Public Sector Job Cuts Threaten Recovery

Since peaking in 2008, local governments have shed almost 500,000 jobs.

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Net job change chart for July 2011

This is what austerity feels like. In another setback for the economy, the unemployment rate in June rose to 9.2 percent, its highest level since December 2010, the Labor Department reported. A measly 18,000 jobs were added in June, carried by an increase of 57,000 jobs in the private sector but dulled by losses of 39,000 jobs in the public sector. As government stimulus winds down and states move to close massive budget gaps, public sector cuts should continue to grow, labor market experts say.

"These numbers are awful," says Tom Kochan, co-director of the Institute for Work and Employment Research at the MIT Sloan School of Management. "It means that we have fallen about 130,000 [jobs] short of just keeping up with the growth in the labor force, and we are falling farther and father behind from restoring the jobs that we've lost from the Great Recession."

While the overall picture painted in the report is gloomy, the bigger story may lie in cuts on the government front. In June, local governments reported job losses of 18,000, and the federal government shed 14,000 jobs. Nearly 100,000 local government employees have lost their jobs so far this year, and 464,000 have found themselves jobless since local government employment peaked in September 2008. Meanwhile, private sector employers, who cut jobs at a more rapid pace earlier in the recovery, have slowly added jobs. Since March 2010, when private sector employment rose for the first time in more than two years, private employers have added about two million employees to their payrolls.

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That means for total employment to grow, the private sector must pick up the slack. "We need more rapid growth in the private sector to compensate for the cuts in the public sector," says Patrick O'Keefe, director of economic research at accounting firm J.H. Cohn and former deputy assistant secretary at the U.S. Department of Labor. So far this year, private employers have added about 140,000 jobs a month—a pace that's too sluggish to have a meaningful effect on the unemployment rate. Economists say the economy needs to add 350,000 to 400,000 jobs each month over the next three years to bring unemployment down to around 6 percent.

While gains during the first quarter of the year were promising, the number of unemployed has risen by 545,000 since March, pushing the unemployment rate up by 0.04 of a percentage point. Some economists say the unemployment rate will continue to rise before it drops, as the jobless who have been too discouraged to look for work feel inspired by the recovery and return to job-seeking. About 14.1 million people are unemployed, with 44 percent finding themselves out of work for at least 27 weeks.

Adding to June's lousy report, even revisions for the last two months were negative: 217,000 jobs were created in April rather than the originally reported 232,000, and May's jobs numbers were revised to 25,000 from 54,000. The small growth in June came from professional and technical services, which added 24,000 jobs; leisure and hospitality, which added 34,000 jobs; and health care, which edged up 14,000 jobs.

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The public sector is expected to remain a drag on overall job growth in the months and even years to come. "We can't afford the amount of government service that we've been consuming," O'Keefe says. Despite all the layoffs over the past few years, the public sector still has 7 percent more workers than it had at the beginning of 2000. The private sector, on the other hand, has about 1 percent fewer jobs. "The growth in public sector employment was probably going to be curtailed irrespective of the general trend in the economy, but obviously with the severe disruptions that we had from '07 to '09, the impact on the public sector has been even more severe," O'Keefe says.

Madeline Schnapp, director of macroeconomic research at TrimTabs Investment Research in Sausalito, Calif., expects state and local governments to cut between 800,000 to one million jobs during the next fiscal year, which began on July 1 and ends on June 30, 2012. Local governments employ the vast majority of public sector workers. Of the approximate 22 million public sector workers, about 14 million are employed by local governments, according to the Labor Department.