where one sees that government employment has been falling in all but two of these months.  Note that the government figures in the graph are for total government, including at the state and local level.  But the underlying figures show that the fall has been in employment both at the federal and at the state and local levels.

This steady fall in government employment depresses overall job growth, and adds up over time.  Between January 2009, when Obama was inaugurated, and May 2012, total government jobs fell by 607,000.  In contrast, over January 2005 and May 2008, the comparable period in Bush’s second term, total government employment rose by 743,000.  If government employment had been allowed to grow as much during the Obama period as it had during the Bush period, the difference would have been an additional 1.35 million jobs.   This difference alone would have brought the unemployment rate down from the current 8.2%, to just 7.3%.  But one would expect with the still depressed economy, with unemployment high, that increased government employment would have spurred some private job growth.  Assuming conservatively a multiplier of two (i.e. there would be one additional private job for each additional government job, to produce what the now employed government workers will spend on), the unemployment rate would have dropped to just 6.5%.

That is, had government employment been allowed to grow during the Obama period by as much as it had during the comparable Bush period, unemployment would have dropped to 6.5%.  With full employment generally considered to be in the range of 5 to 6% currently, this would have brought employment most of the way to full employment.

The other disappointing report was on estimated GDP growth in the first quarter of 2012, released by the Bureau of Economic Analysis on May 31.  This was the regular first revision of the initial estimate of GDP growth that had been released a month ago.  The initial estimate of GDP growth in the first quarter of 2012 was discussed in a posting on this blog in April.  The initial estimate was that GDP had grown at a 2.2% annualized rate in the first quarter.  This estimate has now been revised downward to 1.9%.

The revision is not large, but is not in a good direction.  And it is interesting to note that two-thirds of that downward change (0.2% points of the 0.3% points reduction) was due to a downward revised figure on government spending.  Government spending was already falling, and the initial estimate, discussed in the blog post cited above, was that it took 0.6% points away from what GDP growth would have been.  The revised estimate increases that reduction to 0.8% points of GDP.  Government spending on goods and services (for all government, including state and local) is estimated to have declined at an annualized rate of 3.9% in the first quarter, similar to the 4.2% rate fall in the fourth quarter of 2011.

The reduction in government demand for goods and services leads to a reduction in GDP in present circumstances since unemployment is high, there is substantial excess capacity, and hence goods and services produced for sale to government will not come from goods and services that could be sold elsewhere.  There is plenty of capacity to produce whatever people demand, and the problem is there is no demand for additional goods and services to be sold elsewhere.

This fall in government spending, especially in the last half year (i.e. the fourth quarter of 2011 and the first quarter of 2012), can explain a large part of the recent slow growth.  As noted above, the revised GDP estimates indicate that the fall in government spending in the first quarter of 2012 subtracted 0.8% points from what GDP growth would have been.  There was a similar 0.8% point reduction in the fourth quarter of 2011.

But far from simply not falling, government spending will grow in a normally growing economy.  Hence the basis of comparison should not be to zero government spending growth, but rather something positive.  One comparison to use would be the growth seen during the Bush administration.  Over 2001 to 2008, government spending growth on average accounted for 0.42% points of GDP growth at an annualized rate.  Keep in mind that this spending growth is for all government, not simply federal spending (which was high), but also state and local government spending.  Also, government spending in the GDP accounts is for direct goods and services only, and excludes spending via transfers (such as Social Security).

Finally, government spending growth in periods such as now, when unemployment is high and there is excess capacity, will have a multiplier impact, for the reasons discussed above.  A reasonable and conservative multiplier to use would be a multiplier of two.

The table below summarizes the impact of these assumptions for what growth would have been in 2011Q4 and 2012Q1:

      Annualized growth rate of GDP 2011Q4 2012Q1
GDP Growth Observed 3.0 1.9
GDP Growth if Government had not contracted 3.8 2.6
GDP Growth if Government had grown at the Bush rate 4.2 3.1
GDP Growth if Government had grown at the Bush rate, with a multiplier of two 5.5 4.3

GDP growth as actually happened was at a 3.0% rate in the fourth quarter of 2011 and 1.9% in the first quarter of 2012.  Had reductions in government spending not taken away 0.8% points from these growth rates in each of these two periods, growth would have been 3.8% and 2.6% respectively.  But this implicitly places government spending growth at zero.  Had government been allowed to grow as it had between 2001 and 2008 during the Bush terms, growth would have been 4.2% and 3.1% even with no multiplier.  With a multiplier of two, the rates would have been 5.5% and 4.3% respectively.

Such growth rates of about 5% on average is what the economy needs if it is to recover.  At 2% or so, growth is insufficient to create sufficient demand for labor to bring down unemployment on a sustainable basis, as we have just seen in the report this morning.  And a 2% growth rate is so modest that it is vulnerable to shocks, such as from Europe (where Germany and the EU still have not addressed what needs to be done to resolve the Euro crisis), or from a spike in oil prices (should the Iran situation blow up, literally), or even from swings in inventories (as discussed before in this blog).

With government contracting as it has, despite the high unemployment and excess capacity, fiscal drag is acting as a severe constraint on economic growth.  There is a not a small danger that growth could slip back to negative rates, and that is not good for an incumbent President in an election year.