Divergent Labor Markets: Private Gains, Public Losses

The last unemployment report before the election came out Friday, and the news was middling: Unemployment ticked up to 7.9 percent.

The private sector created more than 180,000 new jobs, but state and local governments resumed laying workers off. That discrepancy is part of a longer-term trend.

For a few years now, private sector employment has been growing, but since mid-2010, state and local governments have eliminated roughly half a million jobs.

"There's real consequences to these huge cuts in the public sector, for overall growth in the economy and for public services that we all need," says Sylvia Allegretto, labor market economist at the University of California, Berkeley.

She says close to 40 percent of all the public-sector jobs losses have come in California.

"Class sizes are increasing because we laid off a ton of school K-12 teachers," she says. "Our police department, which we've had to lay off a lot of those officers, is struggling."

Distributing Stimulus

But to really tell the story of these two labor markets, you have to go back four years, to the beginning of the financial crisis. In early November 2008, Barack Obama had just been elected president.

The economy was in turmoil, and the October job report had just come out: 240,000 jobs had been cut and the unemployment rate hit a 14-year high of 6.5 percent.

Those numbers were horrible, but they actually understated the real scale of the crisis.

Even before he was elected, Obama was pushing for a stimulus bill that was supported by a broad coalition of groups.

But by the time that stimulus bill was passed and signed into law in February 2009, more than 2.2 million more jobs had disappeared. The bill's effect on private-sector employment has been debated ever since.

The next year, however, the number of government-sector jobs remained relatively stable.

"We didn't start losing these jobs immediately," Allegretto says.

She says there is often a lag in a downturn before governments start laying people off: "It takes time for the government to institute their austerity measures."

But there was another factor, too. Even though many state and local budgets were decimated, the stimulus bill offered those governments more than $53 billion in aid. That cash prevented hundreds of thousand of layoffs, at least for a while.

Lagging Public Sector Losses

By 2010, the private labor market had begun to show signs of life. At the same time, stimulus aid to state government had begun run out.

"The large losses in the government sector actually started occurring once the recovery was underway," Allegretto says.

And the political climate had changed. The newly elected Republican House had no appetite for another stimulus. Without more federal aid, local governments started to lay off workers.

Allegretto believes those layoffs created another powerful drag on the economy, but most economists on the right don't share that view.

"You can have a fiscal expenditure to try to hire workers or keep workers in their jobs, but someone has to pay for that. That doesn't come for free," says University of Chicago professor Randall Kroszner, who served on President George W. Bush's Council of Economic Advisers.

"It's very important for sustainable, overall economic growth to be creating private-sector jobs," he says. "The government perhaps can provide a stopgap, but that's very, very temporary at best."

Instead, he prefers to see the federal government hold the line on new spending and then do everything it can to help the economy grow up around it.

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