The Big Idea
Quantifying federal government employment
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With Elon Musk and DOGE threatening to fire federal government employees in large numbers, the question is what the magnitude of a shrinking federal footprint could mean for the aggregate U.S. economic data. While the headline at times seem bracing, it appears that the impact on the overall economy may be relatively modest.
Federal employment
According to the payroll data published by the Bureau of Labor Statistics, excluding the Post Office, the federal government employed 2.42 million people in civilian jobs in January 2025. These figures exclude active military personnel, an area unlikely to be touched by DOGE in any case.
The largest single employer in the federal government is the Department of Defense. According to the payroll data, the DoD accounted for 558,000 civilian workers in January, or nearly a quarter of the total. In contrast, the Office of Personnel Management puts the Pentagon civilian workforce at 770,000 as of last August. My guess is that at least part of the discrepancy reflects differences in how Department of Defense medical facilities are accounted for. In the payroll data, “federal hospitals” are a separate category.
Speaking of which, the “federal hospitals” line item within payrolls tallied 376,000 workers in January. The bulk of this total presumably reflects VA hospitals, another area that I would not expect to see steep cuts.
The remainder of federal government payrolls excluding the Post Office works out to 1.45 million workers, which is just under 1% of the total payroll figure of over 157 million in January and just over 1% of the private workforce of 133.6 million in January.
To add further context, federal civilian employment rose by roughly 10% from December 2019, just before the pandemic, to January 2025, adding about 200,000 jobs cumulatively over that time period.
Prospective cuts in federal employment
The rumors have been flying regarding the prospects of unprecedented job cuts among the federal government ranks. A few agencies may see their workforce slashed by half or more, while others could see minimal reductions.
Starting with the largest employer, Defense Secretary Hegseth announced recently that he expects to trim the Pentagon’s headcount of civilian workers by 5% to 8%, which would amount to between 38,000 and 62,000 in reductions. The Defense Department is starting by culling the ranks of probationary workers, cutting over 5,000 beginning in March.
The buyout offer to federal workers found 75,000 takers. However, those employees can draw their salaries through the end of September, so they will not necessarily drop out of the payroll count until much later this year, by which time, many of them may have already found employment elsewhere. Moreover, while 75,000 seems like a big number, the annual number of federal government retirees in recent years has been close to that amount. The difference, of course, is that the bulk of retirees would normally be replaced but in this instance, that may not be the case.
Gauging the magnitude of overall federal reductions is difficult at this early stage. Going with Secretary’s Hegseth guidance for DoD and assuming a similar proportion of cuts for the “federal hospitals” category yields about 70,000 for those two categories combined. For the “other” aggregate, assuming a 10% across-the-board cut would add another 145,000. That would mean a total of just over 200,000. A more extreme assumption of a 20% reduction for the “other” category would mean closer to 350,000, which strikes me as the absolute upper limit scenario.
The timeframe of these changes matters. Obviously, a 350,000 drop in federal government employment over a few months would have a massive impact on payroll readings. However, a 200,000 cumulative impact that takes place over the course of a year or two would represent a modest effect on monthly payroll readings, perhaps in the 10,000 to 20,000 a month range.
One element to keep in mind is that, unlike some special factors, like a major natural disaster, federal government workforce reductions will be relatively easy to quantify, as they will be constrained to one sector of the payroll figures, “federal government.” In fact, a simple way to isolate the effect will be to focus on the private sector payroll readings.
In assessing the net impact on payroll growth, the other key variable, which will not be easy to pinpoint, is how many federal workers who are laid off or voluntarily depart will find work elsewhere and how quickly. The labor market is not as tight as it was in 2022 or 2023, but the demand for workers is still solid and, presumably, most of these people are well-educated and have valuable experience and should be able to find new jobs over time.
Output
Measuring the government’s output is difficult. As the Bureau of Economic Analysis notes in its “Concepts and Methods” reference piece, most government output is difficult to value since it is not sold in the marketplace. As a result, the BEA estimates government output in large part by tallying up inputs, that is, the cost of labor and capital and the purchase of intermediate goods and services. This means that, by definition, productivity is assumed to be constant.
Elon Musk and others within the Trump Administration are arguing that the federal government can pare its workforce significantly and still get everything done that needs to be completed. In theory, in that case, significant headcount reductions would result in unchanged output and a jump in the federal government’s productivity.
Even if that were true, however, the way that the BEA tallies government output is quite different. Given the BEA methodology, a 10% reduction in federal government employment would translate directly into a proportionate drop in federal “consumption expenditures.” In the latest GDP figures, real federal government outlays were $1.53 trillion, of which $1.13 trillion was “consumption expenditures.” In the methodology piece, the BEA reveals that employee compensation accounts for around 65% of consumption expenditures, which would put the output total deriving from federal employee compensation at about $730 billion.
Even if we assume a 10% drop in this figure, which is likely significantly too large because these GDP statistics include the military, the GDP impact would only be about $73 billion. If this reduction occurred over the course of one year, the GDP impact would be about one quarter of a percentage point, a two to three tenths drag on GDP growth. Thus, the overall negative impact on GDP is likely to be modest.
Moreover, once again, the impact will be relatively easy to isolate. In fact, Fed officials have increasingly focused recently on the rate of growth in private domestic demand, which by definition will not be directly affected by federal workforce reductions.
Federal budget impact
Total compensation, including benefits, for federal government employees averages over $150,000 per year. With 2.42 million civilian workers, the total tab for federal civilian employee compensation would be in the neighborhood of $350 billion to $400 billion. Using a 10% reduction to get a general sense, the annual federal budget impact would be well under $50 billion a year, a literal drop in the bucket at a time when annual budget deficits are in the neighborhood of $2 trillion.
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