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Fiscal cliff deal won't help labor market, economists say

January 02, 2013|By Alana Semuels
  • Job-seekers may have a tougher time for the first few months of 2013.
Job-seekers may have a tougher time for the first few months of 2013. (David Paul Morris / Bloomberg )

Lawmakers may have avoided another recession by coming to a last-minute deal on the so-called fiscal cliff, but they did little to boost the lackluster labor market, indicating job seekers may have a tough time finding work in the first half of 2013, economists say.

Congress did not postpone a scheduled increase in payroll taxes, which means that employed Americans will see less take home pay than they did last year. That means they'll spend less initially while they readjust their budgets to the new reality. Slowing consumer spending will create less demand for goods and services, so "businesses will see less of a need to hire,” said Michael Feroli, chief U.S. economist for JPMorgan Chase.

The Bureau of Labor Statistics will release job numbers for December on Friday, and economists expect those numbers to be decent, with businesses and government adding about 150,000 jobs. But that report may be the best for months as businesses pull back in January and in the first quarter of the year because of that reduced demand.

Mark Zandi of Moody’s estimates that the deal will result in about 600,000 fewer jobs created this year than would have been created had last year’s tax policies remained in place.

The cuts will slow consumption by about 1% for the year, said Michael Gapen, senior U.S. economist at Barclays in New York. But the biggest hits to the labor market may be in the first few months of the year, when businesses purge payrolls after the holiday season. They won't hire much in the first quarter because businesses will remain cautious, waiting for Congress to make more decisions about the budget and sequestration in March, he said. 

“The cautiousness on the part of businesses will persist,” he said.

On the other hand,  Congress did extend unemployment insurance benefits through 2013, which will keep some spending in the economy, as unemployed workers generally spend their benefits on essentials such as food and clothing. About 2 million workers would have lost jobless benefits this week had the program not been extended.

Some economists, such as Peter Morici, an economist at the University of Maryland, warn that higher taxes on small businesses, coupled with increasing costs from Obamacare, will drag down hiring significantly.

“Small businesses now have more certainty – the assurance of more burdensome regulations, healthcare costs and taxes, and this will burden growth,” he wrote.

But more economists are slightly more optimistic. They expect a slowdown in the labor market to last about three to six months, unless, of course, more uncertainty is created by negotiations in March. One thing is for sure, said Gapen -- the recession illuminated some big problems in American governance, and until those are resolved, the economy will likely limp along.

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