Is Government Crowding Out Private Sector Jobs?

We got a huge pop in jobs in last month’s employment report. And this was mainly responsible for the drop in the unemployment rate as over 400,000 temporary census jobs came online.  John Lounsbury figures that the individuals employed in these temporary jobs will be on the street looking for positions in short order. He says more than half a million job losses are coming as a result.  Even Jan Hatzius who was pretty bullish on the jobs number – expecting 150,000 private sector jobs – thinks we should focus on the private sector, implicitly saying these census numbers will be coming back into the unemployed labour pool.

(video below).

Nonetheless, some others are acting as if these jobs are being siphoned off from the private sector, in essence claiming the government is crowding out the private sector in the quest for labour.  Is this really true?  In his latest daily note, David Rosenberg chimes in:

I’m hearing a lot from Wall Street houses that the reason why private payrolls were so weak was because the government borrowed jobs from the private sector, and that when the Census ends, these workers will migrate to the private sector. Really?

There are a lot of reasons why this makes no intuitive sense and one of them is simply that nobody in their right mind would take a temporary government job doing the census over a full time job (with benefits) offer in the private sector. Plus, there should be no problem at all for firms in the private sector to fill their labour needs given the enormous volume of potential supply — the total supply of available labour in the U.S.A. now exceeds over 20 million (and was actually drawn down by 500,000 last month, so I don’t see how this fits in with the ‘crowding-out’ theory).

Construction employment fell 35k last month. Did these builders really leave to work door to door for the government? Or did the housing industry come to a standstill as the tax credits expired?

The financial sector laid off 12k last month — did investment bankers really leave to work for the Census?

State and local governments fired 22k — tell me, these folks voluntarily left their full-time jobs at this level of government to go and take on a Census job?

Give me a break!

Plus, it is extremely difficult to run regressions from prior Census years because 1990, 1980, 1970 and 1960 were all recessions, so it goes without saying that private payrolls were extremely weak. Seems to me that this analysis would have been more credible if it was released before the data than after — this is akin to trying to fit the facts to the number.

In addition, ‘crowding out’ is a process, not something anyone should be viewing for a one-month wonder. Yes, we typically get a “pop” in private payrolls in the June of a Census year but then it tails off in July. So, I’m not really sure this does anything to solve the debate as to what the real contours are shaping the U.S. labour market. I still think the stalling out in initial jobless claims, at around 460k, is a big story and they are part of the Conference Board’s index of leading economic indicators.

Bottom line: the anti-government crowding out rhetoric is nonsense right now. The government isn’t crowding out anything.  The private sector simply isn’t hiring workers.

We have 15 million people who are unemployed, 6.7 million of whom have been unemployed for over 26 weeks. There are an additional 8.8 million people who are working part-time purely for economic reasons and an additional 1.1 million people who are labelled as marginally-attached discouraged workers.  There is an enormous supply of labour the private sector can choose from.

Think of it this way. Per capita income in the United States is just under $40,000 per year. So total lost economic output can be calculated as follows:

  • $40,000 * 15 million unemployed = $600 billion
  • $20,000 * 8.8 million part timers = $176 million (let’s assume they are half-time employees who could be full time employees)
  • $20,000 * 1.1 million discouraged = $22 billion (let’s assume they could be half-time employees)

Total lost output and income per year? About $800 billion. Of course, some would argue there is always some lost output via frictional unemployment as people change locations, professions, etc. Fair enough. Let’s haircut the figure a massive 25% then, down to $600 billion for argument’s sake.

Are you telling me we should be worrying about crowding out right now when $600 billion in income is being lost?  That doesn’t make any sense to me.

While I still think we could see some decent private sector jobs gains by year’s end, I can’t get my head around the concept of government stealing jobs from the private sector when there are some 25 million people who are underemployed. The crowding out story is total nonsense.

  1. Abhishek says

    Crowding out the private sector jobs – This is one of the more fanciful theories that I have heard from the “bullish” Street thinkers.With millions unemployed how could 400k workers crowd out the job market? Anything to justify your beliefs

  2. Matt Stiles says

    I agree that there is no direct crowding out. Although I strongly suspect government stimulus policies are making the private sector more averse to hiring new workers.

    Surely they see the massive deficits and correctly imply a higher rate of future taxation. And the government has certainly done their best to ensure wages do not fall (part of their anti-deflation campaign), thus making it less economic that it would have been to hire new workers. But these distortions have only just begun, in my opinion, and hardly have any effect yet on aggregate employment numbers. They will prove to be a lag on output only after the business cycle has troughed – something that hasn’t occurred yet (still too much debt to mark a trough).

    1. Marshall Auerback says

      The private sector might think that. There is no accounting for changes
      in private portfolio preference shifts or the behaviour of corporations. By
      the same token, there is no reason for government to make things worse via
      stupid policy, which is what the withdrawal of fiscal stimulus would do.
      In effect, that would validate businesses decisions not to take on more

      In a message dated 6/9/2010 3:58:05 P.M. Mountain Daylight Time,

  3. DavidLazarusUK says

    There is absolutely no way that the government is crowding out the private sector. It might be an issue when unemployment is below 4% but with US U6 unemployment well above 17%. The same applies to private borrowing. No one is borrowing, and banks really do not want to lend to anyone other than the government at the moment if they were honest. Everyone is too indebted and so it will be payback time for a long time.

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