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State, Local Hiring Are Finally Joining the Recovery

The latest employment numbers show a job market that is still in slow recovery, but one underlying trend suggests the economy may have finally turned a corner, raising hopes for broader improvement in 2014.

State and local government hiring, which has been in a free fall for most of the past four years, has been steadily inching upward in recent months, a sign that local governments are finally seeing enough on-the-ground economic improvement and enough pickup in tax collections to hire more employees. Should that trend hold and expand, it would add a significant boost to overall employment growth and could accelerate the recovery.

From now to the end of 2014, government payrolls should go up by 350,000 jobs, or 10 percent of the total number of new jobs added next year, says Daniel White of Moody’s Analytics.

That figure would probably be even higher had the federal government not axed jobs following several years of cuts. Despite the federal drag, government employment should represent around 10 percent of the overall employment gains next year, making government the second fastest-growing sector after construction, White said.

State governments added 8,000 jobs in November, while their local counterparts added 6,000, with much of that increase driven by education hiring. Since June, states have hired 40,000 new workers. Their local counterparts have created almost 60,000 jobs this year so far.

The federal government, on the other hand, has been moving in the opposite direction, largely due to the mandatory budget cuts under the sequester. Federal employment fell 7,000 last month, contributing to the nearly 60,000 jobs shed by the federal government this year.

State and local governments employ 1 in 7 workers, collectively making them one of the largest employers in the country. The legions of teachers, firefighters, university administrators and others who are included in this category took a significant hit during the worst years of the recession, when states laid off hundreds of thousands of workers in the face of collapsing revenues. Now, though, their ranks are up, although growth is still slow.

The latest jobs report from the Bureau of Labor Statistics, which showed the overall unemployment rate falling to 7 percent, is the latest in good news for state and local governments. Last week the Census Bureau reported that spending on construction increased 0.8 percent in October, driven by a sharp 3.9 percent gain in state and local government construction spending. And last month, the Bureau of Economic Analysis reported that higher spending by state and local governments helped them contribute to overall growth in gross domestic product in the second and third quarters of this year. Before that, state and local governments had been holding back growth for 13 of the past 14 quarters.

Also, in the year ending in June 2013, state and local governments collected $77 million more than in the 12 months ending in June 2012, according to the Census Bureau.

Why has it taken so long for governments to bounce back? Part of the reason is that public spending tends to lag the overall economy, because governments can’t make budget cuts as quickly as the private sector. Likewise, governments are among the last to feel the effects of a recovery.

“The tax revenues that are being collected today are really based on economic activity that took place three, four or even five years ago,” White said.

“State and local government spending behavior is in many respects like household spending,” said Gary Burtless, a senior fellow at the Brookings Institution. “As soon as there is a drop in income, there is a pause in how much consumption declines, and consumption doesn’t decline as much as household income falls, but nonetheless it does fall.”

During the recession, governments were able to keep their employment rolls relatively steady thanks to stimulus spending. But once that money dried up, the drop was steep.

Among local governments, employment peaked in July 2008 — technically at the middle of the recession — at roughly 14.6 million workers. The recession officially ended in June 2009, but by then the drop in local government employment was only beginning. Local officials slashed payrolls for more than three years. By October 2012, there were almost 600,000 fewer people working for local governments. State governments shed almost 200,000 jobs between 2008 and 2012.

“State and local spending has declined for three years in a row, something which had not happened previously in the post-WWII era,” Joseph LaVorgna, chief U.S. economist for Deutsche Bank, wrote in a research note. “Outside of construction, this has been one of the largest sectors to shed employment since the last recession.”

Governments were shedding jobs even as the private sector starting adding them in early 2010. As a result, state and local governments weighed down the economy at a time when it desperately needed a boost. Part of that drop can be attributed to the emergence of a new class of Republican governors and state legislators, elected in 2010, who promised to keep taxes low and implement deep cuts throughout state government, Burtless said.

Even now, their recovery is still shaky. The Medicaid expansion brought on by the 2010 health care law (PL 111-148, PL 111-152) could end up costing states more in health care spending down the road. Likewise, tax collection has become more unpredictable in an era of slow economic growth.

“People are still looking for pickup and growth next year and in 2015,” said Paul Edelstein, U.S. economist at IHS. “It will probably happen because hopefully the federal government won’t be much of a drag. Overall, I think we’re in a protracted period of slow growth.”

Pawtucket, R.I., Mayor Donald R. Grebien said he has seen the first signs of an economic uptick in his hard-hit city. When Grebien took over three years ago, the city was in crisis. Desperate officials were considering turning off streetlights, and there was talk of a state takeover. Today, the situation has improved slightly. Small businesses are opening up and the jobless rate in the city has fallen from 12.3 percent in August 2012 to 11.1 percent a year later. That’s still considerably higher than national and state averages, but Grebien said he expects it to continue to improve.

The city government, which lost about 10 percent of its workforce through attrition and layoffs, is only now starting to hire again, Grebien said. In large part, the delay in hiring was due to the city’s desire to beef up its emergency rainy day fund before adding employees. That fund now holds about $900,000, far less than the $5 million it should have.

“We were the last to feel the effects of the recession,” he said. “We were a year or two behind everyone else. We’ll be a year or two behind” in the recovery.

Corrects the number of local government employees in July 2008.

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