Budget, Business, Congress, Jobs

Budget sequestration: Review of job loss estimates

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U.S. debt clock (Wikimedia)
U.S. debt clock (Wikimedia)

The Budget Control Act of 2011, the product of the ongoing American debate over national debt, puts in place the legal mechanisms for automatic cuts in government spending across a wide range of agencies. The cuts — totaling $1.2 trillion over nine years — would be split roughly equally between non-exempt defense spending and other government programs, including Medicare. The law originally stated that if Congress did not reach a deficit-reduction deal in advance — a debate partly framed around tax policy — the broad cuts would go into effect January 2, 2013. Of course, that deadline has now been postponed to March 1, 2013. The technical name for this process is “sequestration.” The Congressional Budget Office offers answers to a variety of common questions about it.

Roughly $85 billion in cuts must be implemented this fiscal year, under the current legislation. The Bipartisan Policy Center has said it expects job losses of at least 1 million as a result, though the depth of these losses would vary according to sector. The White House has issued its estimates of state-by-state job losses, though Republicans have claimed these figures are being produced for political purposes.

Many observers assert that all of this is the product of a broken budgeting system. See this interview with Harvard Kennedy School budget expert Linda Bilmes for a sense of the particular dynamics. For more insight on what programs could be exempted, see this January 2013 Congressional Research Service report titled “Budget ‘Sequestration’ and Selected Program Exemptions and Special Rules.”

For a critique of some media coverage around sequestration, see David Cay Johnston’s article for the Columbia Journalism Review, titled “Time to Leave Budget Biases Behind.” Of course, there is now considerable controversy over whether the White House or Republicans in Congress are responsible for initiating this legislation; for more on that, see “Five Myths about the Sequester,” published by Thomas Mann and Norman Ornstein in the Washington Post.

An October 2012 report from the Congressional Research Service, “Sequestration: A Review of Potential Estimates of Job Losses,” synthesizes the findings of recent studies related to how such automatic budget cuts may affect U.S. employment. The report notes that the cuts will impact jobs in three respects: directly, by ending funding for government jobs and contractors whose work depends on funding; indirectly, by hurting jobs that depend on the spending of federal contractors; and by diminishing the spending of workers whose salaries are often cycled back into the economy through the purchase of goods and services — called “induced jobs.”

The report aggregates the findings of several research reports — some from industry advocacy groups — including:

  • The George Mason University Center of Regional Analysis estimates that fiscal year 2012-2013 would see total defense budget cuts of $115.7 billion, reducing “employment throughout the economy by 2.1 million jobs.” This total would include employment reductions of 746,000 direct jobs — 277,000 federal civilian jobs and 469,000 prime contractor jobs — 433,000 indirect jobs at “suppliers and other firms that depend on prime contractors for business”; and 959,000 induced jobs.
  • An Inforum/University of Maryland analysis predicts that a $48 billion nominal decrease (6.7%) in defense expenditures in 2013 would “reduce defense-dependent employment in the calendar year by 907,000 jobs. The total includes 152,000 direct DOD civilian (50,000) and military (102,000) positions as well as 91,000 direct jobs at defense contractors; 135,000 indirect jobs at suppliers to contractors; and 376,000 induced jobs due to reduced spending by those formerly in direct and indirect jobs.” Furthermore, a “$64 billion nominal decrease (8.8%) in defense expenditures in 2014 was estimated to reduce defense-dependent employment in the calendar year by 1,211,000.”
  • Research by the American Hospital Association, the American Medical Association, and the American Nurses Association estimates that a 2% reduction in the Medicare program would result in a cut of $10.7 billion from the baseline budget in fiscal year 2012-13, producing “500,000 fewer direct, indirect and induced jobs.” Of that, “almost 212,000 were direct jobs in such occupations as nurses, housekeepers, independent contractors and medical residents. By 2021, when the reduction in Medicare was projected to have steadily risen to $16.4 billion, job loss throughout the economy might total almost 767,000 and includes about 330,000 direct jobs.”
  • An analysis by the United for Medical Research association assumed a 7.8% reduction to the National Institutes of Health budget for “extramural awards, which are made to universities and other nongovernmental research facilities”; in fiscal year 2013, this might result in “almost 34,000 direct, indirect, and induced job losses.”
  • A National Education Association report estimates that a $4.8 billion (8.4%) cut to the fiscal year 2013 Education Department (ED) and Head Start budgets might result in 80,500 lost jobs “among early childhood personnel, elementary and secondary school (K-12) educators, postsecondary faculty and other support personnel.”
  • Research by the Aerospace Industries Association (AIA) estimates that a $1 billion cut to the Federal Aviation Administration (FAA) budget could result in the loss of “between 66,000 and 132,000 direct, indirect and induced jobs annually through 2021.”

“Any projections involve considerable uncertainty and thus margins for error,” the Congressional report cautions. “In this case, the specifics of how the Administration would implement sequestration were not known at the time the studies were conducted. In addition, the state-by-state job impacts of the analyses — which appeared to garner the most attention — were based on the perhaps unlikely assumption that the distribution of program spending by industry in the past would continue in the forecast period.”

The University of Michigan has analyzed the potential effects for the research and development community.

A December 2012 article from the RAND Corporation, “Big Defense Cuts Are Coming, Regardless of the Fiscal Cliff,” provides wider context on Pentagon budget issues, based on detailed analysis and research.

Tags: economy, financial crisis, teachers


By | February 14, 2013

Citation: Levine, Linda. "Sequestration: A Review of Estimates of Potential Job Losses," Congressional Research Service, October 2012.

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