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Why the latest job report is more evidence of the stupidity of the sequester: Erica Alini

Look at government jobs.

The U.S. economy added 175,000 jobs in May. That was better than April’s 149,000 increase, and over twice as much as 80,000, the number of hires the U.S. Census Bureau reckons the economy needs to churn out each month simply to keep up with population growth. On the other hand, it was below the roughly 180,000 additional jobs the labour market had been adding on average in the six months to April. In other words, a “decent-to-good” report, as the Wall Street Journal put it.

But that 175,000 number doesn’t include government jobs, and the public sector shed some 3,000 jobs overall in May. The sinking stone dragging down public sector employment was the federal government, which lost 14,000 jobs last month, for a total of 45,000 positions gone since February.

In all likelihood, that’s the sequester at work—more evidence of just how ill-timed the automatic, across-the-board spending cuts that kicked in on March 1 were. Admittedly, 3,000 jobs is peanuts in the U.S. labour market, but, as the chart below shows, the federal layoffs mean that Washington is starting to be a drag on employment growth just as state and local governments are beginning to recover (blue is the federal government; green is state government; red means local government; and private sector employment, excluding farm employees, is orange) .

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As this other chart, by the Federal Reserve Bank of Boston shows, government employment held up relatively well during the recession, but started bleeding jobs during the recovery. The public sector has shed over 800,000 jobs over past four years, 700,000 of which were at the local and state government, according to the Federal Reserve.
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The hemorrhage was particularly acute among states, many of which had little wiggle room to cope with sinking tax revenue because they have to produce balanced budgets every year. However, as the following graph shows, public sector employment outside the federal government started stabilizing in 2012 (the outsized swing in 2010 reflects massive temporary hires for the decennial U.S. Census—people knocking on doors to hand out the survey are not regular government employees so they do appear in the nonfarm payroll survey).

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But there are likely effects of the sequester on job growth that charts can’t quite capture. For one, federal spending cuts are also likely weighing on state and local government hiring—as about 25% of their funding comes from Washington. Second, insofar as the sequester is acting as a cap on overall economic growth, it is, in some measure, putting a lid on private sector hiring as well.

The good news here is that the Federal Reserve has pegged its target interest rate to the unemployment rate, saying late last year that rates won’t rise until the share of the jobless has fallen to 6.5% (it is now 7.6%). And the unemployment rate, you see, does count laid-off government workers. Barring an extraordinary pick up in private-sector job growth then, interest rates will likely stay at rock bottom until employment in the government sector has normalized. This is just another way in which the Fed is pumping monetary stimulus into the economy to offset the effect of fiscal restraint.

The bad news, as Boston Fed President Eric Rosengren put it recently, is that the Fed hasn’t been able to fully offset the fiscal headwinds. Coupled with other bumps on the road (think the eurozone crisis and slow global growth) the overall effect, he added, “has been economic growth around 2 percent, and only a very gradual improvement in labor markets.”

Erica Alini is a California-based reporter and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy. Follow her on Twitter: @ealini.