The immediate and most visible impact of a shutdown is in the government’s day-to-day operations. Many national museums and parks are closed , immigration hearings are being postponed and the Food and Drug Administration isn’t doing routine inspections of domestic food-processing facilities, to name a few examples. Of the 800,000 federal employees affected by the shutdown, 420,000 are working without pay while the rest have been furloughed.
But beyond the individual workers and families affected, could a short or lengthy shutdown affect the broader U.S. economy as well?
An economic speed bump
While a shutdown affects the economy in a number of ways – from delaying business permits and visas to reducing service hours at innumerable agencies – a primary channel through which a shutdown affects the economy is through withheld or foregone pay from federal employees who don’t receive their paychecks.
Since consumer spending makes up about 70 percent of economic activity in the United States, withholding pay from even some government workers could introduce a significant economic speed bump in the short run.
And that’s exactly what we saw in 2013.
Similar to the situation today, a partisan standoff in Congress led to a partial shutdown of the government that lasted a little over two weeks beginning on Oct. 1 of that year.
Well over a million federal employees were affected and didn’t receive a paycheck during the shutdown. Some were furloughed – sent home and told not to do anything related to their job. Those deemed “essential” or “exempted” – such as security personnel screening passengers at airports or border patrol agents – were required to continue working at their jobs, although they were not receiving paychecks. The government eventually paid both groups the money owed them, regardless of whether they worked, after Democrats and Republicans reached an agreement on Oct. 16, 2013.
My colleague Yannelis and I sought to understand how households responded by tracking how they behaved in the days leading up to, during and following the shutdown using detailed financial data.
We obtained this anonymized data from a personal finance website where people track their income, expenses, savings and debt. Using the paycheck transaction descriptions, we identified over 60,000 households that contained employees of federal agencies affected by the shutdown. These affected employees included both those who were asked to work without pay and those who were furloughed.
As a comparison group, we also identified over 90,000 households with a member who worked for a state government. That would likely mean they have fairly similar levels of education, experience and financial security, yet their paychecks were unaffected by the shutdown.
Short-term impact on spending
Our study led to two primary findings.