Q&A: What do government shutdowns cost us?

October 1, 2025
illustration of a sign reading “Sorry we're closed” over a dark blue background depicting the US capitol building

(Illustration by Johnny Utterback, University Communications)

A U.S. government shutdown began at midnight Tuesday when Congress failed to pass a funding bill. While last-minute showdowns over government funding have become routine, University of Virginia Darden School of Business professor Christoph Herpfer, who specializes in health care finance, corporate finance and banking, says the consequences are anything but.

It has already been a tumultuous year for the federal government, which has shed more than 300,000 jobs in 10 months. In the case of a shutdown, hundreds of thousands of workers are at risk of being furloughed, or even fired.

Christoph Herpfer

University of Virginia Darden School of Business professor Christoph Herpfer says government shutdowns carry lasting financial and workforce consequences. (Contributed photo)

But the damage from a shutdown extends beyond lost wages, Herpfer said. His research shows shutdowns deal a shock to federal employees’ morale that’s equivalent to a 10% pay cut. As a result, Herpfer said, thousands of civil servants leave government employment, leading to a brain drain.

Herpfer explains what shutdowns mean for federal workers, government performance and the broader economy.

Q. What are the immediate impacts of a government shutdown?

A. The obvious impact is the suspension of some government services. There is also usually quite a bit of media coverage about furloughed workers, in extreme cases about their financial hardships as they struggle with the liquidity shock of missing paychecks. Research has shown that, like most Americans, federal workers are not prepared for long periods without a paycheck. The median government employee has about one week’s worth of expenses in their checking and savings accounts around the day of their paycheck arriving, and many live paycheck-to-paycheck. This leaves little room for error.

Interestingly, while the financial hardship generates news and compelling images, these are not the things that matter the most, long-term. Employees eventually receive back pay, and services restart. The hidden costs are, well, less visible and set in later, but with more consequences down the line.

Q. What are the hidden costs?

A. As you can imagine, getting sent home without pay and being used as a pawn in a political game really demoralizes government employees. That’s something so meaningful we can actually trace it in responses to government workforce surveys.

The first thing many of them do when back in the office is fire up LinkedIn and look for private sector jobs. Data from LinkedIn itself confirms that phenomenon, and in fact, private sector headhunters actively try to poach talent.

Thanks, It's vintage, Shop
Thanks, It's vintage, Shop

Now we are in an era in which human capital, more than physical capital, is crucial. Think about how hard large companies are trying to attract, improve and retain top talent. If shutdowns make the federal government less attractive and make it harder to hire, and if they lose valuable employees, that ultimately will have negative effects on government performance.

Q. What are some of the shutdown effects that emerge later?

A. We find that there is a big uptick in federal employees leaving the government after being furloughed. Now, some people feel that the only way to shrink government size is by starving the beast, so they might like this result. But the government has important roles. It is responsible for crucial infrastructure, basic research, enormous insurance programs, etc. About $1 in every $3 spent in the U.S. economy ultimately passes through the hands of the government. You want smart, capable and motivated people to handle this important work.

What we find is that a few months after a shutdown, we start to see a stream of federal workers leaving who had been exposed to the furloughs. The younger ones quit to go to the private sector, particularly when they work in areas with strong labor markets. The older ones opt to retire, particularly if they have fully vested their retirement benefits. So, the workforce is bleeding both older, experienced manager types and younger, motivated employees.

Q. What impact do government shutdowns have on the performance of federal agencies?

A. One of our most interesting results is that we see the affected government agencies starting to perform less well. Now, it is tough to measure “performance” in the context of the government. The Department of Agriculture has a different job function than the Department of Commerce. However, there are some common functions across different agencies, such as representing the government in court or making sure that payments within the government reach the right recipients.

When we benchmark the performance of agencies against each other in these domains, we find that those exposed to the shutdown and the loss of skilled human capital exhibit a reduction in performance. For example, their accounting departments start making more mistakes and faulty payments. Although the rate only goes up by like 1%, given how much money runs through the government’s hands, that amounts to billions of dollars in losses on that single metric alone.

Q. How do you measure the impact of government shutdowns on employees and the broader federal workforce?

A. The unprecedented detail of our data allows us to do some pretty neat analyses. For example, we calibrate a theoretical economic model that allows us to translate the rate of employee departure into a dollar value in terms of salary drop. We find that the shock to morale has an effect that’s comparable to a 10% drop in cash salary, which is, of course, an enormous amount and explains why so many qualified employees leave.

No matter your view on the government, you want it to run efficiently and well, and I am not sure whether the loss of so much human capital will ultimately lead to better outcomes.

Media Contacts

Molly Mitchell

Associate Director of Content Marketing and Social Media Darden School of Business

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