where’s the expansion in government employment?

In the US there are two major policy actions for dealing with recessions. The first is expansionary monetary policy, conducted by the Federal Reserve Bank (the “Fed”). The basic mechanism is to increase the money supply so as to lower interest rates and stimulate consumption and investment. In the wake of the Great Recession, the Fed used all sorts of conventional and unconventional means to push down interest rates, both short-term and long-term. Currently, rates are near historic lows (although the Fed can still do more, it is very reluctant to).

As a complement (or when Fed actions are insufficient), the US government can conduct expansionary fiscal policy. These actions involve lowering taxes (to stimulate consumption and investment) and increasing government spending. In January 2009 President Obama signed into law the American Recovery and Reinvestment Act (ARRA, aka “the stimulus”). ARRA involved about $550 billion new spending, spread over several years, and $275 billion in lower taxes.

Usually, expansionary fiscal policy involves creating new government jobs. Some at the Federal level as new programs and investments are implemented, and sometimes at the state level, where grants to state and local governments are used to buffer them from revenue declines (state and local governments typically can’t run budget deficits–when the economy shrinks, their revenues fall, and they often need to layoff workers in response).

In Colorado, government employment has not grown since the recession ended. In the following chart I show total state and local government employment since 2002. Additionally, I show annual population growth–as new people tend to be the largest driver of demand for public services. The monthly employment data is from the Bureau of Labor Statistics, while the July population data is from the US Census Bureau.

The chart shows that state and local employment did increase for the first few months of 2009, but has plateaued since then. In the mean time, the state continues to add people. Essentially, Colorado government employment has held steady over the past 3 years, despite growing demand. There is no expansionary policy evidence here.

In the following chart I break down Colorado government employment into its state and local components. The chart shows monthly employment as a share of January 2002 totals.

Here we see a couple of things. First, Colorado state government employment totals were flat for the first half of the 2000s. The passing of Referendum C in November 2005 (which offered a timeout from TABOR) led to higher state revenues and subsequently more state government employment. The state actually continued to add jobs over the course of the Great Recession, but that trend leveled off last year.

The really interesting component is the drop in local government employment (which includes school teachers). Here we see the real effects of lower local sales and property tax revenues. Reduced revenues mean fewer jobs.

The bottom line is that we have seen little stimulative effect on government employment in Colorado in the wake of unprecedented stimulus measures by the Fed and the ARRA program.

Indeed, in past recessions increased government employment has helped spark the recovery. Looking back since 1969, we see that this is the first US recession where government employment has not increased immediately after the recession. (In fact, this is true since the 1930s…i just wanted to make the chart easier to read).

* the spike in 2010 is due to hiring for the US Census.


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