Despite what you hear about the overgrown public sector, government has actually been a major contributor to job losses, as budget constraints at the state & local level have been severe.
But according to Deutsche Bank, this may just be about over. The gist: tax receipts are coming back.
Market participants have cited increasing risks to the economic recovery due to state and local budget gaps forcing cuts to the government labour force. To be sure, the fiscal deficits facing state governments are daunting and the centre for Budget and Policy Priorities projects states will have to close $122B gap for FY2011, even after accounting for $36B in federal aid provided by the Recovery Act and a further $23B in federal aid for teachers ($6.2B) and Medicaid ($17.3B) outlined in the recently signed bill. As with any initial set of budget estimates, numbers are sure to change with the trajectory of the economy, but we thought it helpful to examine what states have already done to cut costs. State and local government workers currently number approximately 19.5M (14.4M local/5.1M state employees) and as a percentage of total nonfarm payrolls they account for 15%, the second highest percentage of the total workforce since 1975 (15.6%). However, state governments have so far cut 43k employees since Aug 2008 and local governments have cut 239k during the same period (1.4% of state and local total). 40 seven per cent of those cuts have been local teachers (132k) as they account for over half of the state and local total (10.4M). During the double dip recessions of 1980-81 state and local governments cut 417k employees between November of 1980 and July of 1982 (3.1% of the total at the time). For comparison purposes, private nonfarm payrolls declined by 8.4M between July of 2007 and December of 2009 (-7.3% of the total work force).
On the surface this would seem to suggest that state and local governments still have cuts to make as many investors fear. If the double dip recession period of 1980-81 saw 3.1% of state and local employees let go, then a similar cut from peak to trough applied to the current downturn would imply another 332k layoffs in the pipeline.
However, changes in public sector hiring, at least at the state level, have a 49% correlation with changes in tax collections given a 6 quarter lead and as the chart below shows, state tax collections turned positive y/y in Q1 2010 after 5 straight quarterly declines (y/y). If so, then the worst may soon be behind us with respect to state and local government finance.
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