Federal Worker Firings Could Imperil the Economy. But the Damage Is Yet to Be Seen in the Data

Barely a day goes by without some new tale of firings of federal government workers or other cutbacks to spending across agencies and departments such as the IRS, Department of Justice or the National Weather Service.

But while the stories of people losing their jobs are heartbreaking, it is difficult for economics and labor market experts to actually detect any substantial effect on what has until now been a fairly strong jobs environment.

The unemployment rate is at 4% and job gains in recent months have been above the level needed to maintain a growing labor market even as the ratio of jobs to unemployed workers is now back to 2019 levels after spiking post-COVID.

While the DOGE cuts have grabbed headlines, a lot of the claims of spending from actions by Elon Musk’s Department of Government Efficiency, or DOGE, have failed to materialize or represent small amounts in a federal budget that is currently $6.75 trillion.

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“While there has been a lot of sturm und drang about cancelled contracts, there’s no evidence that the amounts are having a meaningful effect on actual spending yet,” Martha Gimbel, executive director at the Budget Lab at Yale University, posted on social media Monday. “For there to be spillovers to private-sector output and employment, the amounts would have to get much larger.”

Last week, there was a small increase in the number of people filing first-time claims for unemployment and some local measures of employment in the Washington region may reflect some increase in unemployment. Still, it may be too early to discern a pattern.

“Initial claims and the insured unemployment rate have indeed been rising in Washington, D.C., and the spike in initial claims over the last two weeks does align with the timing of DOGE actions,” Gimbel added. However, both magnitudes have been “relatively small.”

There are a couple of reasons for this. One is that it is unclear how many people have actually been let go and there is always a delay after layoffs and the first filings for unemployment. Many of those who are being terminated could have other means of support, such as a working spouse, or some severance or other benefits that can carry them for a while.

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“Our best guess is that between the hiring freeze and recent layoffs, total federal employment will decline by 25K-50K over the next few months,” Wells Fargo economists wrote in a report last week. “This would be in addition to the 75K or so workers who enrolled in the deferred resignation program and will roll off the federal government’s payroll on September 30.”

In January, Trump offered federal workers a chance to resign by Feb. 6 and then collect their salaries and benefits as severance benefits until Oct. 30. If that happens as expected, Wells Fargo said there would be “a sharp drop in federal employment” that will show up in the government’s October jobs report due out on Nov. 7.

Another part of the equation is that while federal government employment accounts for about 2% of the overall labor force, a lot of federal spending goes to private contractors whether defense manufacturing firms or through the outsourcing of work to information technology companies. So, any cuts in those industries would show up in the labor market data separately.

That’s not to minimize the effects that planned cuts or terminations that have already occurred will have on the economy.

“Two percent of the working population is still pretty sizable,” says Allison Shrivastrava, an economist with the Indeed Hiring Lab. In total, that is about 3 million people.

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“These are workers that are going to be looking for jobs in sectors that are already contracting,” she adds, noting that “the federal government is also the largest employer for veterans.”

And while the absence of staffers at a national park may mean it is closed one or two days a week, it also is likely to lead to less business for a nearby motel or restaurant. Add it all up and the ripple effect could slow activity across the entire economy.

The law of unintended consequences also applies and with Trump and Musk chainsawing their way across the government – the add-on effects of their work could both be surprising and meaningful even when the stated intent is to boost American industry.

“Despite President Trump's rhetoric on bolstering domestic drilling and supporting American workers, his administration's policy decisions have paradoxically led to job losses in key sectors,” said Giacomo Santangelo, an economist at Monster.com who is also a senior lecturer and director of the international political economy program at Fordham University.

“Additionally, off-shoring practices, such as moving non-U.S. citizens in U.S. prisons abroad to foreign prisons (necessitating the need for fewer U.S. corrections officers) and hiring international workers under the CHIPS Act, coupled with tariffs impacting domestic industries like steel and automotive, are expected to further reduce job opportunities for American workers.”

“Federal job cuts linked to the Department of Government Efficiency (DOGE) are exacerbating the situation, leading to significant layoffs in specialized roles without subsequent rehiring, resulting in a net destruction of jobs,” Santangelo added. “This trend disproportionately affects workers with specialized skills, such as air traffic controllers, USAID workers, aid recipients, and personnel in various federal departments.”

Although the full effects of the firings of federal workers and terminations of government contracts may not be measured for some time to come, economists will be looking at Friday’s monthly jobs report from the Labor Department for any sign of a slowdown in hiring by the government.