Q&A: UVA Professor Explores ‘Hidden Costs’ of Government Shutdowns

September 27, 2023 By Andrew Ramspacher, fpa5up@virginia.edu Andrew Ramspacher, fpa5up@virginia.edu

It’s well-documented that the federal government could be shut down by the weekend, a potentially devasting blow for non-essential workers in federal agencies whose paychecks will be delayed until the shutdown ends.

The move might not just affect the millions of government employees around the United States, but also those citizens who count on federal organizations such as the IRS, the Federal Aviation Administration and the National Park Service.

But while there is plenty of attention to these very visible consequences in headlines as the Saturday deadline nears for Congress to reach a funding agreement, there’s little in the news about what Christoph Herpfer calls the “hidden costs” of government shutdowns.

Herpfer is a professor at the University of Virginia’s Darden School of Business who specializes in health care finance, corporate finance and banking. He, along with Emory University’s Gonzalo Maturana and Stanford University’s Andrew Teodorescu, conducted research on the hidden long-term impact of a government shutdown and found that thousands of employees never return to their government work after being furloughed. That leads to an array of issues.

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Herpfer’s research, which is based on millions of government employee records during the 2013 government shutdown of Barack Obama’s administration, found that: “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.”

UVA Today caught up with Herpfer to learn more about the research and how it applies to the current situation in Washington.

Q. Why do federal employees not return to their government work after being furloughed during a shutdown?

A. People get disillusioned and they just walk away from the federal government. Because many of these people don’t work for a paycheck; they select into the federal government because they’re very intrinsically motivated. They want to contribute to something bigger than just the bottom line. And others select into the federal government because they really care for the predictability of the job. And when you have a shutdown and people get sent home without pay, this kind of destroys both the illusion of stability and the illusion of working for something bigger than the bottom line.

And we found all this anecdotal evidence of people who essentially say, “I’m working for NASA and I’m making peanuts, when I could work for SpaceX and Elon Musk and make a lot more money. And if I’m being used as a political pawn in a political game, I might as well go for the money.”

Q. Why should this concern the average U.S. citizen?

A. What we find is that high-skill people are leaving. For example, we find that there’s a lot of inventors who leave the government. It’s like the NASA employee who goes to SpaceX. And we find that the government gets worse at managing its payments. The accountants are actually really important because the federal government handles about a third of every dollar that circulates in the U.S. economy.

And what we find is that after the shutdown, a lot of skilled accountants are leaving to the private sector. And the private sector was actually actively head-hunting them during the shutdown. The private sector was very clever and they saw an opportunity to poach some of the best government employees. And as a result, the failure rate of government payments goes up by about 1 percentage point. Now, that doesn’t sound like a lot, but that actually translates into billions of dollars of money that is sent to the wrong people. And most of the money is lost. It can’t be recouped afterward.

Christoph Herpfer

Herpfer is new this year to Darden. He specializes in health care finance, corporate finance and banking. (Darden School of Business photo)

So, even if you dislike the government, having the best and brightest leave government work leads to a lot of inefficiencies afterward.

Q. This looming shutdown comes in the wake of the pandemic and “the great resignation,” when many employers voluntarily resigned from their jobs. Do you see that trend impacting the federal employees about to be furloughed?

A. That’s an excellent point. I think, if anything, we will expect these effects to become bigger over time for a number of reasons.

The first reason is that there is increased political partisanship, which amplifies this effect. People get disillusioned more if they get furloughed by somebody from the other side of the political aisle.

The other thing, as you said, is now work-from-home is popular. You have the ability to leave your job and to go somewhere completely different and work from home, which makes it easy for people to leave their job.

And the third reason is there’s anecdotal evidence that the younger generation, Gen Z and younger people, they care more than their parents about this intrinsic motivation, this idea of serving something bigger. So if they get disillusioned, they might very well decide to walk out.

Q. What can everyday businesses learn from your research?

A. Businesses need a skilled workforce. Human resources are one of the most important assets that they have, and there’s literature in business that shows how important it is to have a motivated workforce. And what our research shows is that if people’s motivations suffer, they will walk away.

And this can have very bad long-term consequences for your organization, whether it’s the government or a business.

Q. Why do you consider your findings hidden?

A. While the direct effects of shutdowns, such as closed national parks, are very visible, the disillusionment of the workforce is not immediately visible; it isn’t something you can see tomorrow. We find that the wave of people leaving federal employment builds up over the course of one year, and we think that this is why the loss of human capital has been hidden.

But the consequences are very real. For example, the government is involved in a lot of lawsuits. The Environmental Protection Agency is suing companies over pollution or the SEC is suing financial institutions over potential issues with consumer protection.

All of these agencies, they constantly are bringing so-called enforcement actions or lawsuits. And one thing we find is another group of high-skilled people who left the government are lawyers. And we find a decreased efficiency of the government in bringing these actions and bringing these lawsuits. And to the degree that we all benefit from a clean environment or well-functioning financial markets or consumer protection, this is going to hurt us in the long run.

Q. Does the federal government do anything proactively to prevent mass resignations following furloughs?

A. Since these effects are hidden, they are unaware of this consequence. We found a little bit of anecdotal evidence where people said, “Oh, the shutdown is hurting morale.” But there was a big Congressional investigation we cite in our paper, where they quantified the cost of the last shutdown, the Trump shutdown, and the idea that the big cost is actually that the best people are leaving government and going to the private sector, that idea doesn’t appear in there.

So, it’s our feeling that this was something that was unknown until we discovered it.

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Andrew Ramspacher

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