As generally positive as we are on US equities, we still worry a lot about how the American labor market will come out of the COVID Crisis. Seventy percent of the US economy is tied to consumer spending and persistent mass joblessness creates social pressures as well. Yes, fiscal and monetary policy have backstopped the US economy for now. But ultimately we need to see business confidence come back and employers fill the very large labor market hole left by the COVID Crisis.
Consider the latest unadjusted insured unemployment rate of 12.8% out today, up from 1.1% a year ago. That is 18.7 million people, and this number does not include a further 9.3 million unemployed workers receiving Pandemic Unemployment Assistance.
Here is the data for just continuing claims to give you a sense of recent trends:
And here is the historical record for continuing claims from 1967 to the start of 2020 for some perspective on how this data series has behaved after prior recessions.
This data shows that the number of workers receiving unemployment insurance payments after a recession follow one of two patterns:
- The first is a classic “V” recovery, where workers return to work fairly quickly. This occurred after the Great Recession, in 1982 and in 1975.
- The second sort of pattern sees the number of workers receiving unemployment insurance remain at high levels for a year or longer. Examples are 1972 (+2 million for the entire year), 1991 – 1992 (+3 million for 18 months), and late 2001 – 2003 (+3 million for 18 months).
Three thoughts on this data:
#1: There is some debate at present about extending the supplemental unemployment benefits past July, with the concern being that this might deter workers from returning to open positions. The Great Recession experience is a useful analog:
- Because of the severity of the 2008 – 2009 recession unemployment benefits were extended from their usual 26 weeks in most states to 99 weeks nationally.
- Despite that extension, the number of people receiving unemployment insurance declined by over 3.0 million from the peak in June 2009 at 6.5 million to 3.3 million in June 2012.
- That’s the closest analog to the current situation, but since the $600/week expanded unemployment benefit is new there is no exact comparison to prior periods.
#2: It is also worth noting that the academic literature on unemployment insurance describes 2 primary economic benefits from the program:
- The first is the obvious one: unemployed workers need the money and spend most of it immediately, supporting aggregate demand.
- The second benefit is that unemployment insurance keeps workers attached to the labor force by mandating they continue to look for employment. This is an especially relevant issue just now, with labor force participation 1.9 points lower in May than March.
Research done in the wake of the Great Recession, for example, showed that extending the duration of unemployment benefits increased unemployment by 0.4 points and increased time spent unemployed by 7%. This wasn’t because the unemployed were turning down work, however. It was because they were still counted as being in the labor force. If you aren’t looking for work, you aren’t unemployed by the Bureau of Labor Statistics’ reckoning.
#3: As far as the future for the data series and what it will tell us about the state of the US labor market in the second half of 2020, 3 thoughts in conclusion:
- We should absolutely see a “V-ish” recovery in terms of fewer workers requiring unemployment insurance through the rest of the year.
In fact, this is already happening. The peak in actual (not seasonally adjusted) continuing claims was 22.8 million for the week ending May 9th. For the week ending June 6th (latest data available), that number was 18.7 million.
That is an improvement of 4.1 million people back to work in just one month.
- Recent changes to the Payroll Protection Program may slow the pace of improvement, however. Instead of having to rehire employees relatively quickly, small businesses now have until the end of 2020 to bring them back. On balance this is a good thing, but it will likely mean more continuing claims for longer.
- We are not worried that an extension of enhanced benefits will slow the pace of job growth. As Jessica noted 2 weeks ago there are plenty of Americans looking for work, ready, willing and able to fill an open position today.