Thursday, October 11, 2012

The latest pickup in state and local government jobs is not sustainable

As economists focus closely on the US jobs data from recent months to gauge the state of the labor markets, one unusual trend emerges. After years of declines, the number of government employees has increased steadily during the third quarter. This was a surprise.

Government jobs in the US (Source: Bureau of Labor Statistics; SA, thousands)

It turns out that most of these new hires were at the state and local level. It's difficult to see what's driving this trend, though signs point to increased hiring in education.
Washington Post (Suzy Khimm): - This month’s jobs report showed a few notable upticks in hiring, including for governments at the state level. State governments added 13,000 jobs in September, marking their third straight month of public gains. It’s been a slow recovery for state employees, but the numbers have generally been creeping upwards since December 2011, when state government employment was at its lowest level since the beginning of the recession.

The gains were concentrated in education, which one would expect employment to increase as we head towards the beginning of the school year. But the numbers are seasonally adjusted, meaning they take that annual bump into account.
Is this the beginning of a recovery in public employment? After all the WP article was entitled "Government jobs are finally starting to come back". Unlikely. According to BNP Paribas, state and local governments are still running near record deficits (chart below), which makes this recent hiring trend unsustainable. Unlike the federal government, municipalities have a tougher time growing their debt indefinitely, which forces them to cut expenses and reduce hiring.

Furthermore we may be reading into these numbers too much because the employment data from municipalities may simply be flawed.
BNP Paribas: - ... the caution to this interpretation is that the data on government hiring rely on self-reports, response rates are low and the data are, therefore, of relatively poor quality. More than likely this is simply a reflection of statistical noise in the data that we expect to be reversed in coming months.
QoQ % changes in state and local government jobs on the right-hand side (green),
Deficit in bn on the left hand side (blue)
(Source: BNP Paribas)

This means that going forward, government jobs will once again create a drag on employment growth in the US, as the recent hiring (real or imaginary) is reversed.

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