Short-Run Economic Impacts of DOGE: Whither Jobs Day?

As the Department of Government Efficiency (DOGE) has made a whirlwind through government agencies, people have started to ask how this will impact the labor market. It is difficult to know how big the impact will be given that DOGE has not been particularly transparent in what it is doing, and where it has claimed transparency there have been relatively substantial errors. It is perhaps more fruitful to lay out where we could see the impacts first and what those measures are currently telling us.

First, despite the huge disruptions to Federal agencies, the total amount DOGE has told the Federal government to stop spending is relatively small. We can see in the Daily Treasury Statement (which shows cash coming in and out of the Federal government) that non-interest government spending hasn’t slowed down and in fact is still trending slightly above the last two years (which we would expect).

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. For there to be spillovers to private-sector output and employment, the amounts would have to get much larger. It is thus not surprising that there do not seem to be changes in the amount of taxes being withheld for individual/FICA taxes (which would suggest a slowdown in the labor market).

For context, here is what this series looked like heading into the Great Recession.

We can also look at initial unemployment insurance claims, which would tell us if private-sector workers are starting to lose their jobs. At the national level, we so far haven’t seen any clear sign of upward movement in that number. 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. However, both magnitudes have been far smaller so far than would be consistent with hundreds of thousands of federal layoffs. Moreover, the rise in DC’s insured unemployment rate began in late November, suggesting some of the continuing claims may reflect post-election-campaign and post-Administration turnover. 

This is not to say that DOGE is having no impact. First of all, even if there are no spillovers to the broader economy yet, it is undeniable that a number of government employees have been fired or put on administrative leave, and this affects them, their families, and the services they provide.

It is too early to tell, but it does look like unemployment insurance claims for Federal employees are creeping up above where you would expect them to be at this time of year (this is a not seasonally adjusted series). Right now it looks like there are several hundred more claims than one would expect. We’ll continue to watch this series closely.

So if we’re not seeing anything in the data yet – does that mean there is no risk to the labor market from DOGE? A few things to keep in mind:

1. The biggest risk to the labor market from DOGE in the immediate term is a sharp slowdown in government spending. The federal government directly employs 3 million civilian workers and 1.3 million active-duty military. But the economic risks go beyond the possibility of direct layoffs. In 2024, it was estimated that Congressional appropriations would result in over $760 billion in procurement (contracts), the equivalent of about 2 ½ % of GDP. It seems unlikely that DOGE will be able to cut significant amounts, but if they do, it could markedly slow down the economy (or even stall it). Even a pause in funds that was restored later could have meaningful disruptions in 2025 and 2026.
2. In the long-run, the biggest risk to the economy from DOGE is that the government will not be able to head off or respond to a crisis. Remember – the government is not a company that is trying to maximize short-run profits. Rather its mission is to ensure the smooth functioning of society by taking on tasks that don’t make sense for the private sector, whether through social insurance like Social Security, regulation, or risk-minimization like avian flu efforts at the CDC. If those efforts are undermined, that could mean that a crisis like avian flu harms the economy and the government struggles to respond properly.
3. Even if there is no immediate crisis, it is highly plausible that standards of living erode below where they would have been otherwise. For instance, cuts in federal investment in innovation and research could slow productivity, which would in turn slow-down long-run economic growth. Call this “the Brexit outcome” – there’s no immediate crash, but a decade from now we look back and wonder whether the growth went.
4. Increase in uncertainty in the policy environment could make it harder for the private-sector to invest and innovate, which would slow economic growth.

In conclusion, the impacts of DOGE are still uncertain. It is important to watch the data for early signs of what could happen - but also to be patient in waiting for effects to emerge.