State Budget Cutbacks: A Job Market Drag?

One of the reasons you hear regularly thrown out to explain why unemployment has remained persistently high this recession and whatever you would call the period we are going through now (recovery, not quite) is state budgets. Government is typically the most reliable employer during a recession. But strapped states are having to follow the economy this time around and lay off workers. The stimulus bill plugged some of those state fiscal holes for a while. But now that that money is gone, state budget cut backs have emerged as one of the economy’s headwinds. The question is just how much of factor has that been in this year’s slowing growth.

Economist and New York Times columnist Paul Krugman yesterday reprinted a chart from Goldman Sachs showing just how much fiscal policy has affected the economy since the credit crisis. According to the chart, government has gone from providing a 2.5% boost to the economy in mid-2009 to being a drag, subtracting about 0.75% from economic growth in the second quarter of this year. And all of that drag came from state budget cuts.

(PHOTOS: Postal Offices Threatened by Budget Cuts)

Looking at this chart, you would suspect that government cut backs, i.e. Republican austerity measures, in particular state budget cut backs, are the main reasons hiring has flat-lined recently. But a look at some recently employment statistics suggests that at least state budget issues have played less of a role in the job market freeze than many think. Here’s why:

On Friday, the government released its state-by-state employment statistics. The Labor Department had already told us that August was a bust. The economy added no jobs last month. But on Friday we also learned that the unemployment rate rose in a majority of states last month – the third month in a row that had happened.

If state budgets were playing a role in all of this, you would expect to see the heaviest job losses in the states that face the biggest budget holes. But that’s not the case. I found a list from the Center for Budget and Policy Priorities of the ten states with the largest projected shortfalls this year, as a percentage of their budgets. The list included California, Illinois, Minnesota and, obviously, seven others. In the past year, on average job growth in those 10 states has risen 1%. That was slightly faster than the economy overall, for which the number of jobs increased by about 0.9% in the past year.

(MORE: Will Obama’s jobs plan be enough to revive the economy)

Last month, employment in New York dropped the most out of any state, down 22,000. But New York, while budget constrained, is not on the list of states with the largest budget problems. In the past year, Georgia has lost the most amount of jobs out of any state, down 29,000. But Georgia isn’t on the list of states facing the largest budget crunches, either.

That being said, the data isn’t completely one-sided. It does appear that in the states that have had jobs losses, government has played a significant role.  In Georgia, for instance, 22,500 fewer people are employed in government jobs than their were a year ago, which could account for over 75% of the state’s jobs loss.

That being said, the employment statistics show that the state budget problems, while perhaps playing a role, are not the main source of the job market’s woes. That matters if and when Washington gets around to passing a jobs bill. Even if government doesn’t kick in its normal share of hiring, the economy can still be put on a path of recovery. It’s businesses that matter most and need to be pushed the most to hire.