Contracting Government Has Hurt Job Growth

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(change, in thousands of jobs) Jan 2001 to Jan 2005 Jan 2005 to Jan 2009 Jan 2001 to Jan 2009 Jan 2009 to Nov 2011
Total Employment -16 +1,110 +1,094 -1,855
Private Sector -916 +263 -653 -1,262
Government Sector +900 +847 +1,747 -593

Obama has repeatedly and emphatically been charged by Republican politicians as fostering  a huge expansion in government job growth, with this a major cause for the weak recovery in private job growth.  The facts do not support this.  The government sector has in fact been contracting sharply during the Obama period, in distinct contrast to the expansion during the Bush presidency, and it is this contraction which indeed can explain a significant share of the drop in overall jobs in the economy.

The table above, drawn from Bureau of Labor Statistics (US Department of Labor) figures on employment levels by the major sectors, shows the change in the number of those employed, for the periods between January 2001 and January 2005 (the first Bush term), between January 2005 and January 2009 (the second Bush term), between January 2001 and January 2009 (the two Bush terms together), and between January 2009 and November 2011 (the most recent figures, for the Obama term so far).

In the first Bush presidential term, overall job growth was basically zero.  But it is striking that it only comes to zero because a decline of 916,000 private jobs is almost fully offset by a nearly identical rise in government jobs of 900,000.  Note that while the time periods we are examining are the presidential terms, government job growth is largely affected by changes at the state and local level, as these account for about 87% of government jobs.

During the second Bush term, private sector job growth became positive, by a modest 263,000 for the period (with growth early on offset by the downturn in his final year), while government job growth continued at a roughly similar positive rate as during his first term.  With both positive, total job growth was then about 1.1 million.

For the Bush presidency as a whole, it is then interesting to note the overall job growth of about 1.1 million (all in his second term), only came about due to a growth in government jobs of about 1.75 million:  Private jobs in fact fell by about 650,000.

During the Obama presidency so far, government job growth went into reverse, with a decline of almost 600,000 jobs.  It is interesting that the pace of the decline for the first 34 months of Obama’s 48 month term (that is, through November 2011), matches almost exactly the pace of the increase during either of the Bush terms.

Suppose government job growth had increased during the Obama period at the pace it had during the Bush terms.  There would then have been a growth in government employment of over 600,000, rather than a decline of almost that amount, for a swing of 1.2 million jobs.  Assuming the same decline as now of over 1.2 million private jobs, overall jobs would have still fallen, but by only about 600,000 rather than over 1.8 million.

Of course, with such a different policy on government job growth, one would not expect private job growth to be the same.  Conservatives might argue that the government job growth would “crowd out” the private sector, leading to even an even larger fall in private jobs.  But there is no evidence to support this, in an environment where unemployment is high and interest rates on government borrowing are close to zero as the economy suffers from a liquidity trap.

Indeed, the basic insight of John Maynard Keynes is that in such a situation, government job growth (and its accompanying spending) will not only not displace private job growth, but will add to it at a multiple of what is spent directly, as the newly employed by the government will add to demand for privately produced goods and services as they spend their wages.  A reasonable estimate of this government employment multiplier would be at least two, and many would argue higher.  At a multiplier of two (that is, each additional government job leads to one additional private job, for two total), the swing in government employment of 1.2 million (that is, a rise of 600,000 rather than a decline of about 600,000), would have led to 1.2 million additional private jobs, and total employment growth would then have been a positive of 600,000 rather than a negative of over 1.8 million.  This is a swing of 2.4 million jobs.  With current unemployment in the US of 13.3 million, and a civilian labor force of 153.9 million, the unemployment rate would then be 7.1% rather than the current 8.6%.  It was 7.8% when Obama took office.

One can quibble with the specific figures, and what multiplier to assume.  But the basic point is that the contraction in government employment in recent years (primarily at the state and local levels) is a major reason why the overall job picture is still so bad.  If government employment had continued to expand at the pace it had during either of the Bush terms, rather than contract at a similar pace, then under quite plausible estimates, unemployment would be less now than when Obama took office.

Unemployment Rate Drops, but How Significant?

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The US unemployment rate dropped by a quite large 0.4% points in November, from the previous 9.0% to 8.6%, according to the December 2 release of the US Bureau of Labor Statistics.   But the drop did not generate much excitement among analysts.  Why?

While at first glance, such a drop would generally be viewed as quite positive, an analysis of the underlying numbers suggests caution.  The estimated number of unemployed fell by 594,000, to a total of 13,303,000.  A fall of 594,000 is major.  However, the estimated increase in the number of employed was only 278,000.  Why the difference?  The reason was an estimated reduction in the size of the civilian labor force of 315,000.  Hence only a bit less than half (47%) of the fall in unemployment came from more workers being employed.  A bit more than half (53%) came from workers leaving the labor force.

Workers may leave the labor force for many reasons, including retirement, but also because they may be unemployed and see little prospect in getting a reasonable job.  Furthermore, the labor force will normally grow (rather than contract) over time as the population grows, but month to month it can vary.  In recent years it has been unusually flat or even falling in the face of high unemployment and hence poor job prospects for many.  Older baby boomers may also be dropping out of the labor force and taking early retirement.

In addition, it is not clear that the estimated increase in the number of employed, of 278,000 in the month, is accurate.  In the same December 2 release, the BLS stated that the number of employed in the month was only 120,000.  Why the difference?  The reason is that both are estimates obtained from surveys, and the figures come from two different surveys.  The 278,000 figure that accompanied the unemployment estimates comes from a survey of households.  The 120,000 figure comes from a survey of establishments (generally firms, but including governmental entities and other employers).

Over time the figures will on average be close to each other, but they can differ in any given month.  Coming from surveys, they are both subject to sampling errors, where it should be kept in mind that both of these figures are the relatively small differences between two estimates (for October and November) of the much larger number of total workers employed in that period.  Furthermore, the timing of the surveys within the month will differ.  Finally, there are some definitional differences, although such differences probably do not affect too much the estimates of the change in employment levels between the two periods.  The household survey asks whether the person has been employed in any occupation during the period.  The establishment survey surveys employers of non-farm workers.  Hence the household survey will include (and the establishment survey will not) those employed on farms, the self-employed, unpaid family workers, private household workers, and those on unpaid leave from work.  The establishment survey, on the other hand, will count each worker, and hence a worker with two jobs will be counted twice.  There are some other small differences as well.

The difference between the two estimates, of 278,000 more employed vs. 120,000 more employed, is large.  The estimates are also preliminary and hence subject to change.  Observers will therefore be looking at the trends over the next few months to see which estimate was likely the more accurate.

Employment Growth Continues, But at Too Low a Rate

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The monthly change in employment figures continue to show growth in total employment, although at rates that remain too low for a reasonable recovery.  Total non-farm employment, both private sector and government, grew by 120,000 in November, based on the Establishment Survey conducted by the Bureau of Labor Statistics.  This total of 120,000 reflected an increase of 140,000 in private employment, offset by a decline in 20,000 in government employment (primarily state and local governments, which account for 87% of government employment in the US).

The 120,000 figure is too low.  Based on employment growth seen during recent periods of growth in the US, the figure would need to be roughly 200 to 250,000 per month for a sustained period for unemployment to decline on a sustainable basis.

The decline in government employment is hurting this.  If government employment were growing at a more historically normal rate of 20,000 per month rather than falling by 20,000 per month, total employment would growth in November would have been 160,000 by this direct effect alone.  That would by itself have accounted for about half the increase one would need to get to the lower end of the 200 to 250,000 band one needs (160,000 is half way between 120,000 and 200,000).  Furthermore, once one recognizes that there will be multiplier effects as well from such increased direct government employment in this economy (with its still very high unemployment), then with a multiplier of only just one (i.e. one additional private job for every additional government job, due to the resulting demand for goods and services from the new government workers), one would have gotten all the way to the 200 to 250,000 band.  And with a not unreasonable multiplier of two, one would be at 240,000, near the top end of this band.  That is, a major reason for the sluggish growth in employment in the US is the cut-backs being forced by conservative politicians on our government.  And they say they are forcing these cut-backs in the interest of “job creation”.

It is also of interest to look at the monthly employment figures in the longer term context.  Obama is being repeatedly blamed by Republican politicians for the high unemployment in the US, but the graph above clearly shows the turn-around that began precisely at his inauguration in January 2009.  At that point, the economy was in free-fall.  This first decelerated, and then, from the summer of 2009, the economy started to grow.  The turnaround and subsequent growth was a result of a large number of government programs rapidly put in place (including, to be fair, programs put in place at the end of the Bush Administration, such as TARP).  Note that the bump in government employment in the spring of 2010 was due to temporary workers hired for the decennial population census, where these jobs then were finished a few months later.  Indeed, the figures do not show a significant number of net new government jobs created in 2009 or since as a result of the stimulus package of Obama.  Government employment has in fact declined since Obama took office.  At most, the stimulus programs reduced the number of government job losses that might otherwise have taken place.

In sum, employment turned around dramatically in January 2009, when Obama took office, and there has been positive overall job growth since early 2010.  But job growth needs to be higher for unemployment to decline to acceptable levels, and it has proven difficult to do this in the face of a contracting government sector.