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Furloughs May Not Save As Much As States Hope

A man peers through the door of a closed Department of Motor Vehicles branch in Corte Madera, Calif. In an effort to close a $26 billion budget gap, California Gov. Arnold Schwarzenegger ordered three work furlough days per month, leaving most state offices closed. (Getty Images)

This week Colorado became the latest state to force government workers to take unpaid time off in an effort to save money. At least 19 states have imposed furloughs in the past year or are considering them.

But economists have yet to determine just how effective furloughs are as a tool for state cost-saving. It is beginning to appear that a decline in spending, and therefore tax revenue, and the drop in efficiency associated with furloughs may offset their value.

Drying Out The Local Economy

California, which is experiencing the biggest state budget crisis in the country, has been furloughing state workers since February. On three designated furlough days each month, almost 200,000 state workers across California take a forced day off.

The practice is supposed to help shave $1.3 billion off the state's budget expenditures this year. But the costs to the state may offset a lot of the savings. Gabriel Taylor, an engineer for a California state agency, says the unpaid days off are having a big impact on his spending.

"In theory it's a 14 percent pay cut, but in practice for me it seems a lot more than that because my fixed costs — mortgage, my food — account for a lot of monthly income, and this comes off the excess," Taylor says. "So it's cut my disposable income, so to speak, down by about 50 percent."

Taylor says he's not going out to eat as much as he once did and he's putting off a home remodeling project he'd been planning for some time. His cutbacks hurt local businesses, but they also cost the state money in lost taxes.

Sacramento restaurant Kabul Kabob Cuisine has a sign in the window that reads: "When state workers lose, we lose." Owner Hemayat Sawez says Fridays used to be his busiest time, but business on those days is now down as much as 60 percent.

The rest of the week isn't much better, he says. Squeezed workers are packing their own lunches.

Losing Efficiency

In addition to lost spending and tax revenue, there are the costs to the state from service disruptions. Some are obvious, like people taking more time off from private sector jobs because of longer wait times at public offices like the Department of Motor Vehicles.

Then there are blips, like a truck spilling wine cork lubricant all over a Northern California freeway.

"There was a two-hour delay in sending a cleanup crew. Overall, it took 12 hours to clean up," says Ken Jacobs, chairman of the University of California, Berkeley, Labor Center.

The spill took place on a Friday, a furlough day, and there was no one to go out. Debacles like these end up costing the state money.

Jacobs says furloughs also cost the state money directly when agencies that generate revenue shut down, sometimes to the tune of hundreds of millions of dollars.

Layoffs A Better Option?

John Sullivan of San Francisco State University is skeptical that the furloughs — seven weeks' worth in California this year — will save the amounts they are intended to. He has analyzed the effect of furloughs at private firms and says they can end up costing companies about double what they set out to save, through lost productivity, poor morale and poor quality control. Most important, Sullivan says, companies run the risk of losing their best workers. He says furloughs may be trendy now, but these kinds of cuts across the board don't make sense.

"It's just like if you had a cancer," Sullivan says. "You don't really want to cut off 10 percent of your whole body; you really want to target on the cancer."

Sullivan says focused layoffs would be a better solution.

But not always. Professor David Levine at UC Berkeley's Haas School of Business says some furloughs can be very effective — especially when company executives make a good case for the belt-tightening and are making sacrifices too.

"The main thing managers need to think about is just that the communication is clear and credible so that they're not destroying what in many companies is much more valuable than the plant and equipment, which is the skills and commitment of their workforce," Levine says.

Furloughs, he says, may be a better option than layoffs. When the economy recovers, your workforce is still there.

Still, hard numbers on the bottom line are difficult to come by. Berkeley labor researcher Jacobs says few economists have looked at this.

"I suspect having gone through this economic downturn, now that there will be a lot of data about what happened, this will keep economists busy for a while," he says.

Jacobs says he is already at work with colleagues on the question.

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Transcript

ROBERT SIEGEL, host:

This week, Colorado became the latest state to furlough government workers. At least 20 states have imposed furloughs to save money, or are considering doing so. And many private companies have done the same.

But do furloughs actually save money? California has the biggest budget crisis in the country and it's been furloughing state workers since February. Rachel Dornhelm reports on the debate there over the true savings.

RACHEL DORNHELM: On a recent Friday near California's capitol building, things are quiet. It's a furlough day, one of three a month. And across the state almost 200,000 state workers are taking a forced day off. That's supposed to help shave $1.3 billion off the state's budget this year. But the costs to the state may offset a lot of the savings.

Gabriel Taylor, an engineer for a state agency, explains how the furlough days affect his budget.

Mr. GABRIEL TAYLOR (Engineer): In theory, it's a 14 percent pay cut. But in practice for me, it seems a lot more than that because my fixed costs, you know, my mortgage, my food and whatnot, account for a fair amount of my monthly income. And this comes off of the excess of that. So, it's cut my disposable income, so to speak, down by about 50 percent.

DORNHELM: He's not going out to eat as much. He's putting off a home remodeling project he'd been planning for some time. His decision to cut spending cost the state money in lost taxes and it hurts small businesses.

Here at Sacramento's Kabul Kabob Cuisine, a sign in the window reads: When state workers lose, we lose. Owner Hemayat Sawez says Fridays used to be his busiest time, but ever since the furloughs…

Mr. HEMAYAT SAWEZ (Owner, Kabul Kabob Cuisine): Friday's business is down something like 50 to 60 percent.

DORNHELM: And the rest of the week?

Mr. SAWEZ: It's the same. We see something like 20, 30 percent down.

DORNHELM: In addition to lost spending and tax revenue, there are the costs to the state from service disruptions. Some are obvious, people taking more time off private sector jobs because of longer wait times at public offices, like the DMV. Then there are blips, like a truck spilling wine cork lubricant all over a Northern California freeway.

Mr. KEN JACOBS (Center on Labor Research and Education, University of California, Berkeley): So there was a two-hour delay in sending up cleanup crews. Overall, it ended up taking 12 hours to clean up.

DORNHELM: That's Ken Jacobs, chair of the UC Berkeley Center on Labor Research and Education.

Mr. JACOBS: But again, the spill took place on a Friday. It was furlough Friday, there was no one to go out. And all of those delays are an economic cost to the state.

DORNHELM: He says the furloughs also cost the state money directly when agencies that generate revenue shut down to the tune of hundreds of millions of dollars. At the same time, there are savings from shutting down state buildings for what will be the equivalent of seven weeks this year.

John Sullivan is a skeptic. He's at San Francisco State University and has analyzed the effect of furloughs at some private firms. He says furloughs can end up costing companies about double what they set out to save, from lost productivity, poor morale and poor quality control. Most important, companies run the risk of losing their best workers.

Dr. JOHN SULLIVAN (Professor of Management, San Francisco State University): And so what you want to do is, it's just like if you had a cancer, you don't really want to cut off 10 percent of your whole body, you want to target on the cancer.

DORNHELM: He says focused layoffs would be a better solution, but not always.

Professor David Levine at UC Berkeley's Haas School of Business says some furloughs can be very effective, especially when company leadership makes a good case for the belt-tightening and are making sacrifices, too.

Dr. DAVID LEVINE (Haas School of Business, University of California, Berkeley): The main thing that managers have to think about is just that the communication is clear and credible, so that they're not destroying what, in most companies, is much more valuable than the plant and equipment, which is the skills and commitment of their workforce.

DORNHELM: Furloughs may be a better option than layoffs, says Levine. When the economy recovers, your workforce is still there. Still, hard numbers on the bottom line are difficult to come by. Berkeley labor researcher Ken Jacobs says few economists have looked at this.

Do you think that will change now?

Mr. JACOBS: I suspect going through - having gone through this economic downturn, now that there will be quite a bit of data about what happened, I expect this will keep economists busy for a while.

DORNHELM: Jacobs says he's already at work with colleagues on the question.

For NPR News, I'm Rachel Dornhelm. Transcript provided by NPR, Copyright NPR.

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