Government Hiring Masks Real Unemployment Picture

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South Carolina’s unemployment rate has long been among the worst in the country, hitting a high of 12.5 percent in January 2010. As of June 2010 (latest data available), the unemployment rate had fallen to 10.7 percent. During the same period, South Carolina has gone from having the 4th worst employment rate in the nation to the 7th worst. Currently, the state is one of thirteen suffering from double-digit unemployment. Worse still is that even this marginal improvement in employment is misleading. In fact, government hiring accounts for much of the new hiring, suggesting a private-sector recovery is still a long way off.

 

Why Did South Carolina’s Unemployment Rate Fall?
Although it is tempting to conclude that the federal stimulus—or, closer to home, the Boeing economic incentives deal—contributed to South Carolina’s slight decline in unemployment, this is not the case. Rather, the following two factors are what caused the marginal improvement in the state’s employment situation:
  • A significant drop-off in the number of people actually seeking employment
  • A massive spike in public sector hiring: particularly part-time Census workers
Discouraged Workers Dropping Out
The unemployment rate only accounts for workers who have actively sought employment over the past four weeks. This means that persons who have been unemployed for months and stopped looking are not counted as unemployed. (In 2009, it took 19.4 weeks—the longest search time in the nation, along with Michigan—to find a job in South Carolina.) Likewise, individuals who have moved to another state to look for work or been pushed into early retirement are not counted as unemployed. In other words, a shrinking labor force could actually lead to what seems to be an improved employment rate. And this is precisely what is happening in South Carolina.
From January to June 2010, the state’s labor force shrunk by 24,376 jobs. All told, 34,062 workers have withdrawn from South Carolina’s job market since June 2009.
From January to June 2010, the state’s labor force has shrunk by 24,796 jobs—contracting by 9,618 persons in the last month alone. All told, 34,062 workers have withdrawn from South Carolina’s job market since June 2009—with labor pool losses accelerating rapidly since January. Consider the following trend from May to June 2010:
  • The state’s labor pool shrunk by 9,618 persons
  • The number of unemployed persons declined by 8,609
  • The number of people actually employed in South Carolina fell by 1,009
In other words, there were fewer jobs available in June than in May. But because nearly 10,000 fewer people were actually looking for work, the unemployment rate decreased.
Overall, the state’s labor pool has shrunk by 1.56 percent since June 2009. Thus Coastal Carolina University economist Donald Schunk recently cautioned against being overly optimistic about the improved unemployment rate: “Yes, the jobless rate is moving in the right direction.… But a healthy labor market needs to be able to accommodate labor force growth, not decline.”
Government Hiring Increased by 3.66 Percent from January to May 2010
State Hiring Slows, But Still IncreasingAs indicated, seasonally adjusted state hiring declined from January to May 2010. Yet, during the same period, non-seasonally adjusted hiring increased by 2.2 percent, or 2,200 positions. Understanding this discrepancy requires a word about the methodology used by the U.S. Bureau of Labor Statistics’ (BLS) to calculate state employment rates. The seasonally adjusted dataset uses estimates of what historically happens in the job sector during a particular time of year: for example, in the summer, tourism jobs spike in South Carolina.From January to May 2010, the seasonally adjusted data shows a 1.52 percent decline. Yet, overall, state hiring grew by 2.2 percent. The seasonally adjusted decline indicates that historically the state has hired more positions from January to May. In other words, even though state government added more jobs, it was at a slower pace relative to past years. As a result, BLS seasonally adjusted data indicates a decrease in hiring.
But it’s not just a shrinking labor pool that is lowering South Carolina’s unemployment rate. Government hiring is also driving up employment numbers. From January to May 2010, total public sector employment in South Carolina increased 3.66 percent.[1]
  • Federal: 32.06 percent increase (31,500 to 41,600)
  • State: 1.52 percent decrease (99,000 to 97,500)
  • Local: 1.33 percent increase (221,900 to 226,200)
At the federal level, part-time positions hired for the 2010 Census caused a nationwide bump in the employment rate. In South Carolina alone, such workers accounted for 8,500 new hires from April to May 2010—without which, notes Schunk, “the state would have seen a slight decline in jobs from May 2009.” Likewise, local government hiring continued to grow at a rapid clip. Only at the state level did hiring slow, falling by 1.52 percent. Yet, even this decrease is countered by a 2.2 percent increase in non-seasonally adjusted hires (see box).
During the same period, private sector employment increased by 3.21 percent. And while this growth is welcome, public sector hiring has increased much more quickly than in the private sector, threatening to crowd-out, or slow, a private sector recovery.
5.3 Private Sector Jobs Lost for Every Public Job Gained
Comparing government hiring gains to private sector job losses since the beginning of the recession in December 2007, the disparity between the two sectors becomes even larger. Since December 2007, private sector employment in South Carolina has declined by 130,100 jobs, or 8.09 percent. By comparison, public sector employment has increased by 24,500 jobs, or 7.19 percent. Put another way, the private sector has shed 5.3 jobs for every public sector job created.
  • Federal: 39.60 percent increase (29,800 to 41,600)
  • State: 1.02 percent decrease (98,500 to 97,500)
  • Local: 9.60 percent increase (209,300 to 226,200)
During the same period (FY2008 to FY2010), total state budget appropriations increased by almost half a billion dollars. Thus, while state hiring slowed somewhat, as reflected by a seasonally adjusted decline of 1 percent, spending continued to grow. The result, as we will discuss below, is that government spending is hindering a robust private sector recovery.
Government Hiring Crowding Out Private Sector Growth
As we predicted when the state first began accepting federal stimulus dollars, increased government spending will ultimately have a detrimental impact on private sector job growth in South Carolina. Not only will the federal stimulus package likely lead to a state tax increase, it will also result in 24,000 to 35,000 lost private sector jobs.[2]
These job losses will occur because government spending does not stimulate private sector growth, but limits it—precisely because government spending is fueled by taxes imposed on the private sector. Such spending constitutes a transfer of wealth from more productive to less productive endeavors. This is not to say that government jobs have no value whatsoever, but that they are less valuable, less productive, than private sector jobs. Consequently, they cause an overall loss to the economy.
This approach to government hiring was once recognized as an established fact among economists—even government economists. “The employment and unemployment statistics of the 1930s excluded people who would not be employed in the absence of public largesse,” observed economist William Shughart in a recent op-ed in The Washington Times. Continues Shughart:” To be sure, jobs financed at taxpayer expense were plentiful. But back then, the Bureau of Labor Statistics didn’t count people on work relief as employed. In fact, persons listed on Depression-era work-relief rolls were not included in the labor force at all.”
Today, however, the BLS does count government jobs as part of its total employment numbers. The result, as we saw above, is that private sector job losses are being masked by increases in public sector hiring. Indeed, if we excluded public sector jobs from the total employed workforce, South Carolina’s unemployment rate would be a whopping 28 percent, instead of the current 11 percent.[3]
This pattern of government job growth is evident across the nation—not just in South Carolina. Economist Veronique de Rugy of the Mercatus Center at George Mason University compared job losses in the private sector to gains in government hiring since the beginning of the recession.
More than 7.96 million jobs have been lost in the private sector since December 2007: a 7 percent decline. During the same period, government added 590,000 jobs: a 3 percent gain.
It’s not just that the government has been hiring more workers. According to a BLS report in June, government jobs pay significantly more than private sector jobs. In March 2010, total private industry workers averaged $27.73 per hour worked. But government workers at the state and local level averaged $39.81 per hour. Government employees earned $12.12 more per hour.
What these figures tell us is that politicians think government hiring—and a government-driven economy—is the key to prosperity in our state (and our country). But this continued pursuit of a planned economy will only further hinder a private sector recovery and limit future opportunities for real prosperity. The alternative, as always, is smaller government, less government spending, and more freedom.

[1]These numbers do not account for June 2010, owing to the release of this data as of press time.

[2]Assuming an immediate and direct causal relation between government hiring and private sector job losses (done here only for the sake of illustration), we could argue that government hiring has already reduced the private sector by 12.5 percent. This figure assumes an initial ratio of 4.7 private sector jobs for every public sector position.
[3]In South Carolina, there were 1,920,479 workers employed as of May 2010. Dividing that figure by the total labor force (2,158,803) results in the current unemployment rate of 11 percent. If we removed all workers employed by government (365,300), the total employed workforce would be 1,555,179. Assuming for the sake of this analysis that none of these workers were then employed in the private sector, the unemployment rate would be 28 percent. Granted, a more refined, dynamic analysis would alter these numbers, but the raw data vividly indicates the massive distortions government hiring has on the job market.

 

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