INDICATOR: March Employment Report and Commentary on the Jobs Data
KEY DATA: Payrolls: -701,000; Private: -713,000; Revisions: -57,000; Restaurants: -417,000/ Unemployment Rate: 4.4% (up 0.9 percentage point); Unemployed: +1.35 Million; Wages: +0.4%
IN A NUTSHELL: “We are just seeing the tip of the iceberg when it comes to the collapse of the labor market.”
WHAT IT MEANS: The labor market is a basket case but we have no idea how really bad things are. The March numbers simply don’t reflect the true state of the situation. Take the huge payroll drop. It is large, but there were about 700,000 or more jobs lost for six consecutive months in late 2008 and the first half of 2009. But we are likely to see a lot more job cuts, as there were ten million unemployment claims in just two weeks. Indeed, look for numbers in the millions in the April report. Not surprisingly, the largest decline was in food services. The drop in hotels was not nearly as large and should be massive in the next report.
As for the unemployment rate, it rose sharply, but again, it does not reflect the true state of the economy. The increase in the number unemployed was small compared to the surge in unemployment claims. The Bureau of Labor Statistics noted that there were a lot of workers who were “absent”, but could not be considered unemployed, according to their rules. If they had been counted, the unemployment rate would have been one percentage point higher. The reality is that we have an unemployment rate that is likely in the low to mid-teens already. The hourlyd wage jumped, but that was likely due to the large percentage of workers being cut in low wage industries (that raises the average).
Labor Market Data Commentary: In order to be consistent, which is critical, BLS has to follow the rules of how people are categorized. Importantly, the data are collected during the week of the 12th of the month and everything runs off of that. Thus, we currently are greatly undercounting the number unemployed and the job losses. That is acceptable, as long as we eventually catch up on the “true” state of unemployment. It happens all the time.
However, going forward, the “true” state of unemployment is going to be muddied by the CARES Act. In the past, the government got money to people who lost their jobs through the unemployment compensation program. If you are collecting unemployment, you are unemployed – obviously.
But the CARES Act changes the way funds are distributed to unemployed workers. Instead of the government directly paying the workers, the government pays businesses to pay workers. Those “workers” shift from being unemployed to being employed, even though the true “employer”, that is the organization paying the salary, is the government.
That artificially lowers the number of people unemployed and the unemployment rate. The key point here is that the workers hired by the businesses don’t have to do anything. As long as the business keeps the worker on the payrolls through June, the “loan” becomes a “grant”. As I have noted before, the idea is to create a Reserve Army of the Employed who will be able to quickly go back to actually working. Whether they actually work now is irrelevant.
So, first of all, we need a new “real unemployment rate” measure. That should be created by adding the number of government paid, private sector workers to the number of so-called actual unemployed workers. The current traditional unemployment rate and especially the dumb “real unemployment rate” are now irrelevant. Indeed, all measures misrepresent the true state of the labor force, which is what the unemployment is supposed to summarize. Even the new one is not accurate as there will be government paid workers that do work, so shouldn’t be categorized as unemployed. Thus, it is an overestimate of the situation.
There is also the issue of whether it even makes sense for workers to even accept the government paid jobs. The Act increases the unemployment payment by $600 per week for four months. While the payments vary greatly by state, the national average is somewhere around $375 per week. Add $600 to that and the unemployment compensation payment is high enough that workers, especially those who are only minimally attached to some businesses, will not want to work at their old salaries. Thus, it is not clear how many workers will actually take the offers. It also sets up a battle between businesses and those workers who are not showing loyalty to companies by refusing to be rehired.
Finally, there is the issue of the number of jobs in the economy. If workers appear on the private sector payrolls, they will counted as such, even though the government pays them and they might be doing nothing. A comparison of payrolls with past numbers is thus impracticable, as the private sector numbers are meaningless.
The point is that the structure of the CARES Act limits the ability to determine the true state of the labor market. As an economist, that makes it hard to understand what is going on in the economy. I am not being critical of the CARES Act. The purpose is to get money to people and businesses and to position businesses to reopen as quickly as possible. As government officials have said, the issue isn’t doing it perfectly, it is just doing it. Moral hazard, waste and misallocation of resources all take second place to the simple need to provide purchasing power to households and survival funds to businesses.
For at least the next four months, and probably more as there are talks of another stimulus bill being passed, we will simply not know what is going on in the labor market. I will report on the numbers, but be aware, the numbers will be misleading.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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