Tag Archive: unemployment

Labor market improving but still shows plenty of slack

In the longer-run, a key measure of inflation pressure is the amount of labor market slack (unemployed or underemployed people), which heavily influences the ability of workers to demand higher wages.

The standard reported unemployment rate data (i.e., the U-3 measure in the US) is useful in measuring labor market slack, but has limitations due (in part) to its definitions of “unemployed” and the “labor force” in the calculation: “unemployed” people as a percentage of the “labor force”. That is, to be counted as “unemployed”, a working-age person must be considered actively looking for a job (when asked if they have sought employment in the last four weeks in the monthly household surveys done by the Bureau of Labor Statistics, BLS). If they are not currently seeking employment for any reason, they are “not in the labor force” and thus do not count in the standard unemployment rate, even if they consider themselves unemployed.

Another unemployment rate put out by the BLS, known as the U-6 measure, attempts to address this issue to some degree. The U-6 rate is much broader and includes anyone who has been looking for work within the previous 12 months but has been unable to find a job and has not looked for work in the past four weeks. It also includes anyone who has gone back to school, become disabled, and people who are underemployed or working part-time hours and want to work more. The first chart below plots the traditional U-3 rate and the broader U-6 rate since 1994. We can see that they typically follow a very similar pattern, but by construction the U-6 rate is always higher, and likely a more accurate description of slack in the labor market. What is more notable right now is that even after a dramatic recovery in employment from spring of last year (supported by historically large fiscal and monetary stimulus), the current U-6 unemployment rate of 10.7% is still higher than the worst reading of the 2001-02 recession, and far from the December 2019 low of 6.8%. By comparison, the current U-3 rate of 6.0% is likely understated (too optimistic) relative to the pre-COVID (Feb 2020) low of 3.5% due to measurement issues.

However, these metrics still rely on classifying people into various employment categories with somewhat arbitrary conditions.  An even broader and simpler measure of unemployment can help address these issues, and may be a better overall metric of labor market slack: the employment/population ratio (often abbreviated as “EPOP”) among “prime age” people aged 25-54 is simply the proportion of all persons in that age range who are employed, regardless of whether they are actively seeking a job.

The second chart below shows the total EPOP ratio over the last 50 years in the top section, and the bottom section shows the breakdown between male and female EPOP readings. Even after a sharp rebound from last year’s extreme lows and a very strong employment report last week, the overall reading of 76.8% is still far from the recent “full employment” levels in the 80-82% range in recent decades. Note that the true level of “full employment” is unknown and possibly higher than previous peaks in this ratio. This pattern can be seen in the data for both men and women, with men having a downward drift in EPOP over time while women joined the workforce up until about 2000 and have then remained in a range about 10 percentage points below that of men.

Because we are looking at people in the 25-54 age range, when adults are typically working, retirement and schooling should not have much impact on the ratios (as may be the case in the whole adult population). With a population of about 126 million in this age range in the US, the 4% difference in EPOP from current (76.8%) to previous peak levels (~80-81%) suggests five million or more people who are still unemployed potential prime-age workers. The average monthly gain in employment in this age group in 2016-2019 was about 86K/month, so even at an average of 100K jobs per month on a sustained basis it would take roughly four years to return to the previous peak. Further stimulus and a decisive suppression of COVID could accelerate that pace, but there is likely to be slack in the overall labor market for some time. This, in turn, suggests that labor cost-driven inflation is unlikely to accelerate on a sustained basis, beyond the short-term impacts from supply chain disruptions and re-opening.

Unemployment is still a huge issue

The latest weekly report on unemployment claims was released yesterday and provoked mixed responses depending on how the data was (or was not) analyzed. While unemployment claims data is not a perfect measure of the national job market, it is one of the most timely measures and gives a good picture of what is going on (though long-term comparisons can be difficult). Recent methodology and seasonal adjustment changes along with reporting of state-only (not federal) claims data have caused some confusion among investors.

The chart below shows the current preferred measure of ALL continuing (not initial) unemployment claims over the last 12 months, i.e., including the total of all the newly created or expanded federal unemployment assistance in addition to the regular state-level unemployment benefits that are normally reported. The data are not seasonally adjusted, and are shown on a log scale to better capture percentage changes. The picture is pretty clear: the trend in unemployment has not improved materially since May despite the signs of a rebound in economic activity. The positive side is that more unemployed people than ever before are getting at least some benefits while out of work thanks to the expanded federal support programs started in April (far more so than in the 2008-09 Great Recession). This highlights the economy’s current reliance on federal fiscal support.

Total Unemployment Claims

We can see that before February there were around 2 million people getting unemployment benefits (and fewer than that most of last year), which were all from regular state-level programs, and since May there have been steadily between 27 and 30 million people getting benefits from state and federal programs combined. The latest data (for Aug. 15th) shows the number back to the upper end at 29.2 million.  The US labor force (people over 16 deemed working or looking for work) as of the end of 2019 was about 159 million people. So over 18% of the pre-pandemic labor force is now collecting some kind of unemployment benefits, with no real trend of improvement visible yet.

Since part of the confusion about the weekly claims reports is related to the presence of the new federal programs in addition to the standard state programs, we break down the two categories in the chart below. Many state unemployment benefits normally only last 26 weeks, though there have been extensions in some cases. The major federal programs (Pandemic Unemployment Assistance, PUA, is the largest, with Pandemic Emergency Unemployment Compensation, PEUC, the other major one) are designed to both expand who can receive benefits (self-employed, gig workers, people working to support family at home, etc.) and extend the duration of benefits when state programs run out. As the months have passed, some people originally on state benefits (or who would normally have been ineligible) have switched over to the federal programs. We can see this in the chart, where the state-level data (blue line) has been declining from its peak, but the federal programs (red line) have been rising to largely offset the decline in the state data. Indeed, the total in federal programs has now exceeded those in state programs for the first time. This is why the total for all programs together has shown no material improvement (as in the first chart above), but those watching only the standard state-level data argue that employment conditions are improving.

US Unemployment Claims State vs Federal

While the supplemental benefit of $600/week for many of those getting benefits expired at the end of July, the benefits from federal support programs (PUA) are due to run out at the end of this year unless they are extended. Thus there will continue to be much attention focused on Congress as they debate if and how to provide additional economic support, with much uncertainty especially as the November elections approach.