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Tuesday, October 9, 2012

Sequestration: A Review of Estimates of Potential Job Losses

Linda Levine
Specialist in Labor Economics

Policymakers and economists have expressed concern that spending cuts and tax increases (commonly referred to as the “fiscal cliff”) may push a slowly growing economy into recession in 2013. In summer 2012, policymakers particularly focused on how sequestration as delineated in the Budget Control Act (BCA) of 2011 (P.L. 112-25) might affect employment in the near term. (Sequestration refers to an automatic cancellation of a portion of federal agencies’ budgetary resources.) Effective on January 2, 2013, the BCA imposes across-the-board spending cuts split about equally (in dollar terms) between the budgets of non-exempt defense and nondefense discretionary and mandatory programs, a 2% limit is placed on cuts to Medicare’s budget as well.

This report reviews several studies that have estimated the potential effect of the sequestration process on employment. Their findings indicate that reduced federal spending would create or maintain fewer jobs than otherwise would have existed, and that cuts in the budgets of different agencies affect the pattern of job loss by occupation, industry, and state. These results suggest that achieving deficit reduction by means other than the BCA’s about equal split of automatic budget reductions between non-exempt defense and nondefense programs might alter the composition of employers and employees most adversely affected, but the impact on total U.S. employment may be similar.

The expenditures of federal agencies create or maintain jobs in three ways. Direct jobs result from paying the salaries of their employees and contracting with firms in various industries (e.g., shipbuilding) to produce goods (e.g., aircraft carriers). The contractors use a portion of their federal awards to buy products from firms in other industries (e.g., navigational instruments manufacturing) that the recipients of federal funds use in their finished products. The jobs supported by the purchases of federal contractors are referred to as indirect jobs. When the workers in direct jobs (e.g., employees of shipbuilders) and indirect jobs (e.g., employees of navigational equipment manufacturers) spend their paychecks on final goods and services (e.g., at grocery store and doctors’ offices), additional jobs are supported by federal spending. These are referred to as induced jobs.

One study estimated that a $48 billion sequester of Defense Department funds in 2013, compared with a baseline budget (without BCA cuts) for the calendar year, might support 907,000 fewer direct, indirect, and induced jobs. Job losses were forecast to diminish relative to the baseline after peaking in 2014 at about 1.2 million, with laid-off workers predicted to find new jobs in other industries as the economy adjusts to lower federal spending and employment recovers to the baseline forecast for 2022. Another analysis applied a 7.8% reduction to the National Institutes of Health budget for extramural awards, which are made to universities and other nongovernmental research facilities. It estimated that almost 34,000 direct, indirect, and induced job losses might result from such a program cut in FY2013. A third study, which reduced the budgets of Education Department and Head Start programs by 8.4%, put direct job loss among early childhood support personnel, elementary and secondary school educators, postsecondary faculty, and other support personnel at 80,500. Another analysis projected that a 2% reduction in Medicare’s budget ($10.7 billion) in 2013, compared with a baseline budget, might support 500,000 fewer direct, indirect, and induced jobs. Of that total, almost 212,000 are direct jobs in such occupations as nurses, housekeepers, independent contractors, and medical residents.

Date of Report: October 1, 2012
Number of Pages: 12
Order Number: R42763
Price: $29.95

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