Michigan’s Single-State Recession and
its Effects on Public Employment

Memorandum 1124, September 2013

Introduction

The significant private sector job losses Michigan experienced during the prolonged state downturn that began in 2001 and continued through the 2008-09 recession are well documented. What is less widely known is the impact that the economic downturn has had on public sector employment in Michigan. While private sector employment has begun to recover, job losses in some areas of government employment continue.

Economists have documented the sluggish economic recovery from the 2008-09 recession. This slow recovery is especially wearisome in Michigan, as the state economy did not fully recover from the earlier and less severe 2001 recession. Since the official end of the 2008-09 recession in June 2009, Michigan’s total seasonally-adjusted non-farm employment increased by 6.1 percent as of May 2013. Despite this improvement, total employment is still down by 11.6 percent since the 2001 recession began in March 2001 and by 13.2 percent since Michigan’s employment high water mark in April 2000.

While there has been an upturn in private sector employment in Michigan, the number of public sector jobs continues to steadily decline. Since its trough in July 2009, the private sector workforce has grown by almost nine percent. In contrast, over this same time period, public employment has dropped by almost six percent.

The overall decline in public sector jobs has been driven by the local government sector, which is twice as large as the state government sector. Although there have been losses in some areas of state employment, job losses in local government have been widespread. The contraction of the local government sector is primarily a consequence of the housing market collapse, state policy decisions that impact local government revenue, and to some extent, privatization of local government services. Local government employment losses now exceed private sector losses. From Michigan’s employment peak in April of 2000 through May of 2013, private sector employment declined by 13.2 percent, while total government employment fell by 11.1 percent. State government employment, which includes public universities, actually increased by 5.9 percent, while local government employment, which includes K-12 employment, fell by 16.6 percent over this time period.

Michigan’s Single-State Recession and the Current Landscape of its Economy

The nation slipped into a recession in March 2001, shortly after Michigan’s employment peaked in June 2000. Although the nationwide 2001 recession only lasted eight months, Michigan was considered to be in a single-state recession in the years that followed. According to the Michigan Department of Technology, Management and Budget, the single-state recession started sometime in the middle of 2002, signaled by a disruption in employment recovery following the 2001 recession and a fall in job gains compared to the United States as a whole. The employment and job losses in Michigan did not begin to show signs of stabilizing until early 2007. However, as is well-documented by now, any hopes of a full recovery from Michigan’s single-state recession were short-lived as the entire nation slipped into recession in December 2007. The 2008-09 “Great Recession” lasted one and a half years and did not officially end until June 2009.

Between 2000 and 2009, Michigan ranked last in the nation in growth in population, real per capita gross domestic product (GDP), and employment. Michigan became poorer relative to other states as its per capita personal income national ranking fell from 19th highest in 2000 to 41st highest in 2009.

Coinciding with national trends, the Michigan economy has seen signs of improvement, following the end of the national recession in mid-2009. Although still short of its pre-recession levels, the state’s real GDP grew by 11 percent from 2009 to 2012. Annual real GDP growth in Michigan exceeded the national average in both 2010 and 2011, and economists expect state GDP growth to remain steady. Michigan’s real GDP growth in 2011 was the 5th highest in the nation, though its rank fell to 18th highest in 2012. Also, the state unemployment rate dropped to 8.8 percent as of July 2013, down over five percentage points since its peak at 14.2 percent in August 2009. February 2010 marked the end of a 47-month streak in which Michigan had the highest unemployment rate in the country. However, the unemployment rate in Michigan has not yet recovered to its pre-2001 recession level of 4.7 percent in March 2001.

Similarly, employment in Michigan has also increased since the end of the 2008-09 recession based on data from the Bureau of Labor Statistics (BLS). Seasonally adjusted total non-farm employment rose by about 6.1 percent between June 2009 and May 2013. However, employment in Michigan is still down by 535,900 jobs, about 11.6 percent, since the 2001 recession began. Chart 1 shows the composition of employment in Michigan as of the first quarter of 2013.

In response to the near decade-long economic decline, the State of Michigan was forced to make significant spending changes that transformed the composition of the state budget. State budget decisions directly impacted public sector employment levels for both the state government sector, as well as, the local government sector. Between Fiscal Year 2000 (FY2000) and FY2010, total state spending increased by 26.3 percent, keeping pace with inflation growth (22.5 percent) over the period. However, much of the increased state spending was financed by federal aid, not state resources, as state revenue growth was constrained by the effects of the weak economy on major tax receipts. State spending from state resources only increased by 2.5 percent during the same period. As a result, the composition of the state budget was transformed; state expenditures increased for K-12 education (8 percent), corrections (27 percent), and on Medicaid (34 percent), while funding distributed to local governments through state revenue sharing decreased by 34 percent, and appropriations for higher education decreased by 14 percent.

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