State and local governments bleeding jobs

A man walks out of a job fair for military veterans and other unemployed people in Los Angeles, California, October 7, 2010.

WASHINGTON (Reuters) - U.S. state and local governments cut thousands of jobs in June, pushing their payrolls down to the lowest in five years, according to Labor Department data released on Friday, and analysts do not expect the losses to end any time soon.

Local governments shed 18,000 jobs and state governments cut 7,000 in June. The level of local government employment -- 14.143 million employees -- is the lowest since June 2006. State government employment is the lowest since August 2006.

"Today's employment report reflects continued belt-tightening at the state and local level and the trend we have previously noted, a trickle-down in budget cuts from the state to the local level," wrote Natalie Cohen, senior analyst at Wells Fargo Securities, in a research note.

The National League of Cities, which represents civic officials, foresees further job cuts for at least the next 18 months. In a statement commenting on the Labor Department report, the group voiced concerns that continued public job losses will also dampen job growth in the private sector.

Altogether, nonfarm payrolls rose by 18,000 in June, and the unemployment rate notched up to 9.2 percent.

Cuts have been particularly deep in education. In June alone, local governments shed 12,600 education positions. Since last August, when concerns about mass layoffs at public schools spurred Congress to send states millions of dollars, local education has lost 124,300 jobs.

Cohen noted the Labor Department also reported the educational services category in the private sector dropped 17,400 positions in June.

"With the layoffs in public education at the state and local levels and the reduction among private school employees, students shifting into public education are likely to see larger class sizes and fewer resources come this fall. It is our view that we are also likely to see a similar pattern next month," she wrote.

The housing bust, financial crisis and recession devastated state and local tax revenues. For more than three years, states have cut spending, hiked taxes, borrowed and turned to the federal government for help in keeping their budgets balanced. Now, with few places left to find savings, they are rolling back funds for cities, counties and school districts.

The resulting layoffs could become a drag on the national economy. The recession officially ended in 2009, and typically during a recovery period, government employment grows, according to the Economic Policy Institute, a think tank.

During recoveries from the last two recessions, government employment grew at an average rate of 1.7 percent. If that were the case during the current recovery, "the economy today would have 800,000 more jobs," it wrote in a recent report.

"This would not solve all of today's labor market crises, of course, but these jobs would knock at least a half of a percentage point off of the current unemployment rate," it said.

(Reporting by Lisa Lambert; Editing by James Dalgleish)