This is Part II of our two-part series, where we examine employment patterns across labor market sectors, as well as ongoing administrative efforts at reducing the size and scope of the federal workforce.
The aggregate jobs numbers have been weaker in recent months. But even when they look strong, those numbers can obscure what’s actually happening. Some sectors are expanding while others are contracting, and the patterns reveal how both market forces and policy choices are reshaping where jobs grow and where they don’t. The sectoral divide matters, particularly for understanding what’s happening with young workers entering the labor market. This second part examines two things: which sectors are driving employment gains and losses, and the federal workforce reduction effort that’s been underway since January.
Sectoral Shifts: Winners and Losers
Healthcare continues to dominate job growth—adding about 30,000 jobs in August and half a million over the past year. This sectoral strength matters for understanding recent patterns in youth unemployment. John Burn-Murdoch at the Financial Times makes a compelling case that rising unemployment among recent graduates reflects largely a sectoral reallocation. The gender dimension is particularly striking. Women are entering healthcare at high rates, and healthcare employment keeps expanding. Men have concentrated more heavily in tech and computer-related fields, where we’re seeing modest declines. The aggregate data doesn’t give us the granularity to identify precisely which tech occupations are contracting, but the overall pattern suggests that occupational choice—not just skills or credentials—is shaping labor market outcomes for young workers.
Manufacturing employment has been trending down in recent years, but the pace seems to have picked up since April. In August, 12,000 manufacturing workers lost their jobs. There are 42,000 fewer manufacturing workers since Liberation Day (April), and 78,000 fewer than a year ago.
A possible factor: tariffs have significantly raised input costs for manufacturers. Between 54% and 56% of U.S. imports consist of industrial supplies, materials, and capital goods that manufacturers use in the production process. A tariff on steel, for example, may provide a modest cushion for steelmakers, but for every worker employed in steel production, there are scores employed in industries that use steel to make appliances, cars, batteries, and machinery. When input costs rise, those industries hire less, not more.
The sectoral trends reveal how private market forces and policy interventions interact to reallocate labor across industries, favoring health care while constraining manufacturing and tech. Yet the federal government exerts its own influence on the labor market through administrative decisions about hiring, compensation, and staffing levels. The next section turns from the private sector’s adjustments to the deliberate downsizing of the federal workforce, where the scale and speed of reductions echo earlier reform efforts from the 1990s.
Federal Workforce Reductions
Two weeks ago the Office of Management and Budget OMB sent a memo to federal agencies to prepare reduction-in-force plans in the event of a government shutdown. This comes following a funding dispute with Senate Democrats refusing to support a continuing resolution that doesn’t include hundreds of billions of dollars in extra healthcare spending.
While using the threat of layoffs during a shutdown isn’t a great way to go about shrinking the size and scope of the federal workforce, it is part of a broader administrative effort that started back in January. The federal workforce stood at a little over 2.4 million workers at the start of 2025. In the 25 years leading up to that point, it grew by roughly 550,000.
Reducing the size and scope of the federal work force isn’t just a classical liberal position. President Obama called for a leaner and more efficient government in 2012. The last president to significantly reduce the federal workforce was President Bill Clinton in the 1990s.
In his first year in office, Clinton signed an executive order titled “Reduction of 100,000 Federal Positions,” requiring each department or agency to eliminate at least 4% of its civilian personnel. A year later, Clinton signed the Federal Workforce Restructuring Act creating government-wide voluntary “buyouts” for federal civilian employees outside the Department of Defense—up to $25,000 for those who voluntarily resigned or retired.
By the end of Clinton’s first term, the federal workforce had been cut by 331,000 workers. By the end of his second term, it had been cut by 434,000 workers.
The efforts of this current administration echo some of those of the Clinton administration. In January, President Trump signed EO 14210, which aims to significantly reduce the size of government in two ways:
Hiring freeze: Agencies can hire no more than one employee for every four that depart (extended every three months, next expiration on October 15)
Large-scale reduction plans: Agencies must undertake plans for workforce reductions
Another effort is offering deferred resignations, similar to Clinton’s buyout strategy. Under the Deferred Resignation Program, employees could resign or retire early and receive pay and benefits through the end of September or December.
As of August, 85,300 federal jobs have dropped off the payrolls since January, and an estimated 154,000 workers have accepted buyouts under the DRP. Most workers who dropped off the payrolls are the result of the hiring freeze preventing departing workers from being replaced, rather than active job cuts.
So far the pace of federal workforce reductions has been almost double the pace of Clinton-era cuts. However, the largest cuts during the Clinton years occurred in the second half of his first term, so it’s still too early to tell if ongoing cuts will exceed those efforts. By this point in his first term, Clinton had cut about 54,000 federal jobs. The current government has cut 85,300 since January.
If this government is to match Clinton’s first-term cuts, federal employment needs to drop below 2.08 million workers by 2028. Reducing the federal workforce back to the Clinton-era lows of 1999 would require shrinking it down to 1.88 million.
Cutting Jobs, Shifting Jobs, and the Shape of What’s Next
Healthcare’s continued expansion and manufacturing’s contraction illustrate how sectoral reallocation explains much of the variation in labor outcomes, particularly among younger workers. Meanwhile, the administration’s workforce reduction program mirrors historical precedents that aimed to streamline government operations and reduce fiscal burdens. In the months ahead, watch the mix, not just the total—where workers land, and what they produce, will tell us if this reshuffle leaves the economy stronger.
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Making government more efficient, more valuable service per dollar spent (increasing the NPV of government) seems poorly aligned with the idea of reducing the number of the federal workforce per se. Services with low NPV -- ICE is a good example -- should be reduced and that could release workers to move to higher NPV activities. But there could be others with high NPVs --IRS auditors? -- that should be expanded. But the fundamental focus should be on output, not one specific input