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Impact of "sequester" budget cuts on jobs may be exaggerated

Job seekers adjust their paperwork as they wait in line to attend a job fair in New York February 28, 2013. REUTERS/Lucas Jackson
Job seekers adjust their paperwork as they wait in line to attend a job fair in New York February 28, 2013. REUTERS/Lucas Jackson

By Lucia Mutikani

WASHINGTON (Reuters) - Deep government spending cuts are unlikely to weigh on employment as heavily as initially feared, with most of the impact reducing hours worked rather than payrolls, according to economists.

The non-partisan Congressional Budget Office last month estimated that the $85 billion in federal budget cuts known as the "sequester," which started taking hold on March 1, would cost the economy about 750,000 jobs by the end of the year.

Several economists have dismissed the CBO projection as too high and said in the worst case scenario, total job losses would probably be in the region of 300,000, partly because government agencies are likely to reduce hours worked to try to limit layoffs.

"The major flaw in sequester-related government job loss estimates is that they typically are generated by simply dividing spending cuts by average wages and salaries for federal workers," said Maury Harris, chief economist at UBS in New York.

"However, the sequester instead is being implemented primarily through furloughs entailing one- or two-day drops in the monthly workweek per worker. Such furloughs spread the pain and do not entail major headcount cuts."

The CBO was not immediately available for comment.

Economists acknowledged there would be job losses among government contract workers. While a lack of data on the size of the contract workforce made it difficult to accurately estimate the sequester's impact, layoffs would still not add up to the CBO's estimate, they said.

"One way to gauge the potential hit to contract labor is to consider the amount of savings the government expects to receive as a result of sequester cuts after stripping out expected savings from both reductions to federal agency government labor and overhead costs," said Laura Rosner, an economist at BNP Paribas in New York.

This analysis, said Rosner, suggested job cuts would amount to just over 300,000.

"When exactly these workforce reductions will occur in 2013 is an open question. We think the furlough portion of the sequestration impact is likely to be felt throughout the fiscal year," she said.

"We are neither convinced yet that the job cuts will take place immediately nor that they will be completed within a matter of months. These job cuts will probably lower payroll growth and put upward pressure on the unemployment rate, all else equal."

The unemployment rate fell 0.2 percentage point to 7.7 percent in February.

Similar views are shared by other economists, who also pointed that the drag from the spending cuts would weigh more on hours worked, which in turn would undercut earnings.

"You can work three days a week as opposed to five and you are not considered unemployed. You won't see a 700,000 hit to payrolls because of sequestration, we think you will see a hit to hours worked, that will decline," said Tom Higgins, global macro strategist at Standish Mellon Asset Management in Boston.

While the decline in hours worked would curb pay, the impact on consumer spending was expected to be blunted by improving household balance sheets, thanks to record low interest rates and rising home and share prices.

Many economists project nonfarm payroll growth averaging between l75,000 and 200,000 per month this year. UBS forecast a 100,000 annual decline in federal government payrolls.

(Reporting by Lucia Mutikani; Editing by Eric Beech)

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