The weight of this sad time we must obey,
Speak what we feel, not what we ought to say.
The oldest hath borne most: We that are young.
Shall never see so much, nor live so long.
William Shakespeare, “King Lear”
We must remember the gravity of this sad day. Like William Shakespeare, who wrote “King Lear” while under quarantine, it is difficult to ponder the significance of 20.5 million jobs lost and a 14.7% unemployment rate – the grim toll of the jobs data released on Friday — among the casualties and death that surround us.
Quantitative navel gazing is not appropriate on this day of mourning. Yet, there is true meaning in understanding the nature of the economic shock, its impact on the American condition and the tragedy that lies ahead. Domestic economic policy will have to rise to the occasion to meet that shock.
Tragedy
What we know is that this report almost certainly understates the tragedy that has befallen the American labor force as the human and economic toll of the coronavirus has mounted. The U-6 measurement of unemployment or underemployment – which accounts for total unemployed, discouraged workers, those employed part time for economic reasons and those marginally attached — increased to 22.8%.
This is in line with other labor market data that points to a sustained downturn in employment. The household survey, which underscores the estimate of the unemployment rate, indicated a loss of 22.3 million jobs.
We expect the number of unemployed to surpass 40 million, with 25% of that cohort facing permanent unemployment.
The Bureau of Labor Statistics indicated in its report that “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 estimate) had been classified as unemployed or on temporary layoff, the overall unemployment rate would have been almost 5 percentage points higher.”
This would be 19.7%, which is closer to the U-6 measure of 22.8%. This underscores our primary takeaway from this report, which is that the first cut at estimating the damage to the U.S. labor market understates the true shock that the public is absorbing.
Given the increase to 33.5 million in first-time jobless claims over the past seven weeks, we already know that the total number of unemployed, the unemployment rate and underemployment rate are certain to rise in the months ahead. Based on our estimation of U.S. labor market dynamics, we expect the total number of unemployed to crest somewhere above 40 million, with 25% of that cohort facing permanent unemployment.
Just as important was the hours worked data. The report indicated an increase to 34.2 during April, which strikes us as odd. Given the magnitude of the shock that has hit the economy and labor market it is almost certain that hours worked will decline to the point where some will no longer qualify as a full-time worker and sustain health care benefits.
We expect that number to trend down toward 30 hours in the May-June period. Given the tremendous stress on the health care sector and the certainty of depression-era unemployment this year, this will require a targeted and sustained policy response that will last well beyond the pandemic.
Farce
Policymakers and investors should effectively ignore the 4.7% increase in average hourly earnings over the past month and 7.9% on a year-ago basis. This reflects little but the changing composition of the workforce because those with lower-paying jobs lost employment while those with higher-paying employment remained on the job at home.
Once one controls for fixed effects, one will find no substantial positive deviation from the trend. Moreover, any claims that the increase in hourly wages is a sign of inflation or is proof that the economy is holding up well should be firmly set aside and targeted for the dustbin of history.
The undiscovered country (“Hamlet”)
The abyss that policymakers are staring into is vast and dark. There is no precedent to put the words in the mouth of the president. The idea of fiscal conservatism in an era of well-above 20% unemployment and a structural break in the economy would appear to be somewhat out of touch and soon to be out of time.
It is appropriate that in recent days there has been a robust discussion of yield curve control, negative interest rates, helicopter money and a massive infrastructure bill to rehabilitate America’s crumbling roads, bridges and ports while jump-starting 5G and providing broadband for all.
The time for orthodox policy responses has passed and policymakers owe a timely, creative and innovative response commensurate to the current crisis. Failure is not an option.
You cannot be better employed (“Merchant of Venice”)
Inside the data, the damage was as one would expect found in the private service-providing jobs, where 17.1 million jobs were shed. The major source of job losses were in retail, which shed 2.1 million jobs; leisure and hospitality, which lost 7.6 million jobs; and trade and transport, which lost 3 million jobs.
The higher-paying education and health sector shed 2.5 million jobs, and there were 2.3 million goods-producing jobs destroyed. The manufacturing sector lost 1.3 million positions. The financial sector shed 262,000 jobs and the information subsector lost 254,000.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
