Estimates from the Department of Labor indicate that the pace of re-employment is slowing. Monthly increases in nonfarm payrolls fell for the third straight month, to 661,000 in September from nearly 1.5 million in August, and the unemployment rate decreased to 7.9%.
The official unemployment rate understates what we call the pandemic unemployment rate, which we put at 9.2%.
But that decline masks the significant pain felt by the millions who have exhausted unemployment insurance and are now classified as not looking for work. For this reason, the official unemployment rate in our estimation noticeably understates what we call the pandemic unemployment rate, which we estimate is 9.2%.
This recession is like no other – an pandemic-induced economic shock that forced 65 million people to file for unemployment insurance over the past 31 weeks.
The shutdown pushed the U.S. headline unemployment rate – also known as the U-3 unemployment rate – to nearly 15% in April, and that receded to September’s 7.9% rate. But that figure might not be the best indication of the damage being done to the labor force and the economy. The U-6 underemployment rate – which includes people who are part-timers and are otherwise marginally attached to the labor force – reached more than 22% in April before receding to 12.8% in September.
Because of the abnormal, off-the-chart changes in employment during the shutdown – pre-pandemic payroll changes hovered around 185,000 per month – the slowdown in re-employment might best be illustrated in the figure below. We show the number of months that payroll employment has been in decline over the past year.
Monthly payrolls clearly decrease during recessions. Conversely, increases in payrolls occur as the economic recovery picks up steam and then the mean reverts around an average of six increases and decreases per year during periods of stable growth.
The economists Jason Furman and Wilson Powell of Harvard University have suggested that September’s 7.9% U-3 unemployment rate might be understating the level of joblessness because of the impact of the pandemic on labor force participation and the classification of the unemployed.
We have taken Furman’s and Powell’s cue and have come up with revised estimates of U-3 unemployment that can be quickly reported after labor department releases on “jobs day,” the first Friday of each month.
In our analysis, shown in the figure below, we adjust the number of unemployed by including the increase in people who are “not in the labor force but want a job” relative to same month before the pandemic. The pandemic unemployment rate jumps to 9.2% of the adjusted labor force.
Alternatively, we have included another estimate that shows that even under the best of circumstances – in which all employees who are on temporary layoffs are recalled back to work – the unemployment rate remains at 7.6%, which is only slightly better than the current 7.9% unemployment rate.
This suggests that increases in payroll employment should be tempered by the work remaining before the labor force is back to normal. In the end, it’s another indication of the deep scarring in the domestic labor market.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.