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Sequester budget impacts on jobs are exaggerated

By LUCIA MUTIKANI
March 21, 2013

Job seekers adjust their paperwork as they wait in line to attend a job fair in New York.  (REUTERS/Lucas Jackson)

Job seekers adjust their paperwork as they wait in line to attend a job fair in New York. (REUTERS/Lucas Jackson)

Deep government spending cuts are unlikely to weigh on employment as heavily as initially feared, with most of the impact reducing hours worked rather than payrolls, according to economists.

The non-partisan Congressional Budget Office last month estimated that the $85 billion in federal budget cuts known as the “sequester,” which started taking hold on March 1, would cost the economy about 750,000 jobs by the end of the year.

Several economists have dismissed the CBO projection as too high and said in the worst case scenario, total job losses would probably be in the region of 300,000, partly because government agencies are likely to reduce hours worked to try to limit layoffs.

“The major flaw in sequester-related government job loss estimates is that they typically are generated by simply dividing spending cuts by average wages and salaries for federal workers,” said Maury Harris, chief economist at UBS in New York.

“However, the sequester instead is being implemented primarily through furloughs entailing one- or two-day drops in the monthly workweek per worker. Such furloughs spread the pain and do not entail major headcount cuts.”

The CBO was not immediately available for comment.

Economists acknowledged there would be job losses among government contract workers. While a lack of data on the size of the contract workforce made it difficult to accurately estimate the sequester’s impact, layoffs would still not add up to the CBO’s estimate, they said.

“One way to gauge the potential hit to contract labor is to consider the amount of savings the government expects to receive as a result of sequester cuts after stripping out expected savings from both reductions to federal agency government labor and overhead costs,” said Laura Rosner, an economist at BNP Paribas in New York.

This analysis, said Rosner, suggested job cuts would amount to just over 300,000.

“When exactly these workforce reductions will occur in 2013 is an open question. We think the furlough portion of the sequestration impact is likely to be felt throughout the fiscal year,” she said.

“We are neither convinced yet that the job cuts will take place immediately nor that they will be completed within a matter of months. These job cuts will probably lower payroll growth and put upward pressure on the unemployment rate, all else equal.”

The unemployment rate fell 0.2 percentage point to 7.7 percent in February.

Similar views are shared by other economists, who also pointed that the drag from the spending cuts would weigh more on hours worked, which in turn would undercut earnings.

“You can work three days a week as opposed to five and you are not considered unemployed. You won’t see a 700,000 hit to payrolls because of sequestration, we think you will see a hit to hours worked, that will decline,” said Tom Higgins, global macro strategist at Standish Mellon Asset Management in Boston.

While the decline in hours worked would curb pay, the impact on consumer spending was expected to be blunted by improving household balance sheets, thanks to record low interest rates and rising home and share prices.

Many economists project nonfarm payroll growth averaging between l75,000 and 200,000 per month this year. UBS forecast a 100,000 annual decline in federal government payrolls.
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Copyright 2013 Capitol Hill Blue

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2 Responses to Sequester budget impacts on jobs are exaggerated

  1. SDRSr

    March 21, 2013 at 2:20 pm

    Me thinks the Economists maybe talking out their opinions.

    True, the Federal Government is not laying people off, but is instead using Furloughs. Long story short these furloughs, at least for the Department of Defense amounts to a 20% pay cut for at least the next Twenty-Two weeks. This does not include lost Leave, Sick time, and of course all the un-paid overtime DOD employees are often required to work.

    Now come April, Mid April I think, when the first short pay hits we will see what happens.

    Also, what would the civilian work force do if told they had to absorb a 20% pay cut, that you will lose earned leave and sick time for the furlough time and all this while you do not have the right to strike or protest such actions.

    Yea, some fools say the federal workforce has it easy. Those people do not work for the government and know not what they talk of…

    • Keith

      March 21, 2013 at 7:38 pm

      As one who also used to work for the DOD, I have to respectfully disagree.

      Clearly, if all the “make work” that I saw being done in my 20 years with DOD was done away with, there would be no need for a “furlough” and the resulting 20% pay cut for those who stay behind.

      Those jobs could very well simply be eliminated, freeing up positions and allowing people to move on to other employment…just like the rest of the civilian world now does.

      In my experience, because there really IS no output measurement in DOD (i.e. a “bottom line profit and loss statement”)all too often the workload expands to fill the time (spelled “people resources”) available. In most cases, this results in HUGE amounts of waste and abuse.

      Indeed, over my years of service, I can’t begin to tell you how many taxpayer resources I saw being wasted on, for example, spraying brown grass green around the base or completely repainting maintenance hangars and other buildings (that had just been repainted in another color the year before) just because some headquarters inspection “bigwig” was about to show up.

      Unfortunately, this kind of waste still runs rampant in the military. At the time, I called it “misplaced priorities”. And I also contend that, if all this nonsense was done away with, most of that $86 Billion in savings everyone keeps bantering about these days could EASILY be found in just ONE branch of our armed services.

      Back in 1986 when I was the Comptroller for an overseas US military installation, we were faced with a similar situation. We were staring at a year-over budget cut that amounted to HALF of what we had received in the previous year. Not only that, we found out that we only had half as much money to spend this year as compared to last WHEN WE WERE ALREADY HALF WAY THROUGH THE CURRENT ONE!

      So, what did we do?

      We did a “cut drill”.

      That is, we asked everyone on the installation to prioritize their spending….top to bottom….right down to such things as the number of temporary duty days their troops needed.

      The concept is called “zero based budgeting”…that is, we assumed each budget allocation for each part of the installation was cut to zero. Then, we built up the budget again on a priority basis. Those things that were absolutely “must do’s” got funded. Those that weren’t got cut.

      Needless to say, we cut out a HUGE amount of “fat” out of our budget. We were also forced to cut things (and personnel positions) that may have been “nice to have” perhaps, but that were not absolutely essential for mission accomplishment.

      And we made our budget target for the year, so, I know this approach can work.

      As I said, because there IS no fiscal “bottom line” for Government agencies, such “misplaced priorities” (like those outlined above) will continue DESPITE all this “fiscal cliff”, “sky is falling” nonsense unless real money is withheld.

      Or, to put it another way, all the while underlings feel they and their installations must “look good” in the eyes of their bosses (and the bosses implicitly demanding same) such unadulterated waste and abuse will continue.

      I say CUT the workforce, don’t play around with furlough games. FORCE our DOD managers to spend their resources ONLY on those things that are absolutely mission essential, and nothing more.

      The Cold War is over. The “made up” wars in Iraq and Afghanistan are all but over as well. Yet our overpaid DOD bureaucrats (and the “policy wonk” Generals who answer to them) have yet to come to understand that reality, let alone embrace it.

      Furloughing people simply “kicks the can down the road” because it postpones the pain of telling people in the workforce that, because these wars ARE all but over, some of them will no longer be needed.