Tag Archives: employment growth

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.

Job Market Dynamics: A Continued, But Slow, Recovery

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Jobs, employment, new hiring, job separations, net job creation, January 2006 to March 2012


employment, jobs, total separations, layoffs and discharges, quits, January 2006 to March 2012This post is an update of one from January of this year, with more recent data and to reflect revisions that have been made in the earlier figures.  The numbers are from the Bureau of Labor Statistics, and this spring it issued new figures for the last several years, reflecting methodological improvements in the system it uses to go from its survey results to its national estimates.  What is shown above and will be discussed below are jobs in the private non-farm sector.  Government jobs have been falling, as has been noted in this blog, but follow a different dynamic than private jobs.  Hopefully government jobs will now stabilize and preferably grow, rather than continue to act to depress the economy.

The story on the private job dynamics is the same as before, and the more recent numbers (through March in the figures above, vs. through November 2011 in the January posting) confirm the trend that was noted before.  That is, the job market is recovering, but at too slow a pace given the still high level of unemployment.  At such a slow pace, it could easily go into reverse should the economy slow.  As has been noted before in this blog, US GDP growth has been slow due to the continued fiscal drag as government expenditures have been cut back.  There is also the threat of a European collapse, with negative impacts on the US, as Europe has failed to address the Eurozone problems with any policy other than increased austerity.  Growth in Europe is already at zero.

There is now the additional threat made recently by Speaker of the House John Boehner, to hold hostage the Congressional approval required for the debt ceiling later this year unless Republican demands of further government expenditure cuts are met.  Without this Congressional approval, the United States would be forced to default.  Economic chaos would result.

Among the points to note from the figures above:

1)  There were major net job losses in 2008 and 2009 (the curve in red in the top figure), but not because more people were leaving their jobs, due to layoffs or other reasons.  Rather, it was because the pace of new hiring slowed.  At the peak of the housing bubble in 2006, new hiring was being done at a pace of roughly 5 million jobs per month.  This started to fall, but slowly, in late 2006 / early 2007.  It began to fall at a rapid rate in 2008 (the last year of the Bush administration), and then stabilized and began to recover within a few months of Obama taking office, as the stimulus package and other measures began to have their positive effect.  From a trough of about 3 1/2 million new hires per month in mid-2009, new hires has slowly grown to a pace of a bit over 4 million per month currently.  That is, there has been some recovery, but the pace is still well below the 5 million new hires per month seen when the economy is at full employment.

2)  Total job separations, whether from layoffs or quitting or anything else, actually fell in the downturn.  People often believe that unemployment shot up in the downturn because of massive layoffs, but that is not really the case.  Unemployment went up not because of more people being fired or otherwise leaving their jobs, but rather because the pace of job separations did not fall as rapidly as did the pace of new hiring.  In normal times, more people separate from their jobs because they quit (usually to take a new job elsewhere) or voluntarily leave for some other reason (e.g. retirement), than leave because of being laid off.  The pace of layoffs and discharges did indeed go up in 2008, the last year of Bush, from roughly 1.7 million per month before the downturn, to a peak of 2.5 million in the last month of Bush.  But this was less than the fall in the number of people who voluntarily quit, so total separations actually fell.  And layoffs then soon started to fall in number under Obama, and is currently below 1.6 million per month, i.e. less than the pace seen when the economy was near full employment.

3)  Since late 2009, the pace of new hiring has risen under Obama, as noted above, from roughly 3 1/2 million per month to a bit over 4 million per month currently.  Quits also started to rise with the improving job market, from about 1.5 million per month to 2 million per month most recently.  This is a good sign, and an indication that people are voluntarily leaving their jobs as the pace of new hiring has improved.  And layoffs and discharges has slowly fallen over this period as well.  The result is that the pace of total separations have been below that of new hires since early 2010, with net new jobs thus being created.

But the pace of net new job creation has been slow, at only about 200,000 net new jobs per month over the last half year (other than 300,000 in February).  With unemployment still at 8.1%, it would take years to reach full employment at such a pace of net job growth.  That is, at a pace of net job growth of 200,000 per month and assuming growth in the labor force of about 0.65% per year (the rate seen in the past decade, as it depends on population growth and demographics), it would take over two more years for the unemployment rate to fall below 6%, and almost three and a half years to fall below 5%.  At 300,000 net new jobs per month, unemployment would fall below 6% in a more reasonable 15 months, and would hit 5% in about two years.

A pace of net new job growth of 300,000 per month is not at all impossible, but will require a sufficient growth in aggregate demand in the economy so that the goods and services these workers would produce could be sold.  As has been noted before in this blog, fiscal drag largely explains the slow growth in aggregate demand in the US:  Had government demand been allowed to grow during the Obama years at the pace it had during the Reagan period when the economy was recovering from the 1981 downturn, we would now be at close to full employment.