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Tuesday, June 12, 2012

Only the deliberately blind would think the problem was in the public sector

Not only was President Obama's claim that the private sector is doing fine a boneheaded statement to make in the midst of deep concern about economic growth and unemployment, but even in the fuller context that the Democrats are trumpeting, it is just not true. Obama, and others like Harry Reid who have made this point, want to claim that public employment has been held back and needs Obama's new stimulus push to help states hire government workers. However, the BLS reports the unemployment rates for various sectors of the economy and it's clear that the public sector is the one sector doing fine.
According to the Bureau of Labor Statistics, the unemployment rate for government workers last month was just 4.2 percent (up slightly from 3.9 percent a year ago). Compare that to private-sector industries such as construction (14.2 percent unemployment), leisure and hospitality services (9.7 percent), agriculture (9.5 percent), professional and business services (8.5 percent) and wholesale and retail trade (8.1 percent). As Andrew Biggs of the American Enterprise Institute points out, the public-sector unemployment rate “is the lowest of any industry or class of worker, even including the growing energy industry.” If the rest of Americans enjoyed the same unemployment rate as government workers, Obama would be cruising to reelection.
President Obama is clueless that the problems in unemployment since the recession began have been in the private sector. Read this post by Tino Sanandaji to understand what has really been going on with public versus private sector employment.
From the start of the recession to Obama’s first full months in office, the private sector had already lost 5.3 million jobs, while the public sector had actually gained 0.2 million jobs.

During Obama’s three and half year tenure, the private sector has recovered merely 0.8 million of the 5.3 million lost jobs. This is hardly evidence that “The private sector is doing fine” or that “The private sector’s job creation machine is basically working”. Public sector employment by contrast has not changed much. From the start of the recession 0.4 million net public sector (federal, state and local) jobs have been lost.

This means that during the Great Recession so far, 92% of employment decline has been in the private sector. To some extent this is what we should expect, the private sector represented 84% of employment prior to the crash, that’s where the action is. Public sector employment has declined only half as much in relative terms as the private sector, and public employment is at any case too small a portion of the labor market in the United States to be the driving force.
And that's not even talking about how much of the first stimulus in 2009 went to pay for public sector jobs. What the President doesn't seem to understand is that temporary grants to states to pay for teachers, firemen, and policemen doesn't mean that those jobs will be permanent. The states will have to scramble to find funds to pay for them whenever the federal money runs out. That is what is happening now.

There is a lot more analysis at Sanandaji's post to explain all the ways that Obama's analysis is so wrong. This chart shows the percentage of working age adults employed in the public and private sectors.
Prior to the recession, 70.2% of working age adults were employed in either the private or public sector. By the time Obama took over this figure had declined to 67.4%. It declined further during the Obama presidency to 66.1% today, as the working age population increased by 4.2 million while net job growth has been around zero.

Prior to the recession, 58.8% of working age adults had a private sector jobs. This number declined to 55.9% in Obama’s first month in office, and declined further to 55.1% today. The U.S private sector successfully absorbed new workers throughout the post-war period. During the Obama Presidency it failed to do so, resulting in an increasing share of people who cannot find employment.
And how bad have those cuts of jobs for policemen, firemen, and teachers actually been? Jim Geraghty has the numbers from the BLS. The cuts are 2.1% for firemen and policemen and 4.1% for teachers. But those drops are from the peak years of growth in those positions.
In other words, Obama seems to think that the recent peak of local employment is the “normal” level, and that any drop from that is an economic problem to be solved. The notion that the very modest reduction represents localities adjusting their number of employees to a level they can sustain with their post-housing-boom tax base never seems to enter the picture.
The real reason why states and municipal governments have been delaying hiring more public sector workers is due, as Patrick Brennan points out, to their reluctance to take on the pension and benefit requirements associated with taking on new government employees.
Secondly, many governments are quick to resort to layoffs, and slow to rehire, precisely because of Democratic policies: Collective-bargaining contracts make it impossible to negotiate salary cuts, forcing governments to lay off junior employees in order to keep paying generous compensation to other workers. Secondly, because of the burdens represented by a union contract, governments can’t rehire until they’re sure their revenues have recovered for good. This dynamic can be seen at work in Wisconsin, where cities eschewed collective bargaining in order to avoid layoffs (as, in fact, erstwhile gubernatorial candidate Tom Barrett has done as Milwaukee mayor).
Josh Barro looks at the statistics from San Jose to explain this fact.
But the main reason is that costs for a full-time equivalent employee are astronomical and skyrocketing. San Jose spends $142,000 per FTE on wages and benefits, up 85 percent from 10 years ago. As a result, the city shed 28 percent of its workforce over that period, even as its population was rising.

A lot of that increase is due to rising required pension payments, as the assets in the city’s pension funds have lost value. But much also had to do with what Mayor Chuck Reed, a Democrat, describes as “irresponsible policy actions” over the last 15 years. Here’s his list:

1. Giving out raises faster than revenues were growing.

2. Giving out raises and increasing benefits when revenues were falling.

3. Giving out raises and benefits retroactively.

4. Allowing employees to cash out unlimited amounts of sick leave when they retire.

5. Providing lifetime health care for retirees.

He also notes that “the City Council and outside arbitrators also significantly enhanced retirement benefits. The maximum benefit for public safety employees grew from 75 percent of final salary to 90 percent, and a guaranteed 3 percent cost-of-living adjustment was awarded to all employees.”

In other words, the city made a lot of promises that it could barely afford when times were good, and now that times are bad, it really can’t afford them.
So, ironically, polices put in place by Democratic politicians indebted to their public employee union supporters are delaying hiring of more of those employees.

Any way you look at it, the decline in employment has been in the private sector. Only someone determinedly blind to how the economy works would think that these statistics indicate that the private sector is doing fine and that the real problem lies in the public sector. But that is where the Democratic base is so that is what they care about. The bill that Obama is pushing for is all about rewarding those base voters and has nothing to do with employment overall.


equitus said...

Thanks, Betsy. This lays the issues out clearly.

A typical reaction I've seen among Obama's supporters in response to Romney's teachers/firefighters comment is something like, "Under a Romney presidency, classroom sizes will explode and if you have a fire no one will be there to respond." It will be nice to come back with 2.1% and 4.1% reduction stats you cite.

Typical fear-mongering.

LargeBill said...

Another comparison that public sector unions don't like to see is between federal and state/municipal public employees. While there is still considerable waste in federal spending, there has been some reform in compensation. About thirty years ago, federal employees were pushed to a self-funded retirement called TSP with an employee match. New employees had to use that system and older employees (like my wife) could stay on the old pension system. Similarly, military pensions, while generous, can not be gamed like some local ones. Only base pay is used to calculated military retirement. Often union contracts allowed unused sick leave to be added to final pay check prior to calculation of a pension resulting in some folks getting a lot more in retirement than they were getting while working. As I tell people, federal is far from perfect, but local systems are miles past ridiculous. The only real fix is to let some municipalities or even states go under as a warning to others.

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