Why Are Government Jobs Down?

Why Are Government Jobs Down?

In this weekend's New York Times Magazine, Annie Lowrey notes that the recovery has been slower for government jobs than for private-sector ones. But her explanations — implicit racism and imprudent tax cuts — miss the mark. As I explain in a recent report, one also has to look at costs, specifically those related to pensions, in order to fully make sense of why the public-sector workforce has still not returned to its pre-recession peak.

The Times article reports mainly on the state and local scene, and rightly so. "Government" employees mostly work for states, cities, counties, and school districts. The federal workforce composes only 12.5 percent of government employment nationwide. This fact is significant because state and city fiscal policy is different from federal fiscal policy, most notably in the commitment to balanced-budget requirements, and because states and cities are truly driving the decline in government jobs. State and local payrolls are around 500,000 below where they were prior to Lehman Brothers' collapse.

To go to the root of the matter, you have to look at both state and local budget data and the differences between the public- and private-sector workforces. Economists do not agree whether government workers are overpaid, but there is consensus that their compensation has a different structure that what is found throughout corporate America. Specifically, state and local compensation is markedly "back-loaded": Health and retirement benefits take up a proportionately larger share than they do for private-sector employees, and retirement benefits are provided mostly in the form of defined-benefit pensions.

In the defined-benefit model, the employer promises each worker a certain percentage of their final salary through their retirement years. This benefit is funded through a combination of employer (and often employee) contributions and investment return.

That last clause is key. Over the years, states and cities have become increasingly reliant on risky asset classes, such as stocks and alternative investments, to fund benefits. This policy was developed to minimize costs to taxpayers and employees, but in more recent years, underperforming investments have meant increased budgetary volatility. Market losses dig holes in pension funds that have to be filled by larger contributions by taxpayers.

Between 2008 and 2013, the last year for which full data are available, governments' pension expenses rose 32.2 percent, whereas state and local general revenues rose only 11.1 percent. Looking back to the dotcom collapse, from 2002-2013, pension costs went up 176 percent while general revenues increased only 60 percent.

Again, virtually all states and cities are legally required to balance their budgets. Thus, when a major cost category such as pensions rises more rapidly than revenues, some other spending commitment, such as more teachers or cops, gets "crowded out."

In my report, I estimate that, had pension costs risen at the same rate as general revenues since 2008, state and local government jobs would now be roughly 200,000 higher than their current total, and 500,000 more if costs had tracked general revenues since 2002.

To be clear, rising pension costs cannot totally account for why the state and local jobs recovery has lagged that of the private sector since 2008. And conservatives should understand that cutting taxes while your pension-debt totals keep growing is not fiscally responsible. The public-pension crisis is by no means unique to blue states.

But there's simply no way that, across the nation, diminished government workforces can be chalked up solely to a revenue problem. Many, many governments in blue states are having budget troubles these days, such as Monterey County, Calif.; Palo Alto, Calif.; Providence, R.I.; Hartford, Conn.; the Connecticut state government; and the Chicago Public schools. I'd add that racism is probably not behind Monterey County's hiring freeze.

Increasingly generous benefits are not the reason states and cities are spending more on pensions. In fact, benefits have become less generous, as a result of a wave of pension reform passed in the wake of the recent recession. Pension costs are up because pension debt is up. Unfunded liabilities — the gap between assets on hand and how much has been promised in benefits — are now at a 50-year high relative to revenues. The Obama administration has taken note of this troubling development in its "Economic Report of the President" (see Figure 2-v on page 69).

Rising pension-debt service means spending more on the costs of the past. Governments are, in effect, compensating workers and retirees for services the public enjoyed many years ago. The more you have to spend on the costs of the past, the less you have to spend on the costs of the present, such as hiring new employees.

Of course, the larger question is, do we have a problem at all if government jobs are down? I think we probably do, for two reasons. First, even if payrolls are down, government is not truly shrinking if costs are rising to fund pension debt. Second, the public is accustomed to a comfortably-staffed state and local workforce.

Low class sizes are universally popular. Structure fires have declined dramatically in recent decades, and a modest increase in emergency-response times may not be medically consequential, but public pressure to keep emergency-response times low will continue to prop up firefighter and emergency-services staffing levels. Cities can't turn to robots to improve police-community relations. It is probably not a coincidence that the most popular level of government, local government, also happens to employ most of the public-sector workforce.

At the very least, governments should possess the flexibility to rehire as needed. But that is easier said than done when so much of their new revenue growth is being consumed by pension-debt service costs.

The gap between public- and private-sector employment trends points to the serious and unaddressed fiscal challenges now faced by the state and local sector. It's encouraging to see prominent outlets raising awareness of it. But the way to advance constructive debate is to acknowledge that both blue and red states are struggling and to take a broad look at budget dynamics, instead of simply reaffirming liberal biases about those Republicans being at it again with their racial insensitivity and stupid obsession with tax cuts.

Stephen Eide is a senior fellow at the Manhattan Institute

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