Government Drag on Job Growth Poised to Continue

State governments are starting to recover, but local governments are still vulnerable.

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When the monthly jobs numbers are released on Friday, it will, as always, be a surprise to some degree. However, there have been a few reliable recent trends: healthcare always adds jobs, for example, manufacturing is also coming back. And for nearly two years, government has almost always lost jobs. Even with the recovery picking up steam, this trend of public sector cuts could last for a very long time.

The brunt of job cuts have been at the state and local levels. "State and local governments have taken a big hit in the last financial crisis and recession, and hence they've had huge layoffs and contractions. It takes a while for these entities to come back," says John Coleman, professor of economics at Duke University's Fuqua School of Business.

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Government employment can fluctuate widely, but the general trend has decidedly shifted from upward to downward. According to Labor Department numbers, from 1990 through 2008, the public sector posted job gains every year except for 2003, when it shed 42,000 jobs. Starting in 2009, however, the public sector started cutting jobs at nearly twice that rate, losing 76,000 jobs that year, then cutting 221,000 in 2010 and 265,000 in 2011. All told, there are almost 600,000 fewer government jobs now than three years ago.

The losses have slowed in recent months, with a total of only 7,000 government jobs lost in January and February of this year. But a return to the days when government added tens of thousands of jobs per month is likely far in the future.

Because they generally can't run deficits like the federal government can, says Patrick O'Keefe, director of economic research at accounting and consulting firm J.H. Cohn, state and local governments feel fiscal strains more acutely than Washington.

As the recession reduced or eliminated paychecks for millions of Americans, not to mention reducing home values, that made for smaller income, sales, and property tax revenues.

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The good news, says O'Keefe, is that state governments are bouncing back. "At the state level, where there's a greater reliance on sales and excise taxes, revenues are rising," he says, as the recovery encourages people to go out and spend.

The bad news is that local government is still very vulnerable—and it's by far the largest segment of the public sector labor market, employing nearly two thirds of the nearly 22 million government workers in the U.S.

Many local governments rely on property taxes for revenue, and many analysts say that housing values have "hit bottom." That means that it could be some time before county and city governments see this revenue stream grow.

"It takes a long time for housing prices to recover, and indeed it may take a good five or six years before they come up to the prerecession level," says Coleman. "So [local governments] are going to be hurting for revenue until that happens."

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Federal jobs have not been on the chopping block in quite the same way that local government jobs have, but it is still vulnerable. The federal government, in fact, employs 65,000 more people than it did at the start of the recession, but it has shed jobs in 10 of the last 11 months.

O'Keefe points to two areas that could see substantial future cuts. Declining revenues continue to gut the Postal Service workforce, and some Department of Defense jobs could come under the knife due to defense spending cuts put in place by the Budget Control Act, not to mention sequestration cuts scheduled to go into effect in January 2012.

Corrected on : Corrected on 04/05/12: An earlier version of this article misstated the name of Patrick O'Keefe, director of economic research at accounting and consulting firm J.H. Cohn.