Pity the Poor Private-Sector Workers

Has the recession ended? If not, do “green shoots” foretell a recovery’s advent in the near term? The answer, of course, depends on which indicators we check. Unfortunately, the mainstream economics profession and the public alike place too much emphasis on highly aggregative measures, such as estimates of quarterly GDP and the standard rate of unemployment, in their attempts to grasp what is happening. As usual, we must delve into the aggregates and inspect their components in order to gain a clear understanding of how the economy got into its present condition and to arrive at a well-founded conjecture as to where it is likely to go in the near-term future.

Mindful that both the public and the policy makers place heavy emphasis on “jobs, jobs, jobs,” I have been thrashing about in the employment data collected, organized, and distributed by the Bureau of Labor Statistics. At this point in the recession, everyone knows that the standard rate of unemployment, for what it is worth, has risen greatly since 2007 and lately has been stuck in the neighborhood of 10 percent. Because of this statistic’s various ambiguities (which I have discussed elsewhere), however, I am concentrating here on a more unequivocal indicator—employment.

There is no happy news on this front, of course. Total employment peaked in 2007 at 137.6 million persons on nonfarm payrolls, fell slightly in 2008, and then dropped precipitously in 2009 to 132.0 persons, for a two-year loss of 5.6 million jobs. In 2009, total employment was approximately equal to its magnitude in 2001, even though the labor force had grown substantially in the interim. The sharp recent decline in employment, which normally increases from year to year along with the labor force, has been bad enough, but when we examine the components of aggregate employment, we discover even worse news.

We find that the loss of employment has occurred entirely in the private sector: employment fell from 115.4 million persons in 2007 to 109.5 million persons in 2009, a decline that took private employment back to its level at the end of the 1990s. As private employment has collapsed since 2007, however, the government payroll has actually grown slightly from 22.2 million persons in 2007 to 22.5 million persons in 2009, which puts this class of employment roughly 1.7 million persons above its magnitude in 2000.

Monthly data for the most recent year display this difference starkly. From December 2008 to December 2009, total employment fell from 135.1 million persons to 130.9 million, while government employment remained essentially constant at 22.5 million persons. The government employees also enjoyed increased compensation during recent years. Nice work if you can get it: no risk of losing your job, plus practically iron-clad prospects of rising real compensation, notwithstanding that millions of former private-sector employees now find themselves without jobs.

Of course, much of the Obama administration’s “stimulus” spending has been directed toward ensuring that state and local government workers do not lose their jobs, and federal employees, as usual, have not had to fear joining the unemployment line, owing to the rapidly growing appropriations for practically every department and agency in the recent, skyrocketing federal budgets.

This situation bears an eerie resemblance to the employment situation during the Great Depression, when private nonfarm hours worked fell steeply from 1929 to 1932 and did not get back to the 1929 level until 1941, notwithstanding (or perhaps because of) the millions of persons added to government payrolls during the New Deal period. In both cases, the possibility that government employment crowds out private employment, rather than stimulating it, cannot be dismissed out of hand.

Unless private employment growth resumes soon, the United States risks falling into the same long-term economic “sclerosis” that has plagued the welfare states of western Europe for decades. Already it appears that the past ten years may prove to have been America’s second “lost decade” (the 1930s having been the first), an interval of little or no net economic gain, owing to destructive government policies that produced only unsustainable booms followed by inevitable busts, along with such huge, frequent, and unsettling changes in government policies that private planning, especially for long-term investment, has become too risky for private investors to bear—a situation I call regime uncertainty.

Vulgar Keynesians like to suppose that whenever the government undertakes new spending to augment the ranks of its employees a multiplier effect will result, causing private economic activity and employment to follow the same upward course. Here again, however, a closer examination of what the government does and how it goes about doing it may serve to shield us from the fallacies of overly aggregative economic analysis.

UPDATE 1: Those who read Spanish will enjoy the current article at Libertad Digital by my friend Angel Martin, who shows that recent sectoral employment changes in Spain and the United Kingdom mirror those I have described above for the United States. Even if you don’t read Spanish, the graphs will be easy to understand, and they will convey the main point.

UPDATE 2: My friend Tom DiLorenzo makes an important point about these recent employment changes in a note he sent me:

Government employment is even worse than you wrote about in your recent
article, reprinted on LRC. The feds have employed thousands, probably
hundred of thousands or more, of additional “contract employees” in
recent years. They’re listed by the Commerce Dept. as private sector
employees even though all their pay and benefits come from government
contracts. The D.C. suburbs are booming like they’ve never boomed
before in terms of population growth. This boom started with Bush and
Fatherland Security and his wars, and has been greatly expanded by
Obama from everyting I’ve read. Unfortunately, good statistics are
really hard to come by on these contract employees.