How the Government Shutdown Impacts the Economy: A JobsEQ Analysis

The government shutdown just became more tangible. Several federal agencies remain unfunded, leaving 800,000 workers missing out on wages that were to be paid today.[1] It can be difficult to form a mental image of who this affects and how, but JobsEQ makes it easy to see the direct and ripple impact this has on the economy.

As of the first quarter of 2018, there were 2.8 million people working for the Federal Government with average annual wages of $80,751. With about 800,000 of those workers not being paid,[2] the missing paychecks amount to roughly $2.48 billion for a two-week pay period.[3] That is a 29% decrease of the normal total payroll.

That $2.48 billion has deep ramifications for the entire economy, not just government employees. As people earn wages and spend them in various ways, the economy benefits. This is what JobsEQ refers to as an induced effect—a local diner benefits from federal government employees when they eat there, a clothing store benefits when government employees buy more clothes. The economy expands and adds more workers as federal employees spend their wages. The lost wages due to the shutdown represents money that will not be spent on clothing items, groceries, house supplies, dining out, entertainment, etc.

These missed economic opportunities can be quantified in JobsEQ—using GDP data and the Economic Impact model—estimating the effects of these lost wages elsewhere in the economy. This model estimates that the missed federal payroll of $2.48 billion will precipitate another $1.42 billion in lost wages in the rest of the economy and the equivalence of a temporary loss of about 728,000 jobs.[4]

To put this in to perspective, this lost induced impact is the equivalent of losing an additional 728,000 workers for two weeks. While this may not represent 728,000 real job losses, many people in the retail and food industries will see their hours cut and some part-timers will be laid off, resulting in an equivalent of 728,000 jobs impacted.[5] In total, when the 800,000 furloughed federal employees miss their paycheck, not only will they not be getting their pay, but the larger economy will also feel the ripple effects of the shutdown.

This analysis is a look at the short-term impact of the lost federal wages. Ultimately, the impact of the shutdown on the economy is very much unknown, to be determined by factors such as back pay and federal contracts. Historically, federal employees have received back pay for the time not worked, however, it is still unknown when back pay will be provided in this case. Additionally, our analysis above did not include any impacts from the delay in some contract payments, including the lost wages of contract workers.

It remains to be seen how the full impact of this disruption plays out. Regardless, the economy will have some catching up to do.

[1] https://www.washingtonpost.com/graphics/2019/politics/shutdown-federal-worker-impact/

[2] https://www.npr.org/2019/01/07/683021610/about-800-000-federal-employees-still-without-pay-as-government-shutdown-continu

[3] This assumes that those 800,000 workers make average wages for federal employees.

[4] Using latest available annual industry GDP, there was an estimated $439 billion in federal civilian GDP in 2017.  This equates to approximately $156,000 GDP per federal employee or $125 billion of annual output from 800,000 federal employees. Using this estimate in the Economic Impact model we see that the $125 billion of direct output results in $103 billion of induced annual output, $36.8 billion of which goes to wages. Translating this to a two-week period, we see an induced impact of $3.96 billion in output, of which $1.42 billion goes to wages.

[5] The 728,000 job impact over two-weeks can also be thought of as a 28,000 job impact over a full year.