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

Monthly Labor Review, Oct, 2004 by Julie Hatch

Local government. Like State government, local government added jobs at a faster pace during the recession. In 2001, local government employment grew by 2.9 percent, compared with an average of 2.1 percent for the previous 5 years. During the recession itself, localities gained 33,000 jobs per month, split equally between the education and noneducation components. Growth during the 1990s recession had not been as robust, but strength in education allowed local government to expand employment by 68,000.

Education continued to fuel job growth in local government throughout the 1990s, with approximately 2 out of every 3 new jobs created in education. Enrollment in public elementary and secondary schools grew 14 percent from the fall of 1990 to the fall of 1999. (28) Local education is the largest component industry within government (see chart 5) and typically adds a noteworthy number of jobs each year.

Education was not the only growth industry in local government. More than half a million jobs were created in local administration during the 1990s. The residual industry, other local government, which includes components such as libraries, recreation and park authorities, cemeteries, and housing authorities, was the fastest-growing industry. Overall, local government gained almost 2 million jobs during the decade.

The delayed impact of the 2001 recession on local government resulted in job gains. Local governments have a wealth of revenue sources, some more dependent on economic conditions than others. Revenue sources such as sales and income taxes and fees for services are more likely to be affected by both positive and negative changes in economic activity. Property tax, in contrast, weathers economic storms better, creating a short-term safe harbor for localities. (29) During the 2001 recession, the healthy housing market raised the value of residential real estate. Localities in turn reassessed properties, boosting their property tax bases without actually raising tax rates. In addition, cities receive funding from State governments. Because recessionary effects did not have an impact on State budgets immediately, local governments were affected on a lagged basis.

Cities operate on balanced-budget requirements, so they usually try to end the fiscal year with a surplus, which can then be used as revenue for the next year or can be set aside in anticipation of an upcoming economic downturn. According to a survey administered by the National League of Cities, the ending balance as a percentage of expenditures in 2001 was at the highest point, 19.1 percent, since the series began in 1985. (30) It is important to remember that many cities end their fiscal year on June 30 or September 30. Thus, the financial impact of the terrorist attacks on September 11, 2001, would likely be more apparent in fiscal year 2002. The strength in the ending balances is mirrored in the positive employment situation for local government during 2001.

The trickle-down effect slowed the impact of the recession on local governments, but eventually, the weak economy took its toll on budgets and payrolls. From 1977 to 2004, Federal aid to cities declined from 15 percent to 5 percent of total city revenues. In addition, aid from States was reduced $2.3 billion in fiscal year 2004 from fiscal year 2003, a sharp contrast to the past, when downturns were marked by a slowing rate of revenue growth, not an actual reduction in revenue. (31) Localities took various measures in response to reduced funding. For example, according to the National League of Cities, nearly half of the 328 cities surveyed in 2003 increased fee rates, 30 percent reduced city employment, 29 percent imposed new fees or charges on services, 21 percent reduced actual levels of capital spending, and 11 percent reduced city service levels. (32) The deteriorating fiscal conditions eventually affected employment. During 2002, half as many jobs were added in local government as were added in 2001, and by 2003 growth had come to a standstill.