The US Employment Report Was Bad, But Not For The Reason You Think

There was plenty for everyone in last Friday’s US employment report. Bears (and most media) jumped on the massive increase in the unemployment rate to a post-war record of 14.7%, far above the GFC peak of 10%. At the top and spanning the width of the front page, the New York Times had a graphic of monthly nonfarm payroll employment change since 1946. Most of the chart was a couple of inches tall but the last bar, representing 20.3 million lost jobs, stretched all the way to the bottom of the last column. (See table at end of article for a summary of data mentioned in this article).

Bulls, meanwhile, seized on data showing that 78% of the unemployment rolls were due to temporary rather than permanent layoffs. Indeed, the structural unemployment rate, or unemployment minus temporary layoffs, was unchanged at 3.2%!

So how do we connect these disparate narratives? As is often the case, the truth lies somewhere between these extremes – though the bears may have the stronger case. For what no one seemed to notice was that the structural unemployment report may have doubled to 6.4%.

Labour Market Collapse Obscures a Sharp Increase in Structural Unemployment

Apart from the massive jump in job losses, the report held other highly anomalous features. In particular, while total jobs lost fell by 22.3 million, the official count of unemployed people was only 15.9 million. The plug factor was a shrinking of the labour force by 6.4 million people. To be clear, since the labour force series started in 1948, it has never shrunk. Employment may rise and fall with the economic cycle, but the labour force has risen monotonically with population over time (Chart 1).

The Labour Department defines the labour force as the sum of employed and unemployed people. To qualify as unemployed, you must have been actively seeking work within the past month. Apparently 6.4 million people didn’t clear that hurdle in April.

Most Labour Market “Dropouts” are Seeking Work…

It turns out the Labour Department also queries people not in the labour force on whether they want work. That category jumped by 5.4 million people. In other words, 85% of people who technically left the labour force are in fact unemployed and seeking work.

The normal survey process of compiling labour market data was severely disrupted in April due to coronavirus lockdowns. It is possible that the drop in the labour force and increase in people who want work was a massive statistical anomaly that will reverse in coming months. If we assume those people will soon return to the labour force, that opens the door for some interesting pro-forma revisions of April’s jobless data.

…And Would Boost the Unemployment Rate to 17.6%

First, let’s assume those 5.9 million people who are unemployed but not included in the labour force should actually have been included. The April unemployment rate goes from 14.7% to 17.6%.

Second, let’s assume most of those 5.9 million people want work because their layoff was, in fact, permanent, and they would have been searching for a new job were it not for coronavirus lockdowns. If we add those people to the labour force and the unemployment rate ex layoffs rises from 3.2% to 6.4%.

The Good News Isn’t Very Good

There is good news and bad news here. The good news is that April’s employment report suggests that structural unemployment – the kind that typically recovers slowly – is far lower than the peak rate of 9% in April 2010. The bad news is that structural employment fell to 6.4% in mid 2013 – and then took five years to drop another three points. Even if we are fortunate enough that structural unemployment doesn’t rise much more, healing the labour market could take years. The risk, of course, is that the temporarily unemployed morph into significantly more permanent layoffs.

Many observers take some comfort from the knowledge that the April unemployment rate was mostly temporary layoffs who could be expected to return to work in coming months. Few have paid much attention to the collapse in the labour force and that most of those who “left” will likely return to the labour force as soon as lockdowns ease and starting looking for work.

There is obviously no precedent upon which to base a labour market outlook. But we would err on the side of expecting structural unemployment to rise in coming months even as many temporary workers are recalled.

And that’s the number that will largely determine the timeframe for the COVID recovery.

South Korea’s Labour Report Exhibits a Similar Anomaly

On Thursday South Korea released its April labor market report, which showed the unemployment rate unchanged at a seasonally adjusted 3.8%. Meanwhile, its labor force shrank by 341,000(-1.2%) and by 894,000 (-3.1%) over March and April. In a series dating back to 1999, the largest previous two-month decline was only 0.7%.

If we assume most of those labor market leavers want to work, the effective unemployment rate jumps to 6.8%.

Korea does not provide more granular data on temporary versus permanent layoffs so we can’t parse the data further to estimate how much of this increase is likely temporary versus structural.

But the point is that it isn’t only the US with a large gap between official labor market statistics and underlying reality. Indeed it will likely turn out to be a widespread problem.

*Adds labour force leavers who want to work

**Excludes temporary laid off; adds labour force leavers who want work

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)