Part 2: Wages and Income
In the previous blog post (May 1, 2025), I discussed federal downsizing in the 1990s and its effects on employment and population in the District of Columbia. This post will focus on the impact on wages and salaries in DC, as well as personal income. Wages and salaries in DC refer to the total earnings of workers in the District, regardless of residency, while personal income includes the earnings of District residents from all sources, such as wages, business income, investment income, and transfer payments. While wages and salaries are closely related to the size of the District’s economy, personal income better reflects residents' well-being and the District’s tax base, since the District cannot tax the income of nonresidents.
Given that federal employment accounted for about a third of total employment in DC in 1990, it is not surprising that wages and income in DC declined along with reductions in the federal workforce. From the 1st quarter of 1993, when President Bill Clinton’s "Reinventing Government" initiative started, to the 2nd quarter of 1996, wages and salaries in DC, measured in today’s dollars, fell by about $4 billion or 7%. During this time, personal income fell by just over $1 billion or 3% (Table 1), unusual for a period when there were no national recessions (Chart 1).
The 1990s began with a recession that lasted from July 1990 to March 1991, and in DC, as well as the rest of the United States, wages and salaries grew slowly at the start of the decade (see Charts 2 and 3).While wage growth in the District continued to struggle for most of the decade due to the federal government downsizing, the US economy as a whole experienced significant wage increases about three years into the decade. It took another four years for wages in the District to start recovering. By the end of the 1990s, wages and salaries in the District were 11% higher than at the beginning, marking the second-slowest decade of growth for the District (Table 2); only the 1970s saw slower growth. Meanwhile, in the broader US economy, wages and salaries increased by 30% during the 1990s, marking the fastest decade of wage growth in the US between 1970 and the present. The sluggish wage growth observed in the District during the 1990s was a local phenomenon tied to the downsizing of the federal workforce.
Source: US Bureau of Labor Statistics
Like wages and salaries, personal income growth slowed in the early 1990s for both the District and the US due to the 1990-1991 recession. After the recession, real personal income growth in the US surged, but for the District, it continued to decline for several quarters following the start of the Reinventing Government initiative (charts 4 and 5). About two-thirds of the way into the decade, District personal income began to recover, ending roughly 14% higher than its initial level. This growth was lower than in all the decades after 1970, although it was not significantly below that of the decade immediately before it (1980) or the one that followed (2000). In contrast, personal income in the US by the end of the 1990s was 30% higher, representing the highest growth of any decade from 1970 to the present. As with wages and salaries, sluggish growth in the District's personal income during the 1990s was a local phenomenon triggered by the downsizing of the federal workforce.
Although both wages and personal income slowed in the 1990s compared to other decades from 1970 to 2020, wage growth lagged more than personal income. This is because personal income was supported by non-wage income not tied to the District’s economic performance, such as investment income from capital markets, which soared during the 1990s. Additionally, this indicates that federal downsizing may have slowed growth in the District’s economy, as measured by wages and salaries earned there, and the well-being of District residents in aggregate, but the effect on economic growth was relatively greater. However, we should be cautious in interpreting this data, as the aggregate measures mask the uneven impact across income levels. Low- to middle-income residents tend to earn a higher proportion of their income from wages, and thus, the slower wage growth in the 1990s may have had a more significant effect on low- to middle-income residents than the personal income measure suggests.
Concluding remarks
What does the District's economic performance in the 1990s, following major federal workforce cuts, suggest about the potential effects of federal downsizing in 2025? The analysis used total wages and salaries earned in the District as a proxy for the size of the District’s economy, since the US Bureau of Economic Analysis did not begin reporting gross domestic product data for the District and states until 1997. It also used personal income as a measure of the well-being of District residents. The data show a local recession after federal workforce cuts in the 1990s. Three years after the Reinventing Government initiative began, both wages and salaries and personal income were lower, even as wages and income grew strongly for the rest of the nation. Although total wages and salaries and personal income recovered toward the end of the decade, the recovery was relatively stronger for personal income. This is probably because District residents with non-wage income tied to the capital markets benefited from rapid asset price appreciation during this period. As noted in Part 1 of this series, the structure of the District's economy today differs from that of the 1990s. The federal government's share of employment in the District has decreased from 33% at the beginning of the 1990s to 25% now. However, as demonstrated in Part 1, the growth in private sector employment mostly resulted from a shift from direct federal employment to federal contracting, which now faces threats under current efforts to cut federal spending. In large part, growth in federal contracting drove the recovery in District wages and income toward the end of the 1990s. If that source of growth is constrained this time, it remains an open question what will drive the District’s recovery from current federal downsizing efforts.
What is this data?
This analysis relies on wage and income data from the U.S. Bureau of Economic Analysis (BEA), some of which were obtained through the Federal Reserve Bank of St. Louis Federal Reserve Economic Database (FRED®) system.