March 28, 2024

Economix Blog: Federal Austerity’s Bite on Job Growth

The latest jobs report could have been even better. Employers added 236,000 jobs in February, evidence that the economy is gaining strength, but analysts generally agree that the number would have been higher if the federal government had not increased payroll tax rates in January.

And the sequestration of federal spending, which began last week, has joined the tax increases in restricting the pace of job growth.

As a result, the rest of the year is shaping up as a tug of war between a strengthening private sector and federal austerity.

“This is basically a picture of an economy that is showing modest growth, but has not yet felt the impact of the end of the payroll tax cut and the sequester,” Dean Baker, co-director at the liberal-leaning Center for Economic and Policy Research, wrote of the February data released by the Labor Department.

Government and private forecasters expect austerity, in the form of the spending cuts and tax increases, to take a big bite: about 142,000 fewer jobs a month for the rest of the year than would otherwise be added. That’s more than the 134,000 jobs that employers added each month last year, on average.

“Clearly, the labor market was in decent shape before the sequester began and before the impact of the Jan. 1 payroll tax hike started to work through,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisers. “But that does not mean these two factors — a tightening worth about 1.5 percent of G.D.P. — will not reduce payroll growth in the months ahead.”

The Congressional Budget Office estimated last year that the payroll tax increase would cost about 800,000 jobs this year, or about 67,000 a month.

Sequestration, the office estimates, will in turn cost about 750,000 jobs over the remaining 10 months of the year – or about 75,000 jobs a month.

Private economic forecasters have offered similar estimates. Macroeconomic Advisers predicted that sequestration would cost about 700,000 jobs, with most of the missed opportunities falling in the second and third quarters.

On the one hand, these estimates suggest that without federal austerity, the economy might have added more than 300,000 jobs in February. That would have been a good month even by the robust standards of the 1990s.

On the other hand, the estimates also suggest the economy will need to grow even more quickly to keep chipping away at unemployment. Another month like February, taking sequestration into account, would only increase employment by about 160,000 jobs, about enough to keep pace with population growth.

“It will take many months of job growth at this level simply to make up for the job losses during the recession,” wrote Joan Entmacher, an expert in family economic security at the National Women’s Law Center. “And Congress just made the task harder by refusing to block sequestration.”

Article source: http://economix.blogs.nytimes.com/2013/03/08/federal-austeritys-bite-on-job-growth/?partner=rss&emc=rss

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