Public cuts lead to more private employment

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Article Highlights

  • It is undeniable that the unemployment rate would be lower if fewer government jobs had been cut.

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  • Private sector employment is important for the simple fact that state & local tax revenues fund public sector salaries.

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  • The private sector, despite turbulent economic times and uncertainty, continues to be the engine of economic growth.

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Editor's note: This article originally appeared in The New York Times' Room for Debate in response to the question: Are government layoffs the problem? What effect have public-sector job cuts had on the economy? Could governments have responded to the recession in any other way?

It is undeniable that the unemployment rate would be lower, and the recovery more pronounced, if fewer government jobs had been cut. But if the private sector is "doing fine," as President Obama famously said, could one reason be those losses in state and local jobs? The answer is yes.

During 2009 and 2010, President Obama and Congress spent 2.6 percent of gross domestic product at the state and local level primarily through the American Recovery and Reinvestment Act. But despite this huge stimulus spending, the share of G.D.P. contributed by state and local governments has collapsed since 2007.

While state and local spending accounted for nearly 13 percent of G.D.P. in 2008, barely 11 percent of G.D.P. comes from state and local spending today.

Meanwhile, the private sector, despite the turbulent economic times and the recent uncertainty surrounding the fiscal cliff talks, has continued to be the engine of economic growth. Despite shedding a large number of workers at the start of the recession, the private sector has added 5.0 million new employees since June 2009 as state and local governments have dropped 682,000 jobs. Private sector G.D.P. has continued to grow as businesses innovate and become more productive, finding ways to survive and grow in a challenging business environment.

Public sector workers, particularly those involved in education, have an important role to play in the economy. In most states, they account for about 14 percent of all jobs. But real economic growth has to start in the other 86 percent of the economy, where most workers earn their living. Indeed, private sector employment is important if even for the simple fact that state and local tax revenues fund public sector salaries.

As of January, the unemployment rate for those classified as government workers by the Bureau of Labor Statistics is only 4.2 percent, compared to 8.6 percent unemployment in the private sector. Clearly, if we care about economic recovery, we should focus our efforts at combating the specter of private sector unemployment. In a study of data from 1939 to 2008 the economist Valerie Ramey concluded that an increase in government spending typically causes private spending to fall significantly.

That should mean that the current recession-driven cuts in public expenditures may be exactly the stimulus needed to get the private sector on the road to recovery.

 

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About the Author

 

Aparna
Mathur
  • Aparna Mathur is an economist who writes about taxes and wages. She has been a consultant to the World Bank and has taught economics at the University of Maryland. Her work ranges from research on carbon taxes and the impact of state health insurance mandates on small firms to labor market outcomes. Her research on corporate taxation includes the widely discussed coauthored 2006 "Wages and Taxes" paper, which explored the link between corporate taxes and manufacturing wages.
  • Phone: 202-828-6026
    Email: amathur@aei.org
  • Assistant Info

    Name: Hao Fu
    Phone: 202-862-5214
    Email: hao.fu@aei.org

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