How will shrinking the federal workforce impact the labor market?

Summary

• The Trump administration has made reducing the size of the federal workforce a priority since taking office. To what extent will these efforts impact the labor market in the months ahead?

• Federal government employment makes up a relatively small portion of total payrolls in the United States (1.5%). Excluding the Post Office, federal employment growth has accounted for only 4K of the 168K net jobs added over the past 12 months.

• Thus far, the Trump administration's efforts to shrink federal payrolls have occurred through three channels: a 90-day hiring freeze, deferred resignations and layoffs.

  • A hiring freeze can reduce employment as gross hiring stops but natural attrition continues. On a gross basis, the federal government hired 36K people per month over the past 12 months. But, the administration has granted exemptions to the hiring freeze for a variety of government activities, which should help limit the decline in federal payrolls from the freeze.

  • In late January, the administration offered federal employees the opportunity to resign while still maintaining pay and benefits through September 30, 2025. The administration reports that about 75K workers took the deferred resignation.

  • The administration also has laid off some workers, particularly "probationary" employees. To the best of our knowledge, there is no official source that provides a comprehensive tracking of these displacements. Our rough sense is that the decline in federal employment from layoffs is measured in the tens of thousands. We would be surprised if it were less than 10K, and we would be even more surprised if it were over 100K.

• 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. 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. There are likely to be further indirect effects to U.S. payroll employment in the private sector from businesses who contract with the federal government. These will be harder to disentangle in the data, and our initial suspicion is that this drag on job growth will be modest.

• From a timing perspective, we anticipate federal payrolls will decline by about 5K-10K in the February jobs report. Larger drags are likely in the March and April data as the hiring freeze coincides with a pickup in layoffs that has started to emerge in jobless claims filings. We expect some near-term upward pressure on the unemployment rate but for the effects to be small.

• There is significant uncertainty around these estimates. Some announced layoffs have been challenged in court, while others have subsequently been reversed by the Trump administration. Furthermore, these estimates are based on changes that already have been announced, but do not include that impact from future reductions in force that may be forthcoming.

• On net, we see the steps taken thus far to reduce federal employment as exerting only a modest dampening effect on payrolls in the coming months, but they are consistent with our expectation for the jobs market to cool somewhat further this year.

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