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Employment Limbo for Millions
Another day, another grim US economic milestone amid the COVID-19 pandemic. On May 8, the US Labor Department released its April Employment Situation report. The magnitude of the numbers was momentous—nonfarm payroll employment fell by 20.5 million people and the unemployment rate jumped to 14.7%, from 4.4% in March.
Exhibit 1: Nonfarm Payroll Employment (Monthly Change)
Record-breaking numbers had been anticipated for a while, and believe it or not, those headline statistics were slightly better than consensus estimates. After all, leading up to this report, weekly initial jobless claims had topped three million for seven consecutive weeks.
However, those headline numbers do not reflect the US labor market’s more nuanced state. In April, 16 million more people were classified as temporarily laid off, while “only” 544,000 more people were considered permanent job losers—reflecting the unusual nature of the current economic downturn driven by the COVID-19 pandemic and subsequent government policy response. Many companies have turned to furloughs, as they want to hold on to workers and limit the cost of hiring and training if the economy returns to some semblance of normal in a reasonable amount of time.
Exhibit 2: Temporary-Laid Off vs. Permanent Job Losers
The number of officially unemployed may also be severely undercounted. Anyone who said they were not working due to coronavirus-related business closures was supposed to be classified as temporarily laid off, and therefore, counted as unemployed. But millions of people were classified—most likely erroneously—as employed but "absent from work for other reasons." If everyone absent from work were instead counted as temporarily laid off, the unemployment rate would be about five percentage points higher.
What’s more, the widely reported unemployment rate is narrowly focused on those permanently out of work and actively looking for a job or laid off and expecting a recall. However, there are plenty of individuals who want a full-time job but fall outside the standard definition, including part-time workers who want a full-time job. The broader unemployment rate—referred to as U-6—surged to 22.8%. All told, the more relevant level of unemployment—or lack of full-time employment—is probably closer to 28%.
While the numbers are undoubtedly grim and most every corner of the labor market felt some pain, it’s worth noting job losses were concentrated in widely expected areas: Leisure and hospitality accounted for 7.7 million job losses, while trade, transportation and utilities accounted for 3.3 million job losses—most of which occurred in retail. Plus, many companies presumably can ramp back up quickly given the large number of furloughed workers.
Exhibit 3: April Job Losses by Industry Sector (Thousands)
It’s also important to remember employment data are largely backward looking. Weekly initial claims, while still high, are declining. And to get a better feel for how the labor market is really doing amid a fluid and fast-moving environment, some suggest alternative data sources may be more useful.
Safe to say monthly jobs reports will look ugly in the near term—and the human impact will be tremendous. From an economic perspective, though, the key information won’t necessarily be the absolute level of employed or unemployed, but rates of change (decreasing/increasing deterioration) and signs of an inflection. Some of this will emerge in what happens to all those laid-off and misclassified absent workers—namely, how many return to the ranks of the fully employed, become permanent job losers or settle for part-time jobs—and how quickly these moves happen.
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