On 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 approaching fiscal cliff has led to forecasts of a possible recession in 2013, and concern among policymakers about the impact of sequestration on employers and their employees. Several studies have estimated the potential effect on employment of cutting the budgets of different agencies and programs. The BCA also limits cuts in Medicare payments to 2%. 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 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 . 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). Using its Long-Term Interindustry Forecasting Tool (LIFT), 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. 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. 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%. 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. Achieving deficit reduction by some 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 who bear the burden of the cuts, but the impact on total U.S. employment may be similar.
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.