CARES Act saved 400,000 state and local government jobs

Last modified January 5, 2021. Published December 18, 2020.
A teacher in Yonkers, New York teaches first grade in person and remotely during the coronavirus pandemic. (Mary Altaffer, AP)

A teacher in Yonkers, New York teaches first grade in person and remotely during the coronavirus pandemic. (Mary Altaffer, AP)

A U.S. pandemic relief package saved more than 400,000 state and local government jobs, researchers from Harvard and the University of Minnesota found, adding to economists’ understanding of the country's largest-ever stimulus effort as lawmakers consider additional measures.

The Coronavirus Aid, Relief, and Economic Security Act, providing roughly $2 trillion in benefits, was passed by Congress with overwhelming bipartisan support at the start of the pandemic, but has faced criticism over its workings and whether it went far enough to provide support.

In their paper, researchers closely examined the package's impact on fiscal pressures, finding that state and local governments would have shed 401,000 additional jobs in April without funding provided under the CARES Act. As the coronavirus pandemic slammed government budgets by drastically reducing tax revenue, state and local governments laid off 1.5 million workers in March, April and May, according to the economists.

“The first help package to states was effective at keeping jobs,” said co-author Erik Loualiche, a finance professor at the University of Minnesota, in an interview. The research is set to be published in the January 2021 issue of the Journal of Public Economics.

Loualiche, who co-authored the article with Daniel Green of Harvard Business School, added that many of the positions that were saved by the CARES Act were “frontline jobs” like health care workers, teachers, law enforcement officers and administrators of social welfare programs like unemployment benefits and food assistance. 

The number of jobs saved was determined by examining differences in the allocation of CARES Act funds by state. The 21 smallest U.S. states by population received $1.25 billion in funds each, which was equivalent to up to 15% of annual local and state government revenues. Larger states were allocated funds based on population, which generally came out to less than 5% of revenues. 

Researchers used this kink in funding to estimate the relationship between funding and job retention, finding that states that received more CARES funds per capita saved more jobs. 

The paper, titled “State and local government employment in the COVID-19 crisis,” is particularly salient as Congress negotiates an additional stimulus bill. A compromise plan supported by both Republican and Democratic leaders contains no additional aid for state and local governments, the New York Times reported

Green and Loualiche warned that their study shows that failing to support state and local governments would likely lead to additional job cuts. 

“There will be real consequences,” said Green in an interview. “They are going to have to cut the services that everyone uses.” 

Because the federal government is leaving coronavirus vaccine distribution to the states, Green said funds for vaccination may be diverted from other areas like trash collection, education and law enforcement. 

Loualiche added that spending on infrastructure could be cut, potentially hampering the economic recovery for years. 

“It’s not going to be as dramatic as what we have seen in April and May,” he said. “It’s going to be more insidious.” 

One of the primary reasons state and local governments need federal aid, the researchers said, is their reliance on revenue from taxes —such as sales taxes, income taxes, and payroll taxes — to maintain payrolls. They found that states that depended more heavily on sales taxes as a source of revenue laid off more workers during the pandemic, as stay-at-home orders severely reduced sales tax revenue. And unlike the federal government, states and cities cannot take out debt to pay wages. 

“State and local governments can’t borrow money. The federal government can,” said Green. “State and local governments are kind of at the federal government’s mercy.” 

This finding complements a recent paper in the Journal of Public and Nonprofit Affairs, in which economists found that cities and counties reliant on sales tax revenue were particularly vulnerable to the coronavirus crisis. 

While state and local governments cannot borrow money to pay general expenses like payrolls, they are allowed to borrow money to finance specific capital projects like bridges and schools.

Green, who typically studies corporate finance and capital markets, said he was interested in conducting further research on the implications of state and local governments having the ability to finance capital projects but not general expenses. 

Loualiche and Green had been considering working together on a state and local government finance project prior to the pandemic, but weren’t sure exactly what they wanted to study. The coronavirus-related economic crisis gave them focus.

“The silver lining is that when important things happen, that means you can work on important questions,” said Green. 

The two professors, who work over a thousand miles apart, said that collaborating online would have been the norm even if a pandemic was not gripping the country. 

However, Green said that being a parent while working from home has been a challenge. He scheduled his interview with the Academic Times for 12:05 p.m., he said, because he had to put his son down for a nap at noon. 

The paper, “State and local government employment in the COVID-19 crisis,” will be published in the January 2021 issue of the Journal of Public EconomicsThe co-authors are Daniel Green of Harvard University and Erik Loualiche of the University of Minnesota. Green is the lead author. 

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