One Key Sector That's Still Shedding Jobs

Even without political action, government is shrinking.

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Maybe we've got ourselves a recovery after all.

The economy has now been adding jobs for 16 months in a row, with an acceleration in hiring that has surprised nearly every prognosticator. The latest jobs report shows that the economy added 243,000 jobs in January, with healthy gains in professional services, manufacturing, hospitality, and even construction. There's still a long way to go before the economy is truly healthy, but each small gain helps repair the damage caused by a crushing recession.

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One sector, however, continues to shed jobs, a trend that could impact not just the economy but the November elections as well. Government, which accounts for about 17 percent of the nation's workforce, has lost about 60,000 jobs since 2009, with no sign that the gradual downdrift in employment will turn around any time soon.

A shrinking government sector can drag down overall economic activity, since government jobs tend to be stable, good-paying ones that generate a meaningful amount of consumer spending. But smaller government is also a rallying cry for the Tea Party and many voters who feel the public sector has swelled beyond the ability of taxpayers to support it. The irony, of course, is that while politicians argue over the appropriate size and role of government, economic forces have been forcing it to shrink.

The changes vary by level of government, however, and they haven't necessarily occurred where voters want them to. There's been a sharp decline in the size of local government, for instance, while the federal bureaucracy has gotten slightly larger. Here's a breakdown:

Federal government. President Obama may claim that the government he leads has gotten better under his watch, but he can't claim that it's gotten smaller. Overall, the federal bureaucracy has grown by about 39,000 workers since Obama took office at the beginning of 2009. That includes a loss of about 111,000 jobs at the troubled postal service, and a gain of 53,000 Defense Department jobs, which includes the uniformed military. Excluding defense and the postal service, the core federal workforce—what many people think of as the "Washington bureaucracy"—has grown by about 97,000 jobs since Obama took office.

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The size of the federal workforce may have peaked, however. The postal service is likely to continue shrinking, and fresh cuts are coming in defense. Many agencies have hiring freezes in place, and cuts in discretionary spending due to begin in 2013 seem certain to further shrink the federal payroll. Intensifying budget pressures could compel whoever wins the presidency in November to enact even bigger cuts in 2013 and beyond. So Tea Party government-shrinkers may eventually get what they're after, no matter what.

State government. This level of government gets less attention than the feds in Washington, yet employs about 80 percent more people. With state budgets under severe pressure, however, employment has fallen by about 144,000 jobs over the last three years. Unlike the federal government, most states need to balance their budgets every year, so they can't borrow to prop up the payroll.

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Employment in state-run education, including public universities, is slightly higher than it was three years ago. But to protect education, many states have raised taxes and fees by about as much as taxpayers are likely to tolerate. Ongoing budget pressure and a pushback against new taxes probably mean that state employment will continue a gradual decline.

Local government. This is the biggest layer of government, with about 14 million workers. Local government has also seen the biggest cuts, with about 500,000 jobs lost over the last three years. These losses are often the ones that ordinary people feel most, since they affect cops, firefighters, teachers, garbage collectors, and the folks who man city-hall agencies. As many parents know, school districts have been under particular pressure. Total job cuts in local education since 2009: 243,000.

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With many schools and other municipal functions funded by property taxes, the pressure on local budgets will probably continue as long as the housing bust persists. Some economists think the housing market could start to turn around in 2013, but even if it does, a recovery is likely to be slow and uneven. That will probably subdue the size of local government for years. City hall isn't necessarily the first target of small-government activists, but it may be a harbinger of things to come in Washington. This is one trend that's likely to percolate upward.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success , to be published in May. Follow him on Twitter: @rickjnewman