Over the last few months, we’ve seen signs of labor market cooling (though from a very strong base): the historic decline in job openings in August; moderating wage growth; and employment losses in interest-rate-sensitive jobs.  

Private-sector employment rebounded fantastically following the pandemic recession because Congress made fiscal investments at the scale of the problem, and employment in the private sector exceeded pre-pandemic levels by July 2022. While the recovery continues to chug along, with rising labor force participation and prime-age employment-to-population ratio approaching pre-pandemic levels, the one sector that has failed to recover and has actually stalled for much of this year is state and local government employment.  

Figure A shows the dramatic fall in the private sector and the subsequent strong and swift rebound. This bounce back is especially notable in comparison to the prolonged, austerity-starved recovery from the Great Recession. Private-sector employment is now 0.7% above pre-pandemic levels, while public-sector employment at the state and local level remains 3.2% below its February 2020 level, though it experienced far fewer losses than the private sector in the early months of the pandemic. Public-sector employment also suffered in the aftermath of the Great Recession, but for many of the same reasons private-sector employment faltered—the rise in austerity policies at all levels of government choked off the recovery. As a result, it took until 2018 for state and local public employment to recover to its pre-recession level. 

In both the recovery from the Great Recession and the post-pandemic recovery, public-sector employment has faltered. But the reasons for the public sector’s slow growth in these two recoveries are likely very different.  

In the earlier recovery, the public sector was the ground-zero of the austerity that rippled out and restricted the private sector recovery–including the removal of fiscal relief and budget cuts. In the current recovery, federal fiscal relief under the American Rescue Plan has been extraordinarily strong, and state and local governments’ revenues have held up much better, yet public-sector employment still faltered.  

Figure B examines the labor market in both periods using the Job Openings and Labor Turnover Survey. Here you can see a very different pattern following the Great Recession in contrast to the current recovery. Job openings plummeted in the aftermath of the Great Recession. Alongside that decline, hires decreased and quits also faltered. Taken together, there are signs that the public sector wasn’t interested in boosting employment (the notable reduction in postings and hires). Public-sector employees were also less likely to quit, holding onto their jobs for lack of other opportunities due to weaknesses across the public- and private-sector labor markets. 

A very different picture emerged in the last couple of years. Job openings have continued to rise, while hires and quits have also increased. There appears to be demand for workers as job openings climbed dramatically throughout the pandemic. Along with the rise in job openings, we saw hiring pick up in the last year, but the hiring “yield” (hires as a share of openings) fell quickly, and employment (as shown in Figure A) still shows significant shortfalls. Further, quits in state and local employment have risen to historically high levels over the last year. 

These high levels of quits and the inability to fill vacancies could be driven by health concerns, related in part to the age of the workforce, as well as better opportunities for workers in the private sector. The public sector is trying to hire by posting job openings, but workers aren’t willing to accept jobs at the going wages and working conditions. Others are leaving at historically high rates: either exiting the labor market altogether or moving to the private sector.  

Shortages can beget shortages as workplaces are short staffed and workers experience burnout. In the private sector, shortages can be remedied relatively quickly through faster wage growth driven by market competition for workers—as happened in 2021 and earlier this year in rapidly expanding sectors like leisure and hospitality. But wages in the public sector are directly driven by policy decisions, not market forces. State and local governments have to affirmatively act—by making jobs more attractive—to alleviate shortages.  

Improved job quality in the public sector means better jobs and wages, which help workers stay afloat while stimulating private-sector growth. It also means there is sufficient staffing for the vital services the public sector provides, from health care to transit to public education. I hope to finally see some improvement in public-sector employment when the latest employment report is released tomorrow morning.