More than 1.3 million state and local government jobs have been lost since December 2019. While this is the result of a broader economic shock across industrial sectors, we expect additional furloughs in state and local governments unless federal aid is quickly put in place to offset the collapse in tax revenues.
Unless there is aid put forward in the near term, another 1.5 million public sector jobs could be at risk.
Although a windfall from capital gains taxes linked to elevated equity valuations have provided modest relief to beleaguered state and local government budgets, the situation is still dire.
It is essential that these government workers continue to provide critical services for their citizens and that local governments avoid severe budget cuts that could strangle a nascent recovery.
Unless there is aid put forward in the near term, we think that at least an additional 1.5 million public sector jobs are at risk and that this will likely require close to $450 billion in aid to avoid an employment catastrophe. Providing that assistance is in everyone’s interest.
A perfect storm
State and local governments are under financial siege by a perfect storm of higher expenses and lower revenue. The decrease in revenue is easy to understand – the unemployed do not contribute payroll taxes and the general public saves more and spends less, reducing sales tax revenue. The increase in expenses includes higher Medicaid expenses and contributions to unemployment benefits, and increases in other social welfare costs.
State and local governments have limited options: Increasing tax rates, or cutting of labor expenses and the services those workers provide.
The decrease in revenue gives state and local governments limited options: increasing tax rates, or the degradation of services and cutting of labor expenses. What is evident from the figure above is that state and local governments have done what most private enterprises have done – furlough employees.
But degradation of services only makes the situation worse as municipalities become less attractive to households and businesses that might move there. And this, in turn, further degrades the tax base.
During the 2008-09 recession, Congress provided $144 billion in aid to state and local governments, with 90% of state aid going to Medicaid and education – and that still was not sufficient to prevent a loss of public sector employment and created the conditions for a slower pace of growth than would have otherwise been necessary.
It could be argued, however, that the $144 billion was the seed money for regeneration of municipalities. Over the course of the sustained expansion from 2010 to 2019, metropolitan areas in each state became the magnets for educated young people, advanced manufacturing and the digital economy.
The following is a closer look at cuts in state and local employment during the pandemic and the impact on education and health service occupations.
State and local government payroll data is broken down by education employment and non-education employment – which includes a range of jobs, from protective services to administration to trash removal and everything else in between.
As of December, state payrolls for education were down 13.9% compared to December 2019, before the pandemic. Local education payrolls were down 8.4%, with the difference perhaps because of state sponsorship of higher education – with many older students forgoing tuition for remote learning – versus local responsibility for mandated K-12 education.
As of December, state payrolls for non-education services were down by only 0.5% relative to December 2019. Local non-education payrolls, however, were down by 4.6%.
The loss of local government non-education employees comes with potential implications such as the deterioration of fire and police coverage, less frequent trash collection, and the diminishment of other quality-of-life services provided at the local level. These are essential services that allow the rest of us to maintain our lives in an orderly and safe environment.
We can see the decline in essential service employees from the perspective of occupation, which includes both government and private employment of education and health services.
Occupations in education and health services
By the end of 2020, there were 4.8% fewer employees in education and health service occupations than there were in December 2019. This will not be the first recession in which employers have shed the employees who teach our children or care for the sick and elderly.
The furloughing of school support employees might seem logical this year, given that schools are closed. But that doesn’t mean they are simply collateral damage. And getting rid of health care personnel during a pandemic is counterproductive. There are vaccines to be given, infection sources to be traced, and by all reports our intensive care personnel are exhausted and need reinforcement.
Since we are now looking at employment by occupation, irrespective of private or public employer, we need to make the assumption that the majority of primary and secondary education employment is with local public school boards. Health services employment is less clear, however, given that many hospitals and medical providers are private, independent entities.
Nevertheless, we would argue that employment in health services – whether public health administration or private hospitals – has a substantial role in the public’s well-being. Regardless of the employer, the rapid decrease of health care employment is of grave concern.
On a year-over-year percentage basis – which is most useful for historical comparisons – education employment is 3.6% lower than last year. After the initial shock, schools remained open in some form, from virtual to in-person. Health service employment, however, was 11.3% lower in than December 2019.
In terms of employment levels, at the time of the initial coronavirus outbreak and economic shutdown in April, there were 2.2 million fewer education (423,000) and health (1.8 million) service employees than in April 2019. That has since improved to roughly 1.2 million fewer “eds and meds” employees by the end of the year, comprised of 380,000 fewer education employees and 740,000 fewer health employees than in December 2019.
Because we operate a quasi-public option within a private health care system – in the guise of emergency room attention via the Emergency Medical Treatment and Active Labor Act – the costs of attending to uninsured coronavirus victims and other patients are passed along to the rest of society via higher costs for insured patients.
And because the requirements of treating coronavirus victims prohibit elective procedures, hospitals are going broke. Hospital bankruptcies are rampant in all areas of the country, but they have an outsized impact in underserved rural areas, where hospitals were already left to deal with low-income populations for whom medical care is avoided because it’s too expensive.
That suggests the need for construction of policies that re-employ the health care workforce through joint public-private programs to subsidize the salaries of existing health care workers, subsidize the tuition of future medical staff and public health employees, and subsidize the cost of medical attention for low income segments of society.
The benefits to society of a healthy population and productive workforce far outweigh the indirect costs of maintaining an unhealthy and strained population. If we’ve learned anything from the pandemic, it’s that we can no longer afford to be unprepared and uneducated, or allow societal co-morbidities to remain untreated and forgotten.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.