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June Jobs Report: This Silver Lining Has a Cloud

Every indication is that the Bureau of Labor Statistics report for the June labor market will show large gains in the private sector. We have already surpassed the previous highs of non-farm employment and private-sector employment set in 2008. But this silver lining has a cloud. We remain lagging in public-sector employment. Most importantly, local education employment is still below its June 2009 level. Though it fluctuates slightly month to month, it remains near where it was in 2012, about 320,000 below its peak. While other local government jobs appear to have recovered, local public education has not. State government employment also remains lower than its January 2009 high, languishing about 140,000 below its peak.

This is the first post-World War II expansion in which public-sector employment has not recovered quickly. And it is the first expansion in which the public sector has been such a drag on the growth of gross domestic product (the measure of all goods and services produced in the United States). This drop in public-sector spending and public-sector employment gives the appearance of the often-discussed "structural change" in the labor market. Typically, structural change describes a shift away from jobs requiring fewer skills and less education toward high-skill occupations requiring higher levels of education, resulting in workers being displaced and unemployed with too few skills for the new economy. But this is a structural change in reverse because public-sector services tend to require a higher skill set and employ workers with higher levels of education than the types of services that have been growing during this recovery, such as retail, business services, accommodations and food services. 

The low level of public-sector employment is reflected in the continued drag of state and local government on the GDP. Shrinkage in state and local government accounts for about 6% of the 2.9% GDP drop in the first quarter of this year. In real terms, state and local governments are back to their 2005 levels, and continue to fall from their pre-recession peaks. This is the headwind against which the expansion is sailing in the short term, but the decline in investment in public education is more like an anchor dragging on long-term economic growth prospects.

Since 2011, federal employment has continued to fall, dragging on GDP growth. The first quarter of this year was the first since the third quarter of 2012 in which contraction in government spending wasn’t a drag on economic growth. Again, this reflects declining public-sector investment necessary for long-term and sustainable growth.

As the Affordable Care Act continues to expand coverage to more people, state and local governments have growing needs to administer the program effectively. And as global warming continues to cause wild swings in our weather patterns, local communities increasingly are pressed for first responders, and adequate government response and management of disasters. More than being a drag on the recovery, the threat of public mismanagement grows as fewer workers are in place to address public needs.

The recent ruling by the Supreme Court in Harris v. Quinn may further complicate the matter of having an adequate public-sector workforce. Since the court ruled that home care workers in Illinois are not public employees, though their wages come from a public program, they do not enjoy the status of public-sector workers. That will continue to encourage the outsourcing of public functions, leading to reduced accountability with public funds.

The other cloud is that since 2008, the less-discussed labor flow data consistently show that unemployed workers are more likely to drop out of the labor market the following month than to find employment, despite the recovery. This is helpful in understanding how the labor market looks from the perspective of those seeking work. Over the past three months, this figure has improved for men—who have been more likely to find work than to drop out—but the pattern continues for women. The net result is that the unemployed are more likely to drop out than to find work. Women’s labor-force participation, which peaked in the 1990s, is very sensitive to wages and job prospects, suggesting continued weakness in the labor market.

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