Credit Sesame breaks down federal job cuts and explains their potential impact on jobs, wages, consumer spending, and your financial health.
Federal job cuts often spark debates between those who rely on government services and those who think spending should shrink. But the reality is more complex. As layoffs unfold, it’s clear that the effects ripple well beyond government offices, impacting employment, wages, and economic growth for everyone.
Government job cuts so far
February’s employment report was below the standard of recent months. Job gains of 151,000 were below the average of 168,000 for the prior 12 months. A closer look at the numbers suggests they could get much worse.
In February 2025 alone, the government announced over 60,000 job cuts. And yet, February’s jobs report stated that federal government employment declined by just 10,000 jobs. It seems the bulk of the job cuts are not yet reflected in the official employment numbers.
Many more job cuts are expected. And the disruptive environment may also lead to an upturn in resignations.
Beyond the decline in federal jobs, such massive layoffs will likely have much broader impacts.
Broader impact on jobs and wages
The news has been full of images of tearful workers carrying boxes of their personal items out of government offices after they’ve been laid off. You may or may not feel sympathy for these workers. Either way, you might like to be aware of the impact of the layoffs on your job situation. Over the last three years, workers have generally benefitted from a robust job market.
- Unemployment has been much lower than usual. Over the past three years, the unemployment rate has averaged just 3.8%, far better than the 50-year average of 6.2%.
- Wage growth has been strong. Over the past three years, the average wage growth rate has been 5.5%. That’s clearly above the inflation rate of 4.1% over that same period. It’s also better than the historical average wage growth rate of 3.8%.
These two things are related. Naturally, when the unemployment rate is low, finding a job is much easier. Also, low unemployment creates a strong labor demand, forcing employers to pay higher wages.
These conditions may change rapidly. Not only will laid-off federal employees have to look for new jobs, but anyone else looking for work will suddenly find much more competition. In the months ahead, many more former government workers will go after private sector jobs.
This sudden surge in the labor supply could also affect wages. When job seekers are plentiful, employers know they don’t have to pay as much to attract and keep workers. This could stunt wage growth in the future.
Impact on consumer spending
Beyond the impact on employment, job cuts can also dent economic growth. Personal consumption represents just over two-thirds of GDP. Strong consumer spending has been a key factor in recent economic growth.
However, the tens of thousands of workers sidelined represent many consumers who will be spending less rather than more. This would make GDP growth harder to sustain.
Impact on government contractors
The cuts to federal jobs could lead to secondary cuts by businesses that depend on the federal government. This includes government contractors who see cuts to spending programs for their goods and services.
It also includes ordinary businesses in areas with large numbers of government employees. Whether it’s a department store or a restaurant, when unemployment rises in an area, employers in that market feel the pinch. That could jeopardize the survival of some of these businesses or at least force them to make layoffs.
Preparing your finances
Massive cuts in federal jobs and programs could affect your finances even if you don’t work for the federal government. Here are some ways to prepare:
- Consider how vulnerable your job is. If your employer is a government contractor or serves a market with a heavy concentration of government employees, you might consider a move to an employer less sensitive to federal cuts.
- Pay down debt. Rising unemployment and slower wage growth could make it more challenging to make ends meet in the months ahead. That could make debt more burdensome.
- Get your credit score in the best possible shape. While you should be reducing debt, you still want to maintain your access to credit. If the economy weakens, expect lenders to tighten standards. Raising your credit score may allow you to continue to meet their standards.
- Build up emergency savings. This is the best way to weather a financial storm. Emergency savings help you avoid the expense of borrowing to make it through hard times.
Navigating the impact of federal job cuts
Federal job cuts have already begun to reshape employment dynamics. While initial effects are visible, the full ripple effect on wages, spending, and private-sector hiring may take time to unfold.
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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice
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