The Hidden Costs of Government Shutdowns

Abstract

We examine implications of government shutdowns for government employment and productivity. Consistent with shutdowns generating liquidity challenges or disillusionment in employees, employees affected by government shutdowns experience a 31% increase in voluntary turnover after a furlough. This lost workforce is not replenished after exits stabilize. Younger employees with better outside opportunities are more likely to quit, while more experienced employees who receive higher pay are more likely to retire. Affected bureaus react by outsourcing more of their activities, with the cost for temporary service workers surpassing the savings from the reduced payroll by a factor exceeding two. Moreover, affected government bureaus exhibit substantially reduced output, with decreases across payment processing, legal enforcement, and innovation capabilities, which is consistent with shutdowns eliminating valuable human capital and decreasing government productivity.

Keywords: government shutdowns, furloughs, government productivity

JEL Classification: J21, J24, J45, J63