Friday’s headline U3 unemployment rate of 6.2% for February understates the number of out-of-work people in the United States, not by design, but by the peculiar circumstances of the pandemic. After almost one year, these circumstances can be used to inform policymakers, investors and firm managers around critical decisions.
Our estimation of the real unemployment rate implies that further aid to American workers and the economy is in order even as we observe a robust recovery later this year.
While the U.S. economy will return to pre-pandemic levels in the near term, it will most likely be 2023 before the economy returns to full employment, which we estimate is at or below 3.5%.
An analysis of the labor report suggests that the unemployment rate, accounting for the effects of the pandemic, is substantially higher. By adjusting the number of unemployed to include the increase in people who are not in the labor force but want a job, the pandemic unemployment rate jumps to 7.3%, as our analysis in the figure below shows.
This suggests that the encouraging 379,000 increase in February payrolls should be seen within the enormity of the task of restoring the labor force back to normal. Yet even the definition of normal is undergoing revision.
By one definition, normal now includes including those who have become discouraged and have been dropped out of the labor force. What is being called the real unemployment rate suggests that 10.1% of the labor force is currently unemployed.
Another measure, the underemployment rate — which is currently 11.1% — counts those who are only marginally attached to the labor force and are insufficiently employed.
Reducing the real unemployment rate comes with additional burdens imposed by society.
As with the demographic and socioeconomic factors shown to be determinants of the severity of coronavirus infections, the data indicates an ethnic component to employment opportunity. Though improvements are noticeable, unemployment among the white population remains lower than other ethnic groups, with the gap showing a tendency to widen during economic downturns.
As of February, white Americans have a 5.6% unemployment rate, compared to an 8.5% rate for Latinos and 9.9% for Blacks.
In terms of policy, there are reports that the Fed has been looking at the real unemployment rate, which suggests that calls for rate hikes by financial market participants might be out of step with the goals of the monetary authorities.
As to employment opportunities, the fiscal authorities can have a direct impact by expanding employment and procurement practices, and have an indirect impact as well, by taking steps to eliminate the education and health gaps.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.