The latest U.S. job growth figures, released this morning (September 7, 2012) by the U.S. Bureau of Labor Statistics, continued to show positive growth, but at an insufficient rate to boost employment rates and labor market conditions.

If we focus on comparisons with a year ago (which I do to avoid problems with seasonal adjustment factors as well as random monthly fluctuations), total employment in the employer survey increased from August 2011 to August 2012 by 1.8 million jobs (Table B-1).  In the household survey, the total number of persons employed increased from August 2011 to August 2012 by 2.3 million persons (Table A-1). Although an increase in employment of around 2 million is obviously better than zero job growth, this amount of job growth is barely able to keep up with growth in the U.S. population. Therefore, the employment to population ratio for Americans 16 and above was the same, 58.3%, in both August 2011 and August 2012. In contrast, the employment-population ratio prior to the recession averaged 63.0% for 2007.

A portion of the problem is the slow growth in government jobs. This is particularly marked in local government education jobs. For example, in the employer survey data, although overall employment increased from a year ago by 1.8 million jobs, private sector jobs grew by 2.0 million jobs. Government jobs decreased by 166,000 jobs over the past year.  Of this shrinkage, about half was in the local government education sector, which shrunk by 84,000 jobs.

If local government education jobs had just kept pace with private sector job growth, then over the past year, rather than shrinking by 84,000 jobs, we would have added 14,000 local education jobs. As a result, local government education employment would be higher by about 98,000 jobs over what it is today.  With even a small multiplier assumed of 1.5, we would expect a healthier local government education sector to have increased total U.S. employment over the last year by 150,000 or more jobs.

What is going on is that with the phase-out of federal government fiscal stimulus programs, and continued economic weakness, coupled with many state government political leaders being reluctant to raise taxes, education funding has been cut. A recent report by the Center for Budget and Policy Priorities finds that out of 48 states for which data were available, 26 states cut real (inflation-adjusted) per student funding from last year to this  year.

Cutbacks in education sector employment might make sense if we felt that employment in this sector was inefficiently bloated. But there are many education programs whose expansion would both add jobs and boost long-run U.S. economic productivity. These include education programs to increase access to preschool, to increase the length of the school year or add summer school, and to lower class size in early elementary grades. All these proposals have good evidence of long-run effects on increasing the productivity and output of the U.S. economy, and thereby increasing per capita incomes.

What should be done? Although short-run jobs proposals wasn’t mentioned much at the recent Democratic National Convention, the Obama Administration’s American Jobs Act, originally proposed about a year ago,  would be helpful.  Among many other provisions designed to create jobs, the American Jobs Act includes $30 billion in federal aid for local education jobs, which is intended to create about 280,000 jobs.

From a longer-term perspective, the U.S. should have a permanent counter-cyclical revenue sharing program designed to help stabilize state and local government budgets during severe recessions. This program would be triggered on and off nationally based on the unemployment rate, and would direct assistance to state and local governments   based on the severity of each area’s economic downturns. State and local governments could choose whether to direct their assistance to reduce taxes or increase spending compared to what would otherwise occur. However, given the relative popularity of education spending, I think it probable that even unrestricted federal aid would end up boosting educational investments.

Because a counter-cyclical revenue sharing program would be designed to trigger off as the national economy and state and local economies recover, it would not exacerbate the U.S.’s long-term budget deficit problems. But it would help stabilize investment in education while reducing the severity of unemployment problems during recessions.

I think it can be legitimately argued that one of the biggest mistakes of the stimulus program enacted in 2009 was the failure to include automatic triggers that would adjust the stimulus based on the economy’s progress, or lack thereof.  If we had had such triggers, then the fiscal stimulus would be continuing today, although at a reduced level, rather than having been phased out. I suspect part of the political reason for the lack of triggers is that politics makes Congress more inclined to directly control spending and tax programs, rather than to put them on autopilot.  However, given political gridlock, allowing triggers to put stimulus policy on autopilot is very helpful in making fiscal policy timelier as well as more consistent with long-run deficit reduction.

The other biggest issue I have with the 2009 stimulus is the failure to focus more resources on policies that would directly incentivize job creation, such as public service jobs and subsidies for employer job expansion. More targeted job creation program would have a bigger job creation effect per dollar of stimulus.  I have commented more on this in a previous blog post.

I don’t want to be misunderstood. The stimulus clearly created millions of job years of additional employment, and funded many highly useful projects.  However, it could have been designed to create more jobs and be more politically sustainable.

What we need to figure out is where to go from here.  I think progress depends in part on whether there is vigorous public advocacy of doing more to deal with the long-run unemployment problem.  Unfortunately, this is working against the general (and mistaken) public opinion that during a recession, the government should act like a household, and cut spending.