A Decade of Labor Market Progress Lost
The most recent economic expansion was one of the longest in the post war period, and the labor market gains were equally impressive. Before the expansion ended in March 2020 from the coronavirus pandemic, the U.S. economy had created stunning 22.7 million net new jobs and the unemployment rate had fallen to a 50 year low of 3.5% down from 10.0% at its start. The net job creation and drop in unemployment over the past decade surpassed even the most optimistic economists’ wildest dreams.
The clearest example of this is that as the expansion continued and the unemployment rate marched ever lower, economists kept marking down their estimates of the natural rate of unemployment. Early in the expansion, economists thought that the U.S. unemployment rate would remain structurally higher than it had in the past, but later came around to the notion that the U.S. economy could easily operate and handle a far lower unemployment rate without fear of stoking widespread inflation.
But COVID-19 pandemic has swiftly ended all these labor market milestones painstakingly achieved over the past ten years. April’s job losses and increase in unemployment where so bad, 20.5 million jobs lost with 14.7% unemployment, that it is difficult to put the statistics into context looking at month-over-month changes alone. One needs to make comparisons over decades and economic cycles. It took 10 years to increase net jobs by 22.7 million, but only two months to lose 21.3 million as widespread business shutdowns swept across the country.
While many of the federal government’s bailouts and programs to date, like the CARES Act, have been designed to sustain employee incomes and jobs and keep businesses afloat as sales evaporate, the April employment report demonstrates how difficult that will be to achieve. There was some positive news on the earnings front, with both average hourly earnings and weekly earnings surpassing economist forecasts.
But programs like the Paycheck Protection Program designed to give small businesses incentives to keep employees on their payrolls have not stopped widespread job loss from occurring. And more layoffs could be coming from state and local governments and large private employers in sectors less directly impacted by business shutdowns. When consumer demand falls as much as we think it will in the second quarter, no business will be immune to the negative impacts as they ripple through the economy both domestically and globally.
More than half of the job losses in April were in just two major categories leisure and hospitality and trade, transportation and utilities. But substantial job losses were seen in most other categories as well notably, education and health care, professional and business services, and manufacturing. Government and construction also each lost almost a million jobs.
While the headline unemployment rate in April was lower than we expected at 14.7%, it is the U6 measure of unemployment, which includes people who are only marginally attached to the labor force or working part-time for economic reasons, that you should be watching. It has skyrocketed to 22.8% from just 7.0% in February.
The BLS admitted the 14.7% unemployment rate in April is an understatement. In a technical note it mentions “If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical April) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 5 percentage points higher than reported (on a not seasonally adjusted basis). In other words, the headline unemployment rate would have been closer to 19.7% not 14.7%.
The worst news from April’s employment report is actually what is not yet recorded. The layoffs and furloughs have continued into May and millions more Americans are expected to file for initial unemployment claims in the weeks ahead. The final chapter of this labor market tragedy is not yet written, and we have not yet fully seen the longer-term financial and economic damage that will occur as a result.
To learn more, check out this week’s U.S. Outlook Report.