The Biggest Drag on the Job Market Just Got Bigger

If there was any confusion about what part of the economy is working and what part is broken, the political antics of the last week have definitively cleared that up.

The shutdown of the federal government represents both a direct setback for the economy and a symbolic arrow pointing to one of the economy’s weakest sectors. Economic forecasting firm IHS Global Insight estimates that every week the government remains shuttered will reduce GDP by $1.6 billion. That's not a huge hit in the grand scheme of things, but the economy is weak to start with, and it’s not usually considered prudent to trip a limping patient.

The furlough of as many as 800,000 federal employees—punctuated by the government’s failure to publish the monthly jobs report for September on schedule, due to the shutdown--will further weaken a sector that’s already detracting from employment. During the 2007 – 2009 recession, private-sector payrolls collapsed while government payrolls expanded, thanks largely to federal stimulus spending. But the government sector is now shrinking, as the private sector recovers.

Since the recession ended in mid-2009, for instance, the private sector has added 5.9 million jobs, while the government at all levels has shed 780,000 jobs, according to the Bureau of Labor Statistics. The private sector still hasn’t replaced all the jobs lost during the recession, but at the current pace of hiring (before the latest fiscal follies), it should reach a new employment peak within a year or so.

Government hiring is going the opposite direction. The total number of government workers peaked in May of 2010, and has been falling ever since. Local government has shrunk the most since the recession ended, due largely to sharp drops in revenue from property taxes, along with cutbacks in state and federal aid once stimulus spending ran out. But local government employment seems to have bottomed out in 2012, with 48,000 new workers coming on board in 2013 as municipalities once again staff up schools, public safety departments and other divisions.

State governments have shrunk as well, with payrolls continuing a modest decline so far this year. The federal government has lagged the cutbacks at the state and local level, but is now shrinking more than any other big sector of the economy. Federal employment was stable through the recession but started decreasing in 2011: Since the end of the recession, federal payrolls have dropped by about 151,000, with 55,000 of those cuts coming in 2013.

Cutbacks at the beleaguered postal service have accounted for some of the drop, but the sequester cuts from earlier this year, along with limits on hiring at some agencies, have also helped trim payrolls.

To advocates of smaller government, of course, this is good news, because they’re getting a slimmer bureaucracy. The problem is that the structure of government isn’t really changing. The bureaucracy is just thinning out, which can only improve efficiency so much.

As for the broader economy, a lost job is a lost job -- whether it’s a government bureaucrat, a unionized assembly worker or a technology wunderkind. Government workers spend most of their pay just like everybody else, and fewer people with money in their pockets means fewer people shopping for cars, fixing up their homes, buying stuff on Amazon or eating at restaurants.

It’s still not clear whether the government shutdown will put some kind of permanent dent in the federal workforce, or be only a short-lived anomaly. If Congress comes up with a deal to reopen the government, it could include full back pay for every federal worker affected. On the other hand, the shutdown is just Act 1 in a larger drama over federal spending this fall, so permanent cuts in the federal bureaucracy are still possible. As Americans are learning, the less you rely on the government, the better off you’ll be.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.