Sequestration: A Review of Estimates of Potential Job Losses

Sequestration: A Review of Estimates of

Potential Job Losses

name redacted

Specialist in Labor Economics

October 1, 2012

Congressional Research Service

7-....

www.crs.gov

R42763

CRS Report for Congress

Prepared for Members and Committees of Congress

Sequestration: A Review of Estimates of Potential Job Losses

Summary

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.

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Sequestration: A Review of Estimates of Potential Job Losses

Contents

Future Spending Under the BCA..................................................................................................... 1

A Review of Empirical Estimates of the Employment Effect of Sequestration............................... 2

Defense and Nondefense Department Agencies........................................................................ 3

Department of Defense.............................................................................................................. 5

Department of Education and Head Start .................................................................................. 6

Federal Aviation Administration................................................................................................ 6

National Institutes of Health...................................................................................................... 7

Social Security Administration: Medicare................................................................................. 8

Concluding Remarks ....................................................................................................................... 9

Contacts

Author Contact Information............................................................................................................. 9

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Sequestration: A Review of Estimates of Potential Job Losses

O

n January 2, 2013—absent congressional action—largely across-the-board spending cuts

will be automatically imposed as stipulated in the Budget Control Act of 2011 (BCA; P.L.

112-25). The term used to describe an automatic cancellation of budgetary resources to

achieve the policy goal of deficit reduction is sequestration. The approaching fiscal cliff 1 has led

to forecasts of a possible recession in 2013,2 and concern among policymakers about the impact

of sequestration on employers and their employees.3

Several studies have estimated the potential effect on employment of cutting the budgets of

different agencies and programs. This report reviews and summarizes this empirical research,

which policymakers may take into consideration when deliberating whether to modify the BCA

or enact alternative deficit-reducing legislation. Before proceeding to the review, the report

briefly describes how the BCA will limit future government spending.

Future Spending Under the BCA

Congressional concern about growth of the federal deficit and debt4 resulted in enactment of the

BCA on August 2, 2011. The act reduces the budget deficit in two ways. First, it places statutory

limits on the amount of most spending through the annual appropriations process from FY2012 to

FY2021, and it enforces the caps through sequestration in any year in which Congress

appropriates an amount greater than the discretionary spending limit for that year. Second, it

creates an automatic process to reduce spending by $1.2 trillion over the FY2013-FY2021 period

through a combination of sequestration and lower statutory caps on discretionary spending if the

Joint Select Committee on Deficit Reduction, which was established by the BCA, does not

develop and submit to Congress an alternative proposal that achieves at least equivalent budget

savings. Because the committee failed to agree upon a deficit reduction plan, the sequestration

process is scheduled to go into effect on January 2, 2013.

Generally speaking, the BCA would evenly split (in dollar terms) the $1.2 trillion in automatic

reductions over the nine-year period between defense and nondefense spending categories. The

Office of Management and Budget (OMB) is required to determine the annual amount of

spending to be cut from defense and nondefense budgets after 18% attributable to debt service

savings ($216 billion) is subtracted from the act’s $1.2 trillion in deficit savings ($984 billion), or

almost $54.7 billion from the defense and $54.7 billion from the nondefense budget functions per

fiscal year from 2013 through 2021 ($984 billion divided by nine years). Within the defense and

1

The term fiscal cliff describes spending and tax policy changes that would considerably reduce the budget deficit in

2013. These policy changes include not only the automatic budget cuts specified in the BCA, but also the expiration of

tax cuts originally enacted in 2001 and 2003, of tax extenders (temporary tax measures that have regularly been

reauthorized over the years), and of the emergency unemployment benefit program. For additional information, see

CRS Report R42700, The “Fiscal Cliff”: Macroeconomic Consequences of Tax Increases and Spending Cuts, by (name

redacted).

2

U.S. Congressional Budget Office, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022,

August 2012.

3

On July 18, 2012, the House Armed Services Committee held hearings on Sequestration Implementation and Options

and the Effects on National Defense: Industry Perspectives. On July 25, 2012, the chairman of the Senate

Appropriations Committee on Labor, Health and Human Services, and Education, and Related Agencies released

Under Threat: Sequestration’s Impact on Nondefense Jobs and Services.

4

The budget deficit is the amount by which spending (outlays) exceeds revenue in a given year, which is similar to the

amount borrowed from the public in that year. The public debt is the sum of all past borrowing from the public.

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Sequestration: A Review of Estimates of Potential Job Losses

nondefense functions, the annual amount of spending reductions must then be divided

proportionally between their respective discretionary and mandatory programs. Many programs

are exempt from sequestration (e.g., Social Security and Medicaid) however.5 The BCA also

limits cuts in Medicare payments to 2%. To offset this limit, the BCA requires the OMB to

increase and reallocate the sequester proportionally across non-exempt non-Medicare mandatory

spending and nondefense discretionary programs. In addition, the BCA allows the Administration

to exempt any military personnel account if Congress is so notified by August 10. Because the

OMB exempted all military accounts in letters to the Senate President and to the House Speaker

dated July 31, 2012, the sequester of other defense programs must be increased uniformly to

offset the exemption. The end result, as delineated in the BCA, will be spending cuts in four

categories: defense discretionary appropriations, defense mandatory (direct) spending,

nondefense discretionary appropriations, and nondefense direct spending.6

On August 1, 2012, Jeff Zients of the OMB testified that “it is impossible at this time to

determine the exact amount of the reductions that will be required in any given account or

program” because appropriations for FY2013 have not been enacted.7 Members of Congress

expressed their dissatisfaction with the lack of information from the Administration on

implementation of the BCA by passing the Sequestration Transparency Act. President Obama

signed the bill into law on August 7, 2012 (P.L. 112-155). It required the Administration to

provide a detailed report to Congress on the budget accounts that will be subject to sequestration

and on the percentages by which the accounts will be reduced to achieve the savings required by

the BCA.

The OMB report, released in mid-September 2012, provided the following preliminary estimates

of percentage reductions in FY2013: 9.4% for non-exempt defense discretionary appropriations

and 10% for non-exempt defense direct spending; 8.2% for non-exempt nondefense discretionary

appropriations and 7.6% for non-exempt direct spending; and 2% for Medicare. The studies

examined below use reductions for 2013 that differ somewhat from those of the OMB because

they were prepared before the Administration issued its report.

A Review of Empirical Estimates of the

Employment Effect of Sequestration

Spending by the federal government supports (creates or maintains) jobs in three ways. It does so

directly by paying the salaries of federal employees and by contracting with firms in various

industries (e.g., shipbuilding) to produce final products (e.g., an aircraft carrier). Jobs supported

in this way are referred to as direct jobs. Federal government spending also supports jobs

indirectly when contractors use a portion of their federal awards to buy outputs from businesses

in other industries (e.g., navigational instruments manufacturing) that are incorporated in the

finished products of prime contractors. The jobs supported by (dependent on) the purchases of

5

For more information, see CRS Report R42050, Budget “Sequestration” and Selected Program Exemptions and

Special Rules, coordinated by (name redacted).

6

For more information, see CRS Report R41965, The Budget Control Act of 2011, by (name redacted), (name reda

cted), and (name redacted).

7

U.S. Congress, House Committee on Armed Services, Sequestration Implementation Options and the Effects on

National Defense, 112th Cong., 2nd sess., August 1, 2012.

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prime contractors are referred to as indirect jobs. Lastly, when workers in direct jobs (e.g., federal

employees and employees of shipbuilders) and indirect jobs (e.g., employees of navigational

equipment manufacturers) spend their paychecks (e.g., at grocery stores and doctors’ offices),

additional jobs are supported by federal spending. These are referred to as induced jobs.

An input-output model is commonly used to provide a snapshot of these transactions (sales)

between industries and ultimately, of the jobs dependent on these transactions. In this case, the

model is used to trace the output by industry that results from the government (e.g., the

Department of Defense, DOD) and consumers (e.g., employees of suppliers to shipbuilders and of

the DOD) purchasing final products (e.g., aircraft carriers and groceries). The model expresses

these transactions as the value of output supported by one dollar of spending (demand) in a given

industry. Productivity factors (the ratio of employment to output) are then applied to each

industry to translate the output supported by one dollar of demand to the employment supported

by one dollar of demand.8 In effect, most of the studies reviewed below applied these

employment multipliers to their estimates of reduced agency spending under the BCA to calculate

the approximate number of jobs by industry and state that would no longer be supported by

federal purchases (i.e., projected job losses).9

Defense and Nondefense Department Agencies

Stephen Fuller, director of George Mason University’s Center of Regional Analysis, and Chmura

Economics & Analytics produced estimates for the Aerospace Industries Association of the

employment effect of cuts to defense and nondefense agencies’ budgets under the BCA.10 Using

the IMPLAN Pro model,11 Fuller estimated that FY2012-FY2013 budget cuts of $115.7 billion

(in nominal dollars) due to implementation of the BCA might reduce employment throughout the

economy by 2.1 million jobs in FY2013.12 Budget reductions under the BCA in the following

years were estimated to result in fewer annual job losses.

8

For more information, including the assumptions and limitations of regional input-output models, see Rebecca Bess

and Zoe O. Ambargis, “Input-Output Models for Impact Analysis,” Presented at the 50th Southern Regional Science

Association Conference, New Orleans, LA, March 2011.

9

Some studies include estimates of variables other than employment (e.g., national output), but only their estimates of

the BCA’s effect on jobs is discussed in this report.

10

Stephen S. Fuller and Chmura Economics & Analytics, The Economic Impact of the Budget Control Act of 2011 on

DOD and Non-DOD Agencies, Aerospace Industries Association, July 17, 2012, available at http://www.aiaaerospace.org/assets/Fuller_II_Final_Report.pdf. (Hereafter cited as Fuller, The Economic Impact of the Budget

Control Act of 2011 on DOD and non-DOD Agencies.)

11

IMPLAN, an economic assessment package, was used to estimate the impact of the BCA budget cuts on gross

domestic product, direct labor income, and indirect and induced employment by industry sector over the FY2012FY2013 period (cumulative) and the FY2012-FY2021 period (cumulative). Each nondefense agency’s reduction in

payroll (compensation) and procurement was assumed to be proportional to its distribution between the two

expenditure categories in FY2010. “The DOD cutback is assumed to be the same as reported in the CRS Report

[R42506, The Budget Control Act of 2011: The Effects on Spending and the Budget Deficit When the Automatic

Spending Cuts Are Implemented.].” Procurement reductions were allocated across major industries “based on the

purchasing matrix from the GSA procurement database that reflects historic procurement data (2000-2010) for each

agency reported by NAICS [North American Industry Classification System] industries.”

12

“Budget levels in FY2012 are compared to budget outlays in FY2011 and for FY2013 the value of cutbacks are the

differences between FY2012 and proposed budget levels for FY2013 (with BCA).” In other words, spending reductions

were not derived by comparing an estimated FY2013 budget, including BCA cuts, with a baseline (status quo) FY2013

budget as was done in CRS Report R42506, The Budget Control Act of 2011: The Effects on Spending and the Budget

Deficit When the Automatic Spending Cuts Are Implemented, by (name redacted) and (name redacted), which Fuller

(continued...)

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Of the estimated 2.1 million job losses,

•

746,000 were direct jobs (277,000 federal civilian jobs and 469,000 prime

contractor jobs),

•

433,000 were indirect jobs at suppliers and other firms that depend on prime

contractors for business, and

•

959,000 were induced jobs (i.e., jobs throughout the economy supported by

workers in direct and indirect jobs spending a portion of their paychecks).

The study estimated a small difference between the number of direct, indirect, and induced job

losses due to a $56.7 billion reduction in FY2012-FY2013 in DOD spending (1,090,000) and the

number of direct, indirect, and induced job losses due to a $59.0 billion reduction in spending by

nondefense agencies (1,047,000). The number of induced job losses due to DOD budget cuts

(482,000) also was estimated to differ little from the number of induced job losses due to budget

cuts at nondefense agencies (476,000). Differences were greater in the estimation of direct job

loss due to DOD budget cuts (326,000, including 48,000 civilian DOD jobs) and direct job loss

due to budget cuts at nondefense agencies (421,000, including 229,000 nondefense agency jobs).

Differences similarly were substantial in the estimation of indirect job loss associated with

defense and nondefense budget cuts (282,000 and 151,000 jobs, respectively).

The industries estimated to experience the greatest direct and indirect job losses also differed

considerably. Federal government employees could face much larger direct and indirect job losses

as a result of cuts to nondefense budgets (268,000 jobs) than to the defense budget (56,000 jobs).

In the private sector, employees at professional and business services firms13 could face the

largest direct and indirect job losses (180,000) due to nondefense budget cuts and manufacturing

employees might incur the largest job losses (223,000) due to DOD budget cuts.14

Based on the FY2010 distribution of federal compensation and procurement disbursements, the

model also produced estimates of potential employment effects on a state-by-state basis. The

report noted, however, that “[a]ctual agency budget reductions will have a different pattern

depending on how each agency chooses to absorb these cuts in their operating programs and

public service requirements.”15 The areas estimated to experience the largest job losses due to

federal budget cuts are California, the District of Columbia, Maryland, Texas, and Virginia. The

potentially hardest hit areas differed somewhat when defense and nondefense budget cuts were

examined separately. For DOD, the areas are California, Florida, Massachusetts, Texas, and

(...continued)

writes is “the principal source for the distribution of budget reductions to DOD and non-DOD agencies and their

magnitudes and schedule over the FY2011-FY2021 period.”

13

The professional and business services sector is composed of businesses that provide a broad range of services to

clients (e.g., computer services, consulting services, research services, administrative support and clerical services, and

janitorial services).

14

This pattern of direct and indirect job losses by industry explains the larger estimates of job losses at small businesses

due to cuts to DOD than nondefense agency budgets in FY2013 (520,000 and 436,000 jobs, respectively) that are

presented in a report released by the Aerospace Industries Association (AIA) in September 2012 (The Economic Impact

of Sequestration on Small Business, available at http://secondtonone.org/wp-content/uploads/2012/09/FINAL-SmallBusiness-Report_Sept-20.pdf). As noted in the report, “The difference between DOD and non-DOD job losses results

from the fact that the DOD reductions will have a much smaller impact on federal jobs.”

15

Fuller, The Economic Impact of the Budget Control Act of 2011 on DOD and non-DOD Agencies, p. 7.

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Virginia; for nondefense agencies, California, the District of Columbia, Maryland, Texas, and

Virginia.

Department of Defense

Inforum/University of Maryland produced estimates for the National Association of

Manufacturers on the employment effect of reduced DOD spending under the BCA.16 Using its

Long-Term Interindustry Forecasting Tool (LIFT),17 Inforum estimated that the largest adverse

employment impact of cuts from 2012-2022 baseline budgets for DOD would occur in calendar

years 2013 and 2014:

•

A $48 billion nominal decrease (6.7%) in defense expenditures compared with

LIFT’s baseline budget for 2013 was estimated to 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.

•

A $64 billion nominal decrease (8.8%) in defense expenditures compared with

LIFT’s baseline budget for 2014 was estimated to reduce defense-dependent

employment in the calendar year by 1,211,000. The total includes 201,000 direct

DOD civilian (66,000) and military (135,000) positions as well as 117,000 direct

jobs at defense contractors; 176,000 indirect jobs at suppliers to contractors; and

516,000 induced jobs due to reduced spending by those formerly in direct and

indirect jobs.

Job losses were estimated to decrease thereafter relative to the baseline as the economy

adjusts to reduced federal spending (demand). Laid-off workers are predicted to find new

jobs because, as is usual after a demand shock, spending is predicted to increase in

sectors of the economy other than the federal government and overall employment is

predicted to recover to the baseline for 2022.

On an industry basis, manufacturing was estimated to experience the largest job losses in absolute

and percentage terms relative to the baseline forecast. Some manufacturing industries projected to

initially experience job losses were also projected to experience job growth in the out-years

relative to the baseline as the economy adjusts to lower government expenditures. Motor vehicle

equipment manufacturing, which is consumer oriented, and construction and agricultural

equipment manufacturing, which is export oriented, are two examples of this pattern provided by

Inforum. In contrast, Inforum found that large direct suppliers of manufactured goods to the DOD

(e.g., aerospace vehicles, ships, and specialized defense equipment) would not recoup all lost

sales and jobs by the end of the projection period. Although most industries within the service

16

Inforum/University of Maryland, Defense Spending Cuts: The Impact on Economic Activity and Jobs, National

Association of Manufacturers, June 2012, available at http://www.nam.org/~/media/

6C787C12117F49D1BDA2B6526A14DC2E.ashx.

17

The LIFT model was used to develop a baseline (status quo) projection of the economy taking into account current

and expected economic conditions as well as the projected path of defense spending adjusted for inflation similar to

that presented by the Congressional Budget Office (CBO) in its January 2012 Budget Outlook. An alternative to the

baseline scenario was then developed using the LIFT model based on CBO’s estimate of the BCA’s impact on defense

outlays.

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sector were projected to lose jobs relative to the baseline due to defense budget cuts, “once the

shock of lower government spending subsides [wholesale and retail] trade, financial services and

other services all have modestly higher levels of employment, compared to the baseline.”18

Inforum used its State Employment Modeling System to allocate the above-described industry

results from the LIFT model to approximate the state-by-state employment effect of projected

cuts to the defense budget. It also relied on data in the 2011 version of Projected Defense

Purchases: Detail by Industry and State: Calendar Years 2010 Through 2016, which DOD

produces from the Defense Employment and Purchases Projection System (DEPPS, another

Inforum economic model). In calendar year 2014, Inforum calculated that California, Texas, and

Virginia would lose the most defense-dependent jobs relative to the year’s baseline.

Department of Education and Head Start

The report of the National Education Association (NEA) on the size of potential job losses due to

a $4.5 billion (7.8%) or $4.8 billion (8.4%) cut to Education Department (ED) and Head Start

FY2013 budgets used a very different methodology from that of the other studies.19 It confined

itself to estimating the number of direct jobs that might be lost by program and state due to

reduced ED and Head Start spending. Job losses might total 80,500 among early childhood

personnel, elementary and secondary school (K-12) educators, postsecondary faculty, and other

support personnel in FY2013, if the budget reduction for non-exempt nondefense discretionary

agencies is 8.4%.20 (Because the OMB released a preliminary percentage reduction of 8.2% for

non-exempt nondefense discretionary appropriations, as stated earlier in this report, the NEA’s

estimates using 7.8% are not reported.)

Within the estimate of 80,500 job losses, 27,400 might occur nationally among K-12 educators.

NEA derived these figures by (1) calculating from U.S. Census Bureau and other data the

percentage of expenditures on K-12 education going toward employee compensation by state and

the average cost per full-time equivalent employee by state, (2) applying these results to the $4.8

billion sequestration estimate noted in the preceding paragraph, and (3) aggregating state

estimates to obtain a total for the nation.21 Taking a similar approach, the NEA estimated that

Head Start might incur the loss of 30,600 direct jobs.

Federal Aviation Administration

The Aerospace Industries Association (AIA) sponsored research into the impact on total U.S.

employment of cuts to the Federal Aviation Administration (FAA) budget using two scenarios.

18

Ibid., p. 13.

FY2013 sequestration percentages for nondefense programs were taken from Congressional Budget Office (CBO),

Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act, September 12,

2011, and from Richard Kogan, How the Across-the-Board Cuts in the Budget Control Act Work, Center on Budget and

Policy Priorities, April 27, 2012. They were applied against FY2012 funding levels because appropriations for FY2013

had not been enacted when the report was being prepared.

20

Tom Zembar, Impact of Sequestration on Federal Education Programs, National Education Association, June 2012,

available at http://www.nea.org/assets/docs/

Impact_of_Sequestration_on_Federal_Education_Programs_Reformatted_06-26-12.pdf.

21

NEA estimates on a state by program basis can be found at http://www.nea.org/assets/docs/

Sequester_Impact_States.pdf.

19

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The first scenario, in which an 8.5% ($1 billion) annual reduction primarily affected the agency’s

current operations and air transportation system, produced potential job losses throughout the

economy ranging between 66,000 and 132,000 direct, indirect, and induced jobs annually through

2021.22 The second scenario, in which the same size cut in the FAA’s budget primarily affected

development of the future air transportation system (NextGen), produced potential job losses

economy-wide of 40,000 (direct, indirect, and induced) annually through 2020.

More specifically, the first scenario assumed that proportionally applying the FAA’s budget cut

across expenditure categories (two-thirds to operations, facilities and equipment, research,

engineering, and development; one-third to NextGen) would reduce air passenger traffic between

5% and 10%, commercial air freight traffic between 5% and 10%, and aircraft manufacturing

between 1% and 2%. Econsult, the firm that conducted this economic impact analysis, applied

these constraints on the capacity of the current air transportation system to FAA estimates of the

current economic impact of passenger air travel and related industry output, air freight cargo and

related industry output, and aircraft manufacturing. After taking into account that individuals and

firms would very likely switch to other modes of transportation and spend money on non-travel

economic activities given these air capacity constraints, Econsult estimated that the FAA budget

cut would result in a loss ranging from 66,000 to 132,000 direct, indirect, and induced jobs

annually from 2013 to 2021.

The second scenario instead concentrated sequestration in portions of the FAA’s budget affecting

the nation’s future air transportation system (research and development, capital equipment, and

facilities). Expanding upon work previously undertaken by Deloitte that examined the costs and

benefits of implementing NextGen on varying schedules, Econsult estimated that delaying

implementation of a scaled down version of NextGen would result in an economy-wide net loss

of 40,000 direct, indirect, and induced jobs annually from 2013 to 2020, with the job loss figure

rising substantially thereafter.

National Institutes of Health

A study released by United for Medical Research, a group that advocates for increases in funding

for the National Institutes of Health (NIH), estimated that sequestration of NIH extramural

awards23 to states in FY2013 would reduce employment by about 33,700 direct, indirect, and

induced jobs.24 Dr. Ehrlich developed this figure by reducing NIH awards spending in FY2011 for

each state by 7.8%,25 and then applying state-by-state employment multipliers to the amount of

sequestered funds.26 The intrastate employment multipliers for the scientific research and

22

Econsult Corporation, Economic Impacts of FAA Budget Sequestration on the U.S. Economy, Aerospace Industries

Association, August 2012, available at http://www.econsult.com/articles/FAA%20Sequestration%20Impact.pdf.

23

Extramural awards fund research conducted at various universities and other non-governmental facilities.

24

Dr. Everett Ehrlich, Engine Stalled: Sequestration’s Impact on NIH and the Biomedical Research Enterprise, United

for Medical Research, 2012, available at http://www.unitedformedicalresearch.com/wp-content/uploads/2012/07/UMRSequestration-Impact-on-NIH-2012.pdf.

25

The 7.8% reduction in the program’s budget is CBO’s estimated cut for all nondefense discretionary spending

(Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act, September 12,

2011).

26

Based on CRS comparison of statistics in Engine Stalled: Sequestration’s Impact on NIH and the Biomedical

Research Enterprise with statistics in NIH’s Role in Sustaining the U.S. Economy: A 2011 Update (2012) by Dr.

Ehrlich.

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development services industry, in which the recipients of the NIH awards fall, came from the U.S.

Bureau of Economic Analysis’ Regional Input-Output Modeling System (RIMS II).27 To the

RIMS II multipliers for each state, Dr. Ehrlich estimated interstate jobs.28 If NIH extramural

spending patterns remain unchanged from FY2011, those states calculated to incur the largest job

losses due to sequestration in FY2013 are California, Massachusetts, New York, and Texas.

Social Security Administration: Medicare

The American Hospital Association, the American Medical Association, and the American Nurses

Association sponsored research on the potential effect over the FY2013-FY2021 period of a 2%

reduction in the Medicare program as specified in the BCA.29 Tripp Umbach, a consulting firm

that has provided economic impact analyses for hospitals and health systems, customized the

IMPLAN national model and used earlier impact studies it had undertaken for the American

Hospital Association to develop baseline spending in seven industries identified as being directly

affected by Medicare payments and forecast spending in those industries after the sequester.30

Tripp Umbach analyzed CBO’s March 2012 baseline for estimating the magnitude of the

Medicare cuts.31 Input-output modeling was used to estimate industry employment effects.

In 2013, a cut of $10.7 billion from the baseline was estimated to produce 500,000 fewer direct,

indirect and induced jobs. Of that total, 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. Almost one of

every five direct, indirect, and induced jobs lost in both years were estimated to occur in the

hospital industry. A little more than one of every five direct, indirect, and induced jobs lost were

estimated to occur in the three following industries: offices of physicians, dentists, and other

health practitioners; medical and diagnostic labs and outpatient and other ambulatory care

services; and nursing and residential care facilities.

State-by-state projections of job loss across all industries were based on 2011 utilization data

from the Kaiser Family Foundation. “Due to the fact that future utilization is not guaranteed,

state-specific figures should only be viewed as rough estimates.”32 According to the research, the

27

See An Economic Engine: NIH Research, Employment, and the Future of the Medical Innovation Sector (2011) by

Dr. Ehrlich for these state-by-state employment multipliers. RIMS II, which resembles the subnational models of

IMPLAN and Inforum, was developed and is maintained by the Bureau of Economic Analysis within the Department

of Commerce. Very succinctly, RIMS II estimates how a change in economic activity in a given state (e.g., reduced

purchases from the aircraft manufacturing industry in Washington state) affects output, earnings, and employment in

that state.

28

These are jobs created outside a state that must buy goods and services from other states because inputs required by a

NIH award are not produced within the state where the institution receiving an award is located.

29

Tripp Umbach, The Negative Employment Impacts of the Medicare Cuts in the Budget Control Act of 2011,

September 2012, available at http://www.aha.org/content/12/12sep-bcaeconimpact.pdf.

30

The industries are hospitals; nursing and residential care facilities; offices of physicians, dentists, and other health

practitioners; home healthcare services; medical and diagnostic labs and outpatient and other ambulatory care services;

retail stores-health and personal care; and insurance carriers.

31

Tripp Umbach assumed a 2% across-the-board cut to all Medicare and Medicare Advantage service types, except for

Medicare subsidies to low-income beneficiaries of the Part D prescription drug program because the subsidies are

exempt from sequestration.

32

Ibid., p. 14.

Congressional Research Service

8

Sequestration: A Review of Estimates of Potential Job Losses

following states might incur the largest job losses in health care and other industries due to a 2%

sequestration of Medicare funds: California, Florida, Texas, New York, Pennsylvania, Ohio, and

Illinois.

Concluding Remarks

Any projections involve considerable uncertainty and thus margins for error. 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.

For example, DOD might not uniformly reduce procurement across industries. Instead, it might

disproportionately cut purchases of ships compared with past budgets. If so, major shipbuilding

centers (e.g., Virginia and Maine) would likely be subject to larger adverse employment shocks

than projected.

Cutting federal spending will result in some employers losing business and some workers losing

jobs. Because sequestration is scheduled to occur while the economy is slowly recovering from

the 2007-2009 recession, those firms that sell their products to the government (either directly or

indirectly) might have difficulty finding other buyers in the near term and the laid-off employees

of these firms might have difficulty quickly finding new jobs. Achieving deficit reduction by

some means other than the BCA’s about equal split of automatic budget reductions between nonexempt defense and nondefense programs might alter the composition of employers and

employees who bear the burden of the cuts, but the impact on total U.S. employment may be

similar.

Author Contact Information

(name redacted)

Specialist in Labor Economics

[redacted]@crs.loc.gov, 7-....

Congressional Research Service

9

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