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Stephan Whitaker |

Research Economist

Stephan Whitaker

Stephan Whitaker is a research economist in the Research Department at the Federal Reserve Bank of Cleveland. His current work includes research on housing markets and studies of state and local public finance.

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11.02.11

Economic Trends

Local Government Employment in Ohio, Pennsylvania, Kentucky, and West Virginia

Stephan Whitaker

In the past year, policymakers in the Fourth District and across the nation have focused tremendous attention on local government employees. In aggregate across the United States, local government employment has fallen approximately 3 percent since the recession. The ratio of local government employment to total payroll employment rose sharply in the year after the recession because there were widespread layoffs of private sector workers.

Private sector jobs, and the local tax bases they support, have recovered only slowly. In the national figures, cuts in local government employment are bringing the ratio of public to private workers back to where it was before the recession. In the Fourth District, only Ohio has cut local government payrolls in line with the national trend. However, the ratios of public to private workers are returning to their pre-recession levels in all four states.

Local government employment has historically been a stabilizing force during recessions. That is because when the economy slows down, local government employment usually remains stable, and the workers who stay employed help to support demand for goods and services until growth returns. Local government payrolls can usually weather a recession because the largest source of local tax revenue is property taxes. In past recessions, property values did not decline, or they recovered before the multiyear tax assessment process reflected the declines. Local sales and income taxes fall during recessions and recover afterward, which forces some temporary reduction of payrolls.

Local taxes receipts fell during the most recent recession, as they normally do. To help local governments bridge the decline in tax receipts and avoid layoffs, Congress directed a major portion of the 2009 American Recovery and Reinvestment Act ($180 billion of the $787 billion) to state and local governments. In the intervening months, sales and income taxes have only partially recovered, and property taxes are now falling as the dramatic, nationwide decline in property values is being reflected in the assessment process. State revenues are still below 2008 levels, and many states are cutting aid to local governments. For example, Ohio is cutting state-to-local transfers by 28 percent in FY2012. This may force municipal governments to raise taxes or lay off employees.

Since the beginning of the recession, the trend in local government employment has taken a different path in each of the Fourth District states. In West Virginia, there has been a modest increase in local government payrolls. In Pennsylvania, there was a slight increase and a decline. Kentucky’s local government employment has been essentially unchanged. In Ohio, the situation is much different. There has been a decline in local government employment, reaching a level in September 2011 that is 4 percent below the level just before the recession. Ohio has cut local public payrolls more than the nation as a whole.


If local government payrolls are placed in the context of total payrolls, the Fourth District trends all reflect the national pattern. During the recession, private payrolls dropped sooner and faster than public payrolls. The states of the Fourth District, like the nation as a whole, witnessed a half-point increase in the percentage of total employees working for local governments in the year following the recession. Now, in three Fourth District states, the ratio appears to be returning to its level during the previous decade. In Pennsylvania and Kentucky, municipal payrolls are almost flat and the ratio is falling, so other employment is recovering. In Ohio, the public sector workforce is declining to match the diminished private sector workforce. In West Virginia, the ratio is steady, as public and private payrolls sustain similar growth.

Local government employees as a percent of total nonfarm payrolls are below the national average in all the Fourth District states. Pennsylvania stands out with a percentage 2 points lower than the nation since the 1990s.

MSA/Employment

  MSA
Local Government Percent of
Total Nonfarm Employment
December 2006-
November 2007
Change
Local Government Percent of
Total Nonfarm Employment
October 2010-
September 2011
     
TNF
Local Government
  Cleveland
10.9
−7.1
−3.8
11.2
  Canton
10.4
−7.7
−3.5
10.9
  Dayton-Springfield
10.1
−8.2
−3.0
10.7
  Youngstown-Warren
9.7
−6.9
−1.2
10.3
  Toledo
9.5
−7.8
−3.9
9.9
  Akron
9.6
−5.5
−4.1
9.7
  Cincinnati
8.5
−5.5
−3.4
8.7
  Columbus
8.6
−3.4
−1.3
8.7
  Pittsburgh
8.1
−0.9
0.9
8.2
  Lexington
7.2
−4.3
7.0
8.1

Source: Bureau of Labor Statistics.

The metropolitan areas within a state always exhibit larger variations that get smoothed out in averaging. Since the recession, the ratio of public employees to total employees has increased in every metro area of the Fourth District. In most cases, both total and local government payrolls have fallen, but government payrolls have not fallen as far. Cincinnati and Columbus support relatively low percentages of their employment in the local government sector, similar to the average for Pennsylvania. The Cleveland MSA was the only Fourth District metro area to enter the recession with a percentage of workers in the local government sector that was above the national average, and it remains above the national average.

In the coming months, municipalities will have to make some difficult decisions. They will choose between raising taxes, laying off employees, reducing compensation, or some combination of the three. The aggregate impact of their decisions will be felt in the economies of their metro areas and states. It will be interesting to see if local government employment will continue to serve as a stabilizing force as it has in the past.