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Occasional Common Sense

Where Unemployment Might Be Without Government Employment Austerity

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Headline unemployment for February came out today unchanged at 8.3%. Annie Lowrey tweeted “We need about 167,480 jobs per month to be at 7.9 percent unemployment in November.” So I got to wondering about the impact of shrunken government employment, which has been most notable at the state and local levels.

When Barack Obama was inaugurated in January 2009, government wage and salary workers (FRED series LNS12032188) as a percentage of the civilian non-institutional population over 16 years old (CNP16OV) was 9.05%, which is the same as the median for the prior 50 years.  This figure – I’ll call it the government employment rate – now stands at 8.5%, which with the exception of mid-2011 is the lowest it’s been since 1967.

Over the last 50 years, the median government employment rate is 9.0%.  This is also where it stood two years ago, in March 2010.  Since then, we’ve shed 745,000 government jobs. If we had simply maintained government employment at the March 2010 level, the unemployment rate would probably be between 7.9% and 8.1%.

But that’s just part of the story.  Because even if government employment hadn’t fallen, the government employment rate would have, due to a growing population.  To keep government employment at 9.0%, we would have added 467,000 jobs over the last two years rather than chop them. If we’d done that, the unemployment rate might be as low as 7.5% today. Perhaps lower, depending on multiplier effects.

But, you say, isn’t the goal to reduce the size of government?  You know, to get government off our backs?

Well let’s look at Reagan, then, the great government-reducer.

Between June 1980 (Carter) and August 1981 (Reagan), government employment fell from 9.58% to 9.09%. From August 1981 through the end of Reagan’s presidency, the median government employment rate was 9.02% and it never fell below 8.87%.  By the end of 1988, when a raging economy was actually the right time to reduce the size of government (according to Keynes), the government employment rate actually grew – to more than 9.3%.

What about the budget deficit?  In the near term, adding to the debt should be less of a concern than providing adequate government services and getting people back to work. In the longer term, revenues must be increased to match the level of government services people want to have.  At the state and local level, this will happen as the economy recovers. At the federal level, the major cost drivers of Social Security, Medicare, and military spending must be curbed, or taxes must be increased.  There’s no way around this, even with a robust recovery.

While government employment cannot be the whole solution to the recession, the reductions our leaders have forced are certainly part of the problem.  We’re 1.2 million government jobs short of historic norms; that’s more than a quarter of the jobs lost since the last business cycle peak.

How can government improve the jobs situation?  Easy: start re-hiring.

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Written by David Clayton

March 10, 2012 at 12:09 am

Posted in Punditry

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