In April, amidst the early days of the economic downturn, we examined the likely effects that the pandemic-induced recession would have on government budgets and the public sector workforce. Now, more than three months into the economic unrest, hard data reveals the severity of the employment, wage, and output losses. The picture is not good, including the effects on public sector jobs.
The initial employment losses in the state and local government sectors are much more severe than the early months of the Great Recession and these declines are much larger than any three-month stretch during the previous downturn. Early indications are that this recession is likely to have a significant and lasting effect on Michigan’s public sector workforce at all levels.
The near shutdown of many parts of the U.S. economy beginning in March and continuing through May swelled the number of unemployed Americans by more than 14 million, from 6.2 million in February to 20.5 million in May. Michigan’s numbers are no less frightening, as the ranks of the unemployed jumped from 180,000 in February to over 1 million in May with some comparing the dramatic job losses to the Great Depression. The state’s unemployment rate rose from 3.6 percent to 21.2 percent over the same period, with 10 of 83 counties registering rates above 25 percent in May.
Both nationally and in Michigan, these numbers are substantially greater than the unemployment situation arising from the Great Recession. Michigan’s high-water mark during that downturn was 725,000 unemployed (June 2009) with an unemployment rate of 14 percent. The path of employment losses during the Great Recession can be seen in the chart below (shaded area represents period of recession).
Change in Monthly Private and Public Sector Employment Since December 2007
Source: Bureau of Labor Statistics
Private sector employment experienced a steep and sustained decline from the end of 2007 through the middle of 2009. During this period, employment losses in the local government sector were much more gradual, while the number of state government jobs actually increased throughout the recession. This job growth was primarily driven by hiring at the state’s 15 public universities.
By the end of the recession in mid-2009, the private sector had lost about 11.5 percent of its jobs. But the combined state and local public sector, driven by the job losses in local government, including K-12 education, had only shed about 1.2 percent of jobs (note: there are nearly two local government jobs for every state government job) through June 2009. While state employment remained steady and private sector employment fully recovered, local governments continued to shed jobs well into mid-2016. Further, the rebound in this sector since has been much weaker than that experienced with either private or state government jobs. By February 2020, the number of local government jobs was 15 percent below the pre-Great Recession level.
Thus far during the current downturn, employment losses across all sectors of the economy have been more severe than any time during the Great Recession.
State and Local Government Job Losses
The May jobs report revealed a bit of good news with the start of a recovery from steep private sector losses. After losing almost 980,000 jobs from February to April, more than 240,000 private sector jobs were added in May. Still, private employment is down nearly 20 percent since February. This positive news was tempered by continued cuts to the public sector in Michigan, including public education at all levels.
Accounting for about one of every seven jobs in Michigan, state and local governments lost a total of 65,000 jobs since February, or about 11 percent of the total workforce. Since the onset of the pandemic in early March, state and local officials have issued hiring freezes, furloughed workers at shuttered facilities, laid off seasonal employees and trimmed full-time payrolls. While the private sector incurred greater losses than the public sector since February, the reopening of the economy and lifting of stay-in-place orders provides some hope for the return of private sector jobs. The prospect of coming state and local budget cuts means that the public sector workforce remains vulnerable to further reductions.
The first three months of the COVID-19 recession have been unlike the experience of the Great Recession ten years ago. During the first three months of the Great Recession, the public sector lost just one percent of its jobs (see chart below), a small fraction of the current decline. These losses were concentrated in the local government workforce. Current job declines have been much more widespread.
At the state level, over 36,000 jobs have been lost since February. The state education workforce has contracted by almost 25 percent in the pandemic recession, which equates to about 33,000 jobs and accounts for 90 percent of the total state decline. Many of these losses are a result of school closures and looming budget cuts at public universities. Like local governments, university officials issued furloughs, cut seasonal workers, and enacted hiring freezes. Many of Michigan’s 15 public universities are facing significant losses of revenue including state aid, and many students are considering postponing their enrollment for the fall semester, both of which compound an already serious problem.
One area of state employment that has avoided major reductions thus far is Michigan state government. Although Governor Whitmer instituted mandatory two-day furloughs for two-thirds of the state workforce, they have not materially changed the overall employment picture. Monthly civil service payroll reports show that the state workforce is only down a tiny fraction since February. This may be short-lived as officials recently announced a budget agreement to address a $2.2 billion shortfall in the current year that requires a state hiring freeze and layoffs.
At the local government level, the workforce shrank by 29,000 jobs in the first three months of the current downturn. Local education jobs, including K-12 schools and community colleges that account for a little more than half of the total sector, are down 7 percent, equating to a loss of about 14,300 jobs since February. With the closure of public and private school buildings in early March and the shift to remote learning, many schools made significant cuts to non-instructional hourly staff (bus drivers, custodians, and para-professionals), maintaining teaching positions to deliver instruction during the shutdown. Non-instructional positions account for one-half of the K-12 workforce. Most of the cuts to date relate to closures, but further reductions are expected in the coming months in response to budget cuts.
Outside of education, municipal employment is down 8 percent. This includes general administrative jobs in city and county government, but notably public safety positions. The data does not specify how many police and/or fire jobs have been lost. Similar to the state sector, local governments responded to stay-at-home orders by cutting seasonal workers and furloughing staff. Further job losses are expected as local government budgets are cut in response to declining state aid and tax revenues.
Public Sector Job Losses During the First Three Months of Recession
Source: Bureau of Labor Statistics
Looking beyond the first three months of the Great Recession, the number of jobs lost pale in comparison to that experienced during the early months of the COVID-19 recession. The worst three-month private sector job loss during the Great Recession was 4 percent (November 2008 to January 2009), a full year after the onset of the downturn. The worst three-month span for state and local government occurred between May and July of 2009 with a decline of 10.0 percent. Both of these three-month changes are less than the initial employment hit of the current downturn. The Pew Research Center suggests that although the number of jobs lost is significantly higher than the Great Recession, the nature of the layoffs in the public sector may be temporary rather than permanent. However, this will not be known until the full effect of the recession can be studied.
Federal Government to the Rescue?
Because deficit spending is prohibited under state law, government job losses are continuing in anticipation of current and future budget shortfalls. State revenue estimators project combined budget deficits in the General Fund and School Aid Fund of $3.5 billion for next fiscal year. At the same time the state and local governments are preparing for budget cuts, the demand for core governmental services remains fairly constant during the pandemic.
The federal government has passed three substantial coronavirus relief bills including the $2.2 trillion CARES Act in March to help individuals and businesses respond to the problems created by the pandemic. So far, federal action has not sufficiently helped state and local governments make up for the revenue they are losing, and many sectors are suffering due to shortfalls. The federal government’s response has been targeted at helping states respond to COVID-19, but is not designed to fill holes in their budgets caused by the pandemic. The just-announced current-year budget agreement uses some of the state’s CARES funding to offset state budget cuts.
While state and local leaders are hoping for further help from the federal government to make up for revenue shortfalls in the short term, it is unlikely that sufficient federal funds will arrive soon enough to stem the massive government employment losses arising from state and local budget adjustments that have to be made. Further, it is unknown whether federal assistance will be available to backfill state and local revenue losses and make public budgets whole or solely to fight COVID-19.
The prospects for the public sector look bleak at the moment. In particular, the local government job-shedding that began with the onset of the Great Recession has re-ignited with the economic disruption caused by the pandemic. As public budgets are slashed, these jobs are going to disappear. Budget cuts will lead to local government layoffs, not only public workers but also those employees working on local contracts and grants. As all these workers are laid off, they will reduce their spending on various consumer goods and services, which will reduce employment further in the already hard-hit retail sector. Further, job losses may hamper the ability of the government to deliver the services taxpayers expect.
Peter McAndrews, our summer intern and a student at Michigan State University James Madison College, assisted with data collection, research and writing.