08/01/2011 04:57 pm ET Updated Oct 01, 2011

Debt Ceiling Deal A Major Setback For American Labor Market

For American workers -- both those employed and those looking for work -- the deal reached over the weekend to stave off an American default could spell disaster, labor economists say.

The deal struck between Obama and congressional leaders, announced Sunday night, may have averted a historic U.S. default, but the $917 billion dollars in cuts planned for the next decade could worsen an already stagnant labor market.

While many of the specifics of the planned cuts have yet to be settled, with less government spending to lift the labor market, employed workers, full- or part-time, could enjoy less job security and increasingly stagnant wages, economists say. And those without a job will face an ever more difficult route back to employment. An extension of federal unemployment insurance for the long-term unemployed, discussed in negotiations as late as July, was not included in the final plan. And cuts to government and state spending will likely mean that following months of decreases in public sector employment, even more government workers will be laid off.

"This deal represents a consensus of policymakers to look the other way at America's persistent high unemployment," said Lawrence Mishel, president of the liberal think tank Economic Policy Institute. "The deal ensures that unemployment will stay high. It will do nothing to help the labor market and the labor market is deeply distressed right now."

In June, a scant 18,000 jobs were added to the American economy, while the unemployment rate ticked up to 9.2 percent. More troubling still, economists say, is that the rise in unemployment was driven primarily by layoffs in May and June, rather than companies' reluctance to hire. With American manufacturing stalling out in July and GDP growth slowing to a crawl, there is little to suggest that a jump in job creation is on the horizon.

The weekend's deal to prevent debt default will not change this picture. In fact, experts say, it will likely make it worse. Economic historians liken Sunday's deal to Roosevelt's decision in 1937 to try to balance the budget after a robust recovery brought on by New Deal spending, dropping the United States back into the Great Depression.

"Despite years and years of study by economic historians that we shouldn't repeat the mistakes of 1937, we seem to be doing it again," said Lawrence Katz, a professor of economics at Harvard University.

The debt deal, as many economists see it, is the opposite of a stimulus: Instead of putting money into the economy to generate jobs and increase demand, money is being taken out.

"There's the classic mantra: When the consumer is not spending and business is not spending, then government needs to get in and spend," said John Challenger, the chief executive officer of Challenger, Gray & Christmas, an outplacement consultancy group in Chicago.

But now, the effects of the government's package of spending measures aimed at stimulating the economy are becoming exhausted and the debt deal practically ensures that nothing will soon be on the way to replace it.

Challenger thinks the first areas of the labor market hit by the deal will be government employees and the businesses that depend on government spending. State and local governments have already been slashing payrolls for months, and companies that depend on government contracts -- like Lockheed Martin, a Maryland-based defense contractor that has already begun rounds of layoffs -- will likely cut many more positions.

"A lot of those billions of dollars that will be cut in the deal goes to pay people's salaries," Challenger said.

In the private sector, he thinks that the effects won't be as immediate, and said some employers may be feeling relief that the threat of default has passed.

"Private sector businesses are saying, 'Let's hope that this means that the country is going to be on sounder footing: that we're going to get more access to loans that we need to grow our business, that the economy will be more competitive with the rest of the world.' The big fear is that it's going to take a long time for that to work."

But economists point out, even if employers are feeling relief that the threat of default is passed, that relief may not translate to increased hiring. The majority of hiring decisions are based on consumer demand and sales prospects, not anxiety over a default. And with U.S. consumer confidence dropping to the lowest level since the recession's official end last week, an increase in demand may not come anytime soon.

"To the typical American, in any meaningful way, we are still in a great recession," said Katz, the economics professor. Once you account for population growth, Katz added, "the labor market has shown no recovery at all since the recession's supposed end. We clearly need the federal government, in the short run, providing some kind of demand for labor. This deal signals that there will likely be no attempts at that forthcoming."