Employment Report for July 2010

The July 2010 employment report released by BLS today indicates a decline of 131,000 jobs for the month. The federal government accounted for a decline of 143,000 census jobs and state and local government for another 59,000, for a total of 202,000 government jobs lost. Of course, this means that private sector employment was up by 71,000 for the month. The picture is markedly brighter than in June, during which employment declined by 221,000, and total private employment had risen by just 51,000.

The mood on CNBC's Squawkbox this morning was understandably glum. However, I think that this is because people expect that the post-recovery distribution of earnings and, more importantly, employment should look a lot like it did before the financial crisis struck. I see it differently.

It seems very likely that the US must move along its production possibilities frontier to a new, post-crisis point. At the very least, this point will involve fewer resources in construction, but may also involve fewer resources in government employment. It may also involve a smaller financial sector.

The question naturally arises, if we are building fewer houses and providing fewer state and local government services, what will we produce more of, assuming that we do not merely shift to some point inside the frontier? Well, more manufactured goods, for one thing. Manufacturing employment rose by 36,000 in July, compared with just 13,000 in June, and compared with a loss of 80,000 last July. The US dollar is markedly weaker today than it was a decade ago. It would not surprise me to see a revitalization of the US manufacturing sector. Of course, the net effect of such a revitalization on employment depends on the degree of technological change, but such change is endogenous. An increase in the supply of workers of moderate skill, freed up from construction, may lead to reduced pressure for adoption of labor-saving technology. Indeed, about 2,000 new manufacturing jobs have been announced in South Carlina in the last 3 months, and these are just the ones that have made the news.

Regarding state and local government, I would be interested to know how much of the revenue stream relied on real estate or unearned income. Louis Lanier, a Clemon economics PhD recipient, was once hired by the South Carolina Department of Revenue to explain why they consistently underestimated the flow of revenues into the State's coffers. The answer was, of course, the dot com bubble, but even after that bubble burst, the market recovered in part. Did state and local governments expand based on these transient gains? If so, and if those gains do not return, I think that a contraction of the state and local public sectors is almost inevitable. Again, this frees up resources that can be and in fact, are being deployed -- and employed -- more productively elsewhere.

The transition of our economy from one point on the production possibilities frontier to another is not costless or instantaneous, both because of our geography and because of the time it takes for entrepreneurs to emerge from the devastation. The speed of adjustment may be slower than some would like or expect, driven in part by fear and uncertainty engendered by the prospect of higher taxes and more regulation, and in part by difficulties in raising capital. Distinguishing between these two stories should be a high priority for policy makers, researchers, and forecasters.