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Good news for government workers: layoffs easing

The U.S. job market is showing more signs of getting back on a solid footing. That's especially true for state and local government workers, the target of sharp cutbacks as tax revenues dried up during the Great Recession and its aftermath.

The government offered fresh evidence of a slowdown in job losses Thursday as the number of people filing new claims for unemployment benefits plummeted last week to 352,000, the fewest since April 2008. Applications fell 50,000, the biggest drop in the seasonally adjusted figure in more than six years, the Labor Department said. The four-week average, which smooths out fluctuations, dropped to 379,000, the second-lowest level in more than three years. 

"This continues a clear downshift in claims," said Ian Shepherdson, an economist at High Frequency Economics.

The drop in claims follows continued, gradual improvement in the pace of hiring. In December, employers added 200,000 jobs, the sixth straight month of net gains of 100,000 or more. The renewed hiring pushed the jobless rate down to 8.5 percent, a three-year low.  The improvement was also driven by a slowdown in layoffs in public sector jobs following a wave of deep cuts.

For the past three years, government payrolls at all levels have been rapidly shedding workers. Since April 2009, some 700,000 jobs have been cut from all levels of government – interrupted by a spike in federal hiring for the 2010 Census. State and local governments, most of which are required to balance their budget every year, saw the biggest declines in payrolls.

Those job cuts began to slow last year as the economy began showing signs of strength; during the second half of the year government payrolls were roughly flat.

The slowdown in job cuts comes as state and local government finances have begun to stabilize. Many states and municipalities suffered something of a financial hangover last year after the expiration of billions of dollars of state aid provided by the 2009 federal stimulus package.

State and local finances have also turned around as the improvement in the overall job market and the economy has boosted incomes and has helped sales tax receipts to recover. And though home prices continue falling in many parts of the country, the rapid drop in local property tax receipts has begun to ease.

If those two trends continue this year, according to Goldman Sachs economist Alec Phillips, the job outlook for government workers should continue to improve.

“Assuming that these assumptions prove correct, it is likely that state and local payrolls will stabilize later this year, though we wouldn't expect state and local governments to add meaningfully to payrolls until at least 2013,” Phillips said in a research note this week.

Slowing or ending public sector job cuts would also help keep the economic recovery on track; heavy government layoffs have been a significant drag on the overall economy. Phillips noted that state and local governments employ roughly one in seven U.S. workers, and state and local government spending makes up roughly 11 percent of GDP.

As a result of the improved financial outlook, Goldman Sachs economists are forecasting that state and local spending will shift gradually from being a slight drag on the economy through the first half of this year gradually into a slight contributor to growth by the second half of 2013.

An end to government layoffs this year would also help ease the mismatch between job seekers to job openings, which now stands at roughly four to one. But it will take continued improvement in private sector hiring to make a big dent in the overall unemployment rate. The 1.6 million jobs added in 2011 were a big improvement over the 940,000 net job gains in in 2010. Economists expect roughly 1.9 million more jobs to be added this year, according to a survey by The Associated Press.

At that rate, it would take until 2016 to replace the roughly six million workers still sidelined by job losses from the 2007 recession, which wiped out 8.7 million jobs. More than 13 million people remain out of work. Millions more have given up looking for work and so are no longer counted as unemployed.

Don't get so excited about the jobless claims number, says CNBC's Steve Liesman. Weekly jobless claims dropped 50,000 to 352,000 last week. CNBC's Rick Santelli also weighs in.