March Jobs Report Shows Tax Hike Hurt
Policy + Politics

March Jobs Report Shows Tax Hike Hurt

It took three months for the end of the payroll tax holiday to sideswipe the economy, judging by the dismal Friday jobs report.

Employment increased in March by a mere 88,000 jobs, according to the Bureau of Labor Statistics. That dramatically undershot Wall Street expectations of 200,000 jobs and was too small an increase to match the growth of the U.S. population. The unemployment rate ticked down by a tenth of a point to 7.6 percent—but only because more Americans are exiting the workforce.

All of this suggests that easing off years of government stimulus will be rocky. The economy remains in a fragile state, even as deficit reduction tops the list of priorities in Washington.

On Friday, leaks about President Obama’s forthcoming budget plan indicate the White House hopes to smooth the path with some targeted spending to “invest” in the workforce, an administration official told reporters. But the proposal being released on Wednesday will also include Medicare and Social Security cuts to replace the sequestration and trim projected deficits by $1.8 trillion over the next decade.

Not only does the March employment report show how agile policymakers must be in making this transition. But it also presents a political challenge to Obama whose approval ratings were already slipping. Republicans naturally interpreted the jobs numbers as a rebuke of all things Obama.

"The president’s policies continue to make it harder for Americans to find work,” House Speaker John Boehner (R-Ohio) said in a statement Friday. “Hundreds of thousands fled the workforce last month and unemployment remains far above what the Obama administration promised when it enacted its ‘stimulus’ spending plan."

But the report actually suggests that it was the expiration of a tax break that explains the bleak picture.

Both Obama and Congress agreed earlier this year to terminate the payroll tax holiday—a stimulus effort that injected on average $1,000 a year to paychecks in 2011 and 2012. At an annual cost of $120 billion, the temporary two-percentage point reduction in the Social Security payroll tax had a 50 percent larger economic wake than the sequestration cuts.

Smaller paychecks translate into less buying, but it took two months for this to sink in with consumers. Retailers shed 24,100 jobs last month, including 15,300 by clothiers.  Electronics and appliance stores fired 5,700 workers, while building material and garden supplies stores let go of another 10,100. Modest gains at auto dealers, supermarkets, and department stores kept the total from being worse than it already was.

“This is far from a wake-up call,” said Matthew Shay, president and CEO of the National Retail Federation. “It is an urgent plea for help by Americans and the businesses that employ them for policy makers to stop pointing fingers and to start implementing policies that encourage job growth and capital investment.”

The White House tried to pin the blame on the start of the $85 billion in sequestration cuts last month.

“While the recovery was gaining traction before sequestration took effect, these arbitrary and unnecessary cuts to government services will be a headwind in the months to come, and will cut key investments in the Nation’s future competitiveness,” blogged Alan Krueger, chairman of the White House Council of Economic Advisers.

But the numbers indicate that any pain from the sequester has yet to be felt. The federal government—excluding the Postal Service—whittled down its payrolls by just 2,200 in March. State government added 9,000 workers in March.

“If you think the sequester is in these numbers, you really aren't thinking through the issue,” tweeted University of Michigan professor Betsy Stevenson, the former chief economist of the Labor Department.