April 29, 2020
What does it mean to be unemployed in a COVID-19 self-quarantined economy?
On Friday May 8th the Bureau of Labor Statistics (BLS) will release the official estimate of the April unemployment rate. Between February and March, this rate increased from 3.5 to 4.4 percent, with 7.1 million individuals unemployed. However, as the report noted, the reference week used to determine the unemployment rate in March—the 8th through the 14th—“pre-dated many coronavirus-related school and business closings in the second half of the month.” This means that the over 26 million individuals who have since filed for unemployment insurance (UI) were not in the unemployment count. As a result, back-of-the-envelope calculations suggest that the unemployment rate for April will rise to a level not seen since the Great Depression.
But will it? Filing for UI does not guarantee that the BLS will classify you as unemployed. According to official statistics, there is a difference between being “out of the labor force” and being “unemployed.” The first includes all people without jobs who are either not looking for one or are expecting to shortly return to one. The decision to self-quarantine and remain safe may be natural for individuals who otherwise might have decided to newly enter or return to the labor force—young adults looking for their first job, mothers returning to work, and retirees deciding to throw their hat back in the ring. The lack of job prospects in an economy that is severely contracting could provide common-sense justification for these individuals to sit out. If they do, they should be correctly classified as being out of the labor force, and thus not included in the unemployment rate.
To determine if someone is “unemployed,” the most common test is whether they are both without a job and actively searching for work. For the millions of Americans who are not working but are hunkered down in state-mandated or self-imposed quarantine, actively searching for work may be a very low priority, especially with business closures dampening hiring activity overall. This also may be especially true for the millions who have filed for unemployment insurance and live in the 44 states that have suspended or greatly relaxed the work search activity normally required to continue receiving UI checks.
However, there is also a second route to being classified as unemployed: on temporary layoff from your job but with the expectation of being recalled to work—regardless of whether you are actively searching for work. It might seem that the same individuals that were part of the remarkable surge in layoffs and UI filings would qualify as unemployed under these conditions—even if they are living in states with relaxed work search requirements. The key may be in interpreting what is meant by “expectation of recall.” If you are laid off from a large firm, or one with a long-term track record of growth, it may be absolutely reasonable to have such an expectation. On the other hand, if you are working for a small business, such as a restaurant, which is highly leveraged in debt, and you view your employer’s viability as in doubt, the expectation of recall may be low.
The household survey that determines the unemployment rate, the Current Population Survey (CPS), asks laid-off respondents, “Have you been given any indication you will be recalled in the next 6 months?” A yes answer to this question results in the person being classified as unemployed. In March, CPS interviewers were told that if someone was uncertain when (not if, but when) they would be recalled because of the coronavirus, they should enter “yes” as the response to this question, and they would thus be classified as unemployed. However, a respondent wary about their employer’s future may still report no likelihood of recall even if their well-meaning former employer had promised them their job would return.
With all these possibilities, what will be the impact on the unemployment rate? Certainly, it is going to rise, and rise big. The question is, How much lower will it be than if all the people who filed for unemployment benefits were treated as unemployed? And what about the group who decided to forgo entering or returning to the labor force to search for work?
Perhaps the best place to start is to take a careful look at the March jobs report and see how BLS is handling these very same questions. The BLS is an independent agency with career professionals who are well aware of these measurement issues. (Full disclosure: I worked for the BLS for over 30 years and helped supervise the unit that put these statistics together).
The March report did note that there was an “extremely large increase in the number of persons classified as unemployed on temporary layoff.” This suggests that the survey correctly classified many people who were temporarily laid off (with recall expectations) as unemployed. At the same time, however, more workers than usual were classified as employed but absent from work. This status normally includes people on vacation or out sick for the week, not absences due to business closures, and surveyors were instructed to code as “unemployed on temporary layoff” anyone who was employed but absent from work for reasons related to the coronavirus. Yet, it’s possible this did not happen as fully intended. If these individuals (the ones over and above the usual March number in the category) were counted as unemployed, BLS estimates that the unemployment rate would have been nearly a full percentage point higher.
This analysis suggests that, to assess unemployment properly, there are at least three measurement issues to look for in the April employment report:
- How many more people than usual are classified in the “employed but absent from work for ‘other’ reasons” category? Many of these should be considered unemployed. From February to March, this increased from 4.1 to 6.4 million. The March 2020 level was at least 15 percent higher than the March level for each of the previous five years. However, given the surge in layoffs and business closures starting in mid-March, the likelihood of being employed on the interview date in April but absent the previous week due to the coronavirus seems much lower than in March.
- How big was the surge in temporary and permanent layoffs? From February to March, temporary layoffs accounted for 77 percent of the 1.4 million increase in unemployment; adding in permanent layoffs brings the share to 90 percent. (The remaining 10 percent includes those who quit their jobs and people newly entering or returning to the labor force, as discussed above, who did not find a job.) The significant jump in both the level of unemployment and the unemployment rate in March suggests that the survey captured the earliest part of the wave of layoffs associated with coronavirus-related business closures.
Do these categories of layoffs vary systematically in any particular way, such as by industry? For example, is the expectation of recall in manufacturing or health care, where larger employers are common, greater than in small-business-dominated food and drinking places? Between March 15th and April 18th in Michigan, for example, 17 percent of initial claims were in manufacturing, 9 percent in health care and social assistance, and 13 percent in accommodation, which includes food and drinking places.
- Did unusually few people transition from being out of the labor force in March to being unemployed and searching for work in April? Such a drop could be consistent with individuals delaying their decision to enter or reenter the labor market and search for work. (These workers, even if not technically unemployed, are facing harm to their employment prospects.) The number of individuals who transitioned from not in the labor force to unemployed between February and March was 9 percent lower than in each of the previous two years. This drop will likely be even greater between March and April.
The unemployment rate will be affected by both the change in the number of unemployed, as just discussed, and the size of the labor force. Factors that temper the increase in unemployment will also lower labor force levels, such as fewer transitions from out of the labor force to searching for work or the laid off who are not searching or expecting recall. The labor force can shrink when people decide to retire amid the COVID-19 crisis as well as individuals who simply quit their jobs and leave the labor force (although this is far less likely than in a booming economy).
So, how much will the unemployment rate rise? To the extent that those who were laid off end up being considered out of the labor force in April, this will temper the increase in the official rate. So too will a smaller-than-usual labor force entry in April of those who were out of the labor force in March.
We cannot easily estimate these two effects, but we can adopt the extreme assumption that all individuals who lost their jobs between March 15th (just after the March reference week) and April 18th (the end of the April reference week) are classified as unemployed in April. A nearly perfect proxy for this is the total number of initial claims for each of the intervening weeks: 26.5 million. Assuming no decline in the size of the labor force from March to April (162.9 million) and that the 7.14 million unemployed in March remain unemployed in April, this yields an implied unemployment rate of 20.6 percent.
If the labor force shrinks between March and April, this rate of unemployment could go even higher. However, to the extent that many of those who have lost their jobs since mid-March end up counted as out of the labor force, the unemployment rate could also be lower. How much higher or lower? We will find out on May 8th.