The Sluggish Recovery of State and Local Public-Sector Employment

The blog post below later appeared in a revised and updated form on the CUNY Graduate Center’s Economic Studies Group site, for which I originally wrote this. Written in July, when the economic data below was still current, I posted this here as my inaugural blogpost.  The subject matter is of general relevance to my dissertation work, as it attempts to map the current state of the US public-sector labor market in the wake of the coronavirus pandemic-induced recession. 

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A great deal of attention has been paid recently to the trend toward increasing job counts, declining new weekly unemployment claims, and what these trends signal about the healing of the American economy. The Department of Labor’s July 2 news release indicated that June witnessed the single largest one-month period of employment growth (850,000 new jobs) since the late summer of 2020.[1] The Department separately recorded 364,000 new unemployment claims for June, the lowest number of such claims filed since March 14.[2] Yet, another focus of the domestic economic news has been that employers are finding new workers hard to come by. Labor force participation has remained essentially flat over the last year: in June 2021, 61.6 percent of the labor force was active or looking for work, up a mere 0.2 percent from June of 2020.

Though a fierce debate is raging over why labor force participation remains low despite employers’ demands for new workers (for example, whether this is due to a labor shortage fueled by generous unemployment benefits[3] or if the economy is simply ‘ramping up’[4]) this discussion is overwhelmingly focused on what is happening within industries (primarily leisure and hospitality and retail) in the private sector. While this makes sense, as leisure and hospitality witnessed the steepest declines in employment due to non-essential business closures and a fall in consumer spending, often neglected in this discussion are dynamics of the recovery elsewhere in the labor market.

One such oft-forgotten area is the public sector, where declines in sales, personal income, and property taxes, as well as far below average tourism rates have yielded extended furloughs and layoffs due to lower-than-average government revenues. This post looks at the varied performance of state and local government employment and shows that while the beginnings of a what appear to be a rocky rebound elsewhere in the labor market are certainly encouraging, as many economists and observers have rightly emphasized, public sector employment is hardly out of the woods yet.

Public-Sector Labor Market in Perspective

Public-sector jobs currently compose nearly 15 percent of all US non-farm employment, with a vast majority (87 percent) located in state and local government.[5] Between January and May 2020, the US economy shed around 1.5 million state and local public-sector jobs and by June of 2021 just a little over one-third of those jobs (35 percent) have returned. The decline in public-sector jobs in the wake of the COVID-19 recession has been both more sharp and more severe than the loss of public-sector employment following the Great Recession. From January 2009 to January 2010, total state and local government employment declined by 162,000 jobs, or around one-tenth of the decline in the wake of the pandemic-induced recession.

Figure 1. Total US State and Local Public-Sector Employment in Thousands, January 2020-June 2021

Source: National Current Employment Statistics, US Bureau of Labor Statistics.

What’s particularly troubling about recessionary drops in public-sector employment is that they tend to be durable and slow to bounce back. Following the 2008 financial crisis, private-sector employment fell more sharply than all levels of public-sector employment. However, while the private sector reached its pre-Recession levels by April 2014, state and local government employment would not reach December 2007 levels for another two and a half years (see Figure 2). This is especially the case for non-education jobs. Non-education state employment never recovered to its pre-Recession levels. As of June 2021, both state and local government employment appears to be rebounding; however, when education jobs are excluded, the employment trend moves in the opposite direction.

Figure 2. Ratio of Pre-Great Recession Monthly Employment across Sectors, 2007-2021

Source: National Current Employment Statistics, US Bureau of Labor Statistics

How does public-sector employment compare to two of the hardest-hit sectors of the labor market by COVID-19 pandemic, leisure and hospitality and retail trade? Unsurprisingly, far and away the greatest decline in employment from January 2020 to June 2021 has been in leisure and hospitality, which despite the reopening of nonessential businesses across states is still 12.6 percent below pre-pandemic levels (see Figure 3). Though also experiencing a significant initial dip in jobs, retail trade has fared better than state and local public-sector employment. Much of the pandemic decline in public-sector jobs loss has been in education, particularly among non-instructional staff as well as food service and transportation occupations.[6] This is visible when public education employment levels are disaggregated from state and local public-sector employment as a whole. Employment in state public education institutions was most affected, as it reached a 13 percent decline in jobs as compared to pre-pandemic levels. On the other hand, while state and local education employment appears to have begun a sharp rebound as of January 2021, non-education local government jobs have remained at around 5 percent below pre-pandemic levels.

Figure 3. Percentage Change in Employment across Select Industries, January 2020 – June 2021

Source: National Current Employment Statistics, US Bureau of Labor Statistics.

Given that local government employment as a whole saw the greatest pandemic-related drops, it is worthwhile diving deeper to see how public-sector employment fared in individual cities and their outlying communities. Figure 4 presents changes in local government employment in the nation’s five largest cities and their metropolitan areas from January 2020 to May 2021. Though nearly all cities have been affected economically by the pandemic, their response in terms of employment varies considerably. The largest declines in public-sector employment as of June 2021 are in the southeast, in Los Angeles (5.5 percent) and Phoenix (4.5 percent) and their adjacent urban areas. Cities where layoffs as of March have been most minimal include New York City (a decline of 0.9 percent) and Houston and its outlying communities (a 0.7 percent decline). Among these six cities, New York City is an outlier in not only managing to keep employment relatively stable, but to have even grown the size of its public-sector labor force above pre-pandemic levels from September 2020 to January 2021.

Figure 4. Percentage Change in Local Government Employment, Five Largest Municipalities or Metropolitan Areas by Population, January 2020-May 2021

Source: National Current Employment Statistics, State and Metro Area, US Bureau of Labor Statistics.[7]

The above-mentioned patterns of public-sector employment decline are troubling for least two reasons. First, public-sector layoffs, like unemployment elsewhere in labor market, drag down economic growth, as laid off workers lead to depressed consumer spending. Further, lagging government employment growth is indicative of austerity in state and local government spending, which has itself historically dragged out economic recoveries.[8] Second, the public-sector disproportionately employs women and workers of color, so layoffs and furloughs disproportionately affect these groups, making public-sector job declines an issue of racial and gender equity.[9] A recent report by the New York Times shows that Black and Hispanic women experienced the greatest drops in employment and continue to be less likely to have returned to work as of April 2021.[10] Given that Black women make up one out of every four public-sector workers,[11] the slow recovery of government jobs has almost certainly contributed to the persistent unemployment in this demographic group.

What’s Drove the Public-Sector Jobs Decline?

The rest of this post examines how the financial circumstances of sub-national governments have evolved since January 2020, and the way that states and cities have responded to the pandemic crisis by constraining levels of public employment. While closures of non-essential businesses, flagging demand, and supply chain interruptions all have resulted in rising unemployment in the private sector, much of the decline in public-sector employment has been caused by both anticipated as well as actual state and municipal revenue shortfalls.

Data on state budgets and anticipated revenues allow us to compare the how states responded to anticipated revenue shortfalls with cuts to employment in an attempt to balance their budgets. Figure 5  charts the 15 most-populated states according to their anticipated state revenue shortfalls as of November of 2020 against their actual percentage change in state government employment from January 2020 to May 2021. All states in Figure 5 projected shortfalls in tax revenue, and all but Arizona have responded by decreasing their overall levels of state employment. Nevertheless, states display variation in the degree to which they laid off workers. Michigan, Ohio, and North Carolina all reduced their state workforces by more than 10 percent, while two-thirds of the 15 states’ state employment levels shrank by more than 6 percent. Yet, California projected the largest revenue shortfall (17 percent) but shrank its state workforce by half as much as Ohio, which projected a 9 percent revenue shortfall.

Figure 5. Changes to State Government Employment and Estimated State Revenue Shortfalls

Source: National Current Employment Statistics, US Bureau of Labor Statistics; Center on Budget and Policy Priorities, State Budget Watch[12]; Actual changes in state revenue, rather than projected changes, are computed as difference in tax revenues collected between April to December 2019, and April to December 2020, Urban-Brookings Tax Policy Center.[13]

Though all fifteen states in Figure 5 initially projected revenue shortfalls, in certain states revenues did not decline as sharply as anticipated. This is due in part to federal aid, which bolstered consumer spending and helped to restore levels of economic activity faster than expected. Many states that saw better than expected revenues also maintained progressive income taxes, as much of the economic burden of the pandemic recession fell on the backs of those with low-income, and passed budgets with scaled-back expenditures.[14] Examining total state tax revenues from April to December in 2020, researchers at the Urban-Brookings Tax Policy Center found that state revenues were down just 1.8 percent from the same period a year prior.[15] Nevertheless, of the fifteen states in Figure 5 with actual budget shortfalls, red dots, decreased state employment precipitously. However, states without actual budget shortfalls, blue dots, laid off or furloughed state workers, to the same, if not a slightly greater, degree.

Cities also have been in rough financial straits during the pandemic, though systematic data on their budgets is less easily accessible. A December 2020 survey[16] by the National League of Cities estimated a staggering 90 percent of cities had experienced revenue declines because of the COVID-19 pandemic, and that collectively cities are facing a nearly $90 billion budget gap. Because municipalities, like states, are often required to maintain balanced budgets, any shortfall could result in cuts to public jobs. Acting in anticipation of said cuts, the same National League of Cities survey estimated that 37 percent of cities had either laid off or furloughed workers, implemented hiring freezes, and delayed wage increases.

Looking Forward – A Public-Sector Recovery Ahead?

In March 2021, the Biden administration enacted the American Rescue Plan Act of 2021 (ARPA) into law, which provided sub-national governments with much-needed aid to stem impending and future layoffs and furloughs. Under ARPA, states received a total of $195 billion, while local governments received $130 billion.[17] By comparison, the CARES Act passed under the Trump administration allotted half the ARPA amount, just $150 billion, to all fifty states and 38 cities with populations greater than 500,000 people. Perhaps most significantly, however, is the wide discretion that states and local governments have in spending the ARPA funds. While state and local governments were required to show that CARES Act relief dollars were spent to on expenses tied to mitigating the “public health emergency with respect to COVID-19,”[18] ARPA funds can be spent to address the specifically economic impacts of the pandemic. Crucially for government employees, this includes the maintenance of government services that would have otherwise been curtailed due to projected revenue shortfalls. In select cases, ARPA provided funds that have more than filled their projected budget gaps, allowing states and cities to use the money to fund overdue infrastructure projects.[19]

It should be noted that despite the size of the aid provided by ARPA, and the enhanced flexibility that states and local governments have for expenditure, the sluggish recovery of public-sector employment visible in the data presented above are from May and June 2021, three to four months after the Act’s passage. Future monthly employment figures will show more fully how states and municipalities have used the recent infusion of federal assistance from ARPA to restore public jobs. However, it is important to keep in mind that ARPA, though generous, is a one-time stimulus and may not be sufficient to rebuild government services that have been diminished by decades of underfunding. Further, political inertia on the state and local level, combined with the arduousness of Department of Treasury reporting requirements attached to federal assistance, make uncertain the degree to which ARPA funds will be used to address systematic inequalities in order to ‘build back better.’[20] Without the kind of changes in state and municipal taxation recently enacted in New York[21] and Seattle[22], recoveries in government employment could continue to lag years into the future resulting in sustained forms of austerity and reductions in public services. Indeed, as noted above, years after the Great Recession of 2008 government services continued to shed record numbers[23] of public-sector jobs due to persistent state and municipal budget shortfalls.[24]

As observers continue to monitor the health of the pace of the US economic recovery, attention should be paid to the restoration of state and local government jobs. Though a relatively under-examined, job growth in the public-sector is to both the restoration of necessary public services and economic health of the United States.

Notes

[1] https://www.bls.gov/news.release/archives/empsit_07022021.pdf

[2] https://www.dol.gov/sites/dolgov/files/OPA/newsreleases/ui-claims/20211252.pdf

[3] https://www.wsj.com/articles/americans-are-leaving-unemployment-rolls-more-quickly-in-states-cutting-off-benefits-11624786202

[4] https://www.epi.org/blog/job-and-wage-growth-do-not-point-to-an-economy-wide-labor-shortage/

[5] https://www.bls.gov/charts/employment-situation/employment-levels-by-industry.htm

[6] https://www.pewtrusts.org/en/research-and-analysis/articles/2020/11/10/nearly-all-states-suffer-declines-in-education-jobs

[7] Unlike other data in this post, municipal-level local government employment data is not seasonally adjusted. Inclusive of workers in education and health services sectors employed by local governments. Some employment figures include other cities’ employment inclusive of local government workers in adjacent cities within the municipality’s metro area.

[8] https://www.epi.org/blog/a-prolonged-depression-is-guaranteed-without-significant-federal-aid-to-state-and-local-governments/

[9] https://www.epi.org/publication/bp339-public-sector-jobs-crisis/

[10] https://www.nytimes.com/2021/06/04/business/economy/jobs-report-may-2021.html

[11] https://blog.dol.gov/2021/02/09/a-more-inclusive-economy-is-key-to-recovery

[12] All estimated changes in state revenue are derived from projections for FY 2021 except for Nebraska, which is FY 2020. In cases where states provide a range between two percentage figures, an average is taken. https://www.cbpp.org/research/state-budget-and-tax/states-grappling-with-hit-to-tax-collections

[13] https://www.nytimes.com/2021/03/01/business/covid-state-tax-revenue.html

[14] https://www.nytimes.com/2020/12/18/upshot/pandemic-surprising-state-revenue.html

[15] https://www.taxpolicycenter.org/taxvox/why-states-and-localities-need-more-federal-aid

[16] https://www.nlc.org/wp-content/uploads/2020/12/NLC_Survey_November_2020_Infographic_Web.pdf

[17] https://home.treasury.gov/news/featured-stories/fact-sheet-the-american-rescue-plan-will-deliver-immediate-economic-relief-to-families

[18] https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf

[19] https://www.nytimes.com/2021/03/13/us/stimulus-biden-states-cities.html

[20] https://www.crisesnotes.com/will-recovery-funds-really-allow-state-and-local-governments-to-build-back-better/

[21] https://www.nytimes.com/2021/04/09/nyregion/nyc-budget-taxing-rich.html?searchResultPosition=3

[22] https://www.cnbc.com/2020/07/07/seattle-passes-payroll-tax-targeting-amazon-and-other-big-businesses.html

[23] https://economix.blogs.nytimes.com/2012/01/06/under-obama-a-record-decline-in-government-jobs/

[24] https://www.cbpp.org/blog/big-public-sector-job-losses-dragging-down-economy

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