President Obama Proposes Reducing Private Sector Employment by 7000 in 2011 and 18,000 in 2012

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Monday, 29 November 2010 23:44

Using the economic analysis that his advisers relied upon in designing the stimulus package, this would be the projected effect of President Obama's proposal to freeze the pay of federal employees. According the NYT, this will reduce the amount of money that federal employees have to spend by $2 billion in 2011 and by $5 billion in 2012.

Following the multipliers in the Romer-Bernstein paper released by the Obama transition team, we can assume that roughly half of this money would be re-spent. This means that consumption would fall by $1 billion in 2011 and $2.5 billion in 2012. The Romer-Bernstein analysis assumed that an increase in GDP of 1 percent would lead to an increase in employment of 1 million. In this case, GDP will be about 0.007 percent lower in 2011 and about 0.018 percent lower in 2012, implying drops in private sector employment in these years of 7,000 and 18,000 jobs, respectively. The NYT should have noted the impact that the Obama administration's economic team expects to result from this proposed pay freeze.