When there is a lapse in appropriations, some federal government agencies are closed and some employees[1] are furloughed. For the most part, the effects of a federal government shutdown on components of GDP and the national income and product accounts (NIPAs), such as personal consumption expenditures or private wages and salaries, cannot be quantified because they are embedded in the regular source data that underlie the estimates and cannot be separately identified.
However, one component of GDP for which the effects can be estimated is real federal government consumption expenditures, specifically, real federal government compensation.[2] Conceptually, real compensation measures labor input, such as hours worked by federal employees. The estimate of real compensation is based primarily on employment data from the Bureau of Labor Statistics (BLS). During a government shutdown, federal workers are counted as “employed” in the BLS data if they eventually receive backpay, so these data would not reflect the reduction in services provided by the federal workforce. To account for the reduction in services, BEA adjusts real compensation based on an estimate of the reduction in hours worked, reflecting the number of employees furloughed and the number of furlough days.
After shutdowns, furloughed workers receive back pay. As a result, shutdowns have no impact on current-dollar federal compensation. In the NIPAs, compensation of government employees is measured on an accrual basis (when the compensation is earned); therefore, the timing of when the back pay was actually paid out does not affect the estimates.
Because there is a decrease in real federal government compensation without a corresponding decrease in current-dollar compensation, there is a temporary increase in the implied prices paid for federal government compensation, which BEA measures as the ratio between current-dollar compensation and real compensation. This is to say, the effect of a furlough on BEA's estimates is to reduce the level of government services provided while maintaining the same cost of those services.
[1] Federal workers do not include contractors. Federal contractors are included in the private industry sector, and any impact on GDP or private compensation due to a disruption in contract work is embedded in the source data and cannot be separately identified.
[2] In the national income and product accounts, nonmarket government services, which contribute directly to GDP, are measured as the cost of inputs such as labor, materials, and supplies. For more information, please see the box “Measuring the Output of Governments”, NIPA Handbook Chapter 9: Government Consumption Expenditures and Gross Investment.