2025 Fall Seminar Series Seminar: John Stavick University of Tennesee, Knoxville

Public Employee Furloughs as a Budget Balancing Strategy: Evidence of Effects on Employees

Abstract: Many state policy makers pursue furloughs to reduce expenditures and restore balance between revenue and expenditures to comply with balanced budget requirements. Furloughs are often criticized by scholars as a mechanism that inflicts psychological and financial stress on public employees, while others perceive them as a reasonable alternative to layoffs. How sensitive are public employees to furlough-induced pay reductions? This paper implements a novel dataset containing the employee records of all California state employees from 1998-2021 to investigate how state employees responded to its mandatory furlough program implemented in 2009. Although furloughed employees exit public employment more quickly than exempt employees, event studies show weak evidence of an increase in separation rates among furloughed employees relative their exempt colleagues. Two-stage least squares regressions show that the separation elasticity for public employees is about 0.35 for same-year separation, an estimate that implies substantive monopsony power of employer government over public sector workers. However, estimates show that the labor supply response to furloughs grow more elastic in subsequent years, meaning that furloughs maybe a sensible short-run tactic to reduce expenditures during a budgetary crisis.