Friday, June 03, 2011

Contractionary Fiscal Policy and the US Job Market

The BLS released its estimates of employment and the unemployment rate for May. Unsurprisingly, it was a weak report, showing a marked slowdown in the US's net job creation in the private sector in May compared to preceding months.

The government sector of the economy continued to make the jobs picture worse. May was the seventh month in a row during which government layoffs undid some of the work of the private sector in creating jobs. Since January 2009, government employment has shrunk in 21 of 29 months -- and without temporary hiring for the Census, it would probably have shrunk in 25 of the last 29 months.

This steady reduction in government employment is a form of contractionary fiscal policy. (Note that most of the layoffs are at the state and local level, and thus are primarily composed of teachers and public safety personnel.) If government employment were simply keeping up with population growth in the US, we would expect to see about 17 to 18 thousand more state and local government jobs each month. Instead employment has shrunk by an average of 15 thousand jobs per month since the start of 2009.

The following chart shows what the monthly employment report would have looked like over the past 8 months (i.e. since the one-time effects of the Census that skewed employment from March-Sept of 2010) if government employment had simply kept up with the rate of population growth:

And total employment in the US would have followed the blue line in the chart below, rather than the red line:

In other words, in the absence of the sharp cutbacks in government spending that have been prevalent in the US over the past year or two, about 1.3 million additional people would be working now compared to 8 months ago, rather than the actual job growth we've experienced over that time of about 1 million - a 30% difference. That's a pretty tough headwind to fight, especially for an economy that's already struggling.

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