Employment in the public sector: two recessions' impact on jobs

Monthly Labor Review, Oct, 2004 by Julie Hatch

During all this time, employment in State education responded to the outside stimulus. Even though the recession ended during the 2001-02 school year, education employment continued to grow at a healthy pace, as it did during the 1990s recession. However, when colleges and universities started back up in the fall of 2002, they did so with 35,000 fewer jobs (seasonally adjusted). (21) When the school year came to a close in July 2003, employment was little changed from the September level. It appears that the measures taken by the public colleges and universities to strengthen their financial pictures shored up employment. The June 2004 employment level was about equal to that of June 2002. In contrast, after the 1990 recession, education employment continued to grow until March 1995, when it declined for 2 years and 38,300 jobs were lost. This mid-decade slump was felt elsewhere in State government also.

Employment in State government, excluding education, responded to the 2001 recession the fastest of any government sector. The recession did not affect State tax collections immediately. Changes in income are usually felt at least 6 months before personal and corporate taxes are collected. In addition, nonwithholding income tax revenues, which result from items such as capital gains, are collected by States on a lagged basis. (22) The faltering economy did eventually have an impact on State tax revenues. Adjusted for the effects of legislation and inflation, revenues collected during the third quarter of 2001 declined by 4.6 percent, compared with revenues collected the year before. A similar decline was evident in the first quarter of 1991, when the year-over-year change in quarterly State tax revenue was 5.0 percent. (23) Employment in State government, excluding education, was not immediately affected by the 2001 recession. Initially, States relied on several standard budget adjustment tools, such as across-the-board cuts, rainy-day funds, and the reorganization of programs to shore up their budgets and, therefore, employment. (24) But these solutions were not enough to overcome tax revenues that continued to fall. State noneducation employment peaked in December 2001, a month after the recession officially ended. Similarly, excluding education, State employment had peaked 1 month before the 1991 recession ended.

The current picture contrasts sharply with the 1990s postrecession period. At the end of 1991, State employment, excluding education, started to recover and continued to grow, until peaking in January 1995. (See chart 4.) The 2001 recession affected this sector the fastest and hardest of any government sector. (25) Once the recession ended, the problems for States only got worse. By the second quarter of 2004, employment had fallen to the levels of early 2000, although employment had been relatively unchanged since July 2003. The budget problems that became apparent in fiscal year 2001 eventually developed into the worst financial situation in 60 years. Thirty-seven States cut their budgets by the cumulative sums of $12.6 billion and $14.5 billion in fiscal years 2002 and 2003, respectively. Additional methods used to balance budgets included employee layoffs, early retirements, reduced aid for higher education and localities, and other measures. (26) Budgets had started to improve slightly by the third quarter of 2003, coinciding with the improved labor market picture. (27) Even though fiscal conditions improved for fiscal year 2004, they fell short of prerecession levels, as did employment for the same period.