Jobs Data & the Planned Reduction in Federal Government Employment

We Don't Know How Big or Immediate the Impact Will Be

I was planning to write about this in my preview for the February jobs report, but there seems to be enough interest in the topic that I’m publishing this quick hit. Not intended to be comprehensive on an evolving issue, but hopefully it is helpful to readers.

TL;DR: The planned reduction in federal government employment is large, but there are still a lot of question marks about how big it will be and exactly when it will show up in the data.

1. Context

The headlines are currently dominated by the administration’s efforts to reduce federal government spending and employment. A natural question: how will this impact employment, and when?

Let’s start with the basics: the share of US employment directly attributable to the US federal government is quite small and low by historical standards, according to the establishment survey. To my knowledge the household survey doesn’t separate out federal and state/local employment, but its count of overall government employment is comparable in magnitude to the establishment survey.

That’s not the entirety of what will be affected by proposed cuts, to the degree they are implemented. (Some or many of the cuts may get blocked by lawsuits the courts; some cuts are being reversed by the executive branch.) The federal government indirectly employs millions of private sector contractors across multiple industries; additionally, federal money supports some employment by state/local governments and the private sector, even though we wouldn’t think of those workers as federal government contractors. (Think of the cutbacks to university research funding.)

Finally, to the degree that government workers and other affected workers who can’t replace their labor income cut back on spending, there will probably be ripple effects across the rest of the economy.

2. The Proposed Cuts, So Far

I’ve seen two main groups cited in news articles. The first are roughly 75,000 workers who have accepted an early retirement buyout. These folks count as employed in the establishment until the fall, because they are collecting paychecks. There’s some ambiguity on how they’ll respond to the household survey during this interim period - based on the CPS definition, they’re employed, but it’s possible some will self-report as not having a job and/or labor income.

Also, some (but not all) of the 200,000 “probationary employees” have been let go. News articles are ambiguous on exactly how many have been let go. For example, the CNN article I link to says:

The VA said it had dismissed more than 1,000 employees while touting that it would save the department more than $98 million per year. However, the vast majority of probationary employees — more than 43,000 — were exempt from the dismissals, the department said.

The timing of the layoff is also a little ambiguous - at least some are owed paid administrative leave:

The affected employees are supposed to receive four weeks paid administrative leave, the official said, adding that it wasn't clear when individual workers would receive notice.

So as far as the establishment survey is concerned, those who do not get paid past the very beginning of March will count as not employed; administrative leave may push the numbers further out.

As the CNN article notes, there is also distinct group of federal government workers known as “term workers” (they are employed for a fixed term with an end date) that have been let go - I don’t know how many of these there are.

Finally, as ambiguous as the numbers are on federal government employment, it’s going to be much harder to directly assess the impact and timing on the private sector and state/local governments via laid off contractors and vanishing grants. It will show up across a bunch of different industries and will be hard to disentangle from the usual ebbs and flows of monthly jobs data.

3. What Will Be the Impact on the Economy?

I came into this year expecting the new administration’s policies to be labor market stabilizing (and possibly tightening) in nature: hotter demand (due to tax cuts), weaker supply (due to a crackdown on immigration), and business cycle stabilization from the Fed. In the downside risks section, I considered the possibility of “A combination of higher tariffs, sharp cutbacks in government spending without large cuts in other taxes or easing in monetary policy leads to lower aggregate demand and weaker labor markets. This seems like a fanciful scenario!"

Well, maybe it’s less fanciful than I thought. We don’t know the exact numbers and timing - it matters a lot how big this is (maybe more cutbacks are coming! maybe the courts will block a lot of it!), and how quickly it’s implemented (over a few months vs. over a year). *If* we see very large spending cutbacks, a bunch of tax cuts expire without offsetting legislation, and the Fed reacts too slowly, then the labor market will loosen… and possibly by a lot.

Jesse Rothstein, who is the former DOL Chief Economist, wrote about this pessimistic scenario here; Conor Sen has also expressed his pessimism about fiscal policy to me. And it’s worth reading Martha Gimbel’s thread (w/assists from Ernie Tedeschi), which is more cautious about the near term.