Feb 9, 2021

Facts, Myths and Misunderstandings in the January Jobs Report

The labor market recovery stalls, as expected

Media headlines have mourned the latest economic trends in the January jobs report, released Feb. 5 by the Bureau of Labor Statistics, with one outlet even calling the situation “extremely not good.” But the deeper truth is more complicated than an initial reading of the tea leaves would suggest. Getting the story right is important because we have enough to be worried about without unnecessary pessimism.

The 20,000-foot View

The headline statistics from the jobs report are both concerning and confusing. On net, only 49,000 payroll jobs were added back to the economy from mid-December to mid-January. This was an improvement over the previous month’s job losses, but the news seemed to underwhelm most reporters. It’s important not to place too much weight on a single month’s data, though, because the Bureau of Labor Statistics (BLS) continues to update the initial estimates based on late-arriving data.

For example, the BLS announced that it had revised the payroll employment estimates from the November and December jobs reports downward by a total of 159,000 jobs. In other words, the BLS now estimates that 227,000 jobs were lost in December, rather than the original estimate of 140,000. Compared to that, adding back 49,000 jobs in the post-holiday slump during a pandemic seems like a cause for celebration.

Economic commentators were also quick to note that the U.S. economy had 9.9 million fewer payroll jobs than it did in February 2020’s pre-pandemic jobs report. Even after the initial economic recovery, this is still a larger total job deficit than seen during the height of the Great Recession of 2007-09. Meanwhile the number of “permanently unemployed” workers rose by over 130,000—putting the total at 2.2 million higher than last February. And on top of that, a net total of 406,000 workers appeared to leave the labor force last month (they stopped working or looking for work).

In the face of all this bad news, a hopeful development caused confusion: Why did the unemployment rate drop by 0.4 percentage points, from 6.7% to 6.3%, in the midst of a stalling job recovery.

Diving Down into the Data

The last two statistics are actually linked: If unemployed workers give up looking for work, then the headline unemployment statistic (U-3) doesn’t count them as part of the labor force (defined as those people working or actively looking for work). So unemployed workers leaving the labor force can cause the unemployment rate to register a decrease.

But the story is deeper than that. The BLS updates its labor market estimates with new population data from the Census Bureau each January, which means that the top-line December and January labor market statistics are not comparable. For example, rather than 406,000 workers leaving the labor market last month, the net month-over-month decrease, incorporating the population-adjustment, was 206,000. That’s quite a bit better than commonly understood. The unhappy fact remains, however, that at least a third of the 0.4 percentage point decrease in the unemployment rate is attributable to workers leaving the workforce.

The BLS’s year-end revisions to the monthly data from 2020 provide another reason to be cautious when analyzing contemporary data. The update shows that early pandemic job losses were steeper than realized, the initial recovery was stronger and the subsequent job losses during the later wave were larger. In total, 102,000 more jobs were lost last year than had initially been estimated.

The headline jobs numbers also disguise an inversion of the previous trend of strong private-sector employment growth, which had been weighed down by job losses in public education. In January, most private-sector industries showed job losses, balanced out by a rise in temporary jobs. In total, the private sector only saw a net increase of 6,000 jobs. In comparison, public-sector employment made up the lion’s share of employment growth, buoyed by 85,000 returning state and local education jobs.

What Does This Mean for the Recovery?

Regardless of the type or source of unemployment, the lengthening span of joblessness that afflicts many workers will be a problem for the eventual recovery. Previous research has found that the longer a worker remains unemployed, the lower the likelihood that the person will be hired, with a corresponding higher probability of exiting the workforce altogether.

There’s also a reasonable concern that many businesses will use the pandemic as motivation to reorganize their operations, reducing their labor demand through new production plans or increased automation. While the reduced production costs these changes create will be beneficial for long-term economic growth, they will make it harder for the workers already suffering the pandemic’s disruptions to regain their prior income. Improved worker training that allows workers to upskill or reskill will be a crucial part of this process, and Congress could help this happen by ending the tax restrictions that inhibit employers from retraining workers for new jobs.

Thankfully, there’s also reason to be optimistic for an eventual recovery.

First, the oft-quoted statistic that the current jobs deficit is larger than at the height of the Great Recession is technically correct, but the implied conclusion that this recession’s job recovery could be even worse is not necessarily true. From the employment peak in December 2007, before the Great Recession, to the trough in February 2010, total payroll employment fell by 8.7 million jobs—less than the current deficit of 9.9 million jobs. But only 3.5 million of currently unemployed workers are listed as “permanent job losers”—those who have permanently left their previous employer—compared to 6.7 million in February 2010. This is good news for the recovery since it’s harder for permanent job losers to find new employment than for temporarily laid-off workers to be recalled to their jobs.

However, this comparison isn’t perfectly accurate. It’s likely that a large number of the current “permanent job losers” aren’t counted as unemployed because they’ve stopped looking for work until after the pandemic. But since we don’t know how many workers have chosen to retire or otherwise permanently exit the labor market, it’s premature to imply that the recovery from the pandemic recession will be worse than that from the Great Recession.

It’s also important to consider the K-shaped nature of this recession, caused by the industrial concentration of the pandemic’s effects. These four industries account for nearly half of the employment deficit:

  • Restaurants and bars (2.3 million)
  • Arts, entertainment and recreation (800,000)
  • Accommodations (700,000)
  • State and local education (930,000)

But employment in these industries should recover quickly following the pandemic. Middle- and high-income office workers have mostly kept their jobs, and because their pandemic response has been to save much of the income they otherwise would have used on dining, travel and entertainment, there’s likely to be a resurgence of demand for luxury services (and associated employment) that didn’t occur following the Great Recession.

And in one last piece of good news, despite the large loss of jobs in December and the negligible growth in January, the unemployment rate of Black men has substantially decreased, going from 11.2% in November to 9.4% in January. It’s possible that this is a statistical abnormality arising from the survey data, so the trend bears monitoring, but it’s worth noting any good news we can find.

Vaccines as Stimulus

Taken all together, it’s clear that real recovery can only start when the risk posed by the coronavirus has passed. In other words, the most important stimulus program right now is vaccination. It also means that the states with complex vaccination programs are hurting their economic recovery—in addition to public health—by not keeping it simple. West Virginia has had great success by enlisting the logistics expertise of the National Guard—something that California’s mess of county health departments could learn from.

We don’t need B-52s carpet bombing the country with syringes. But with COVID-19 vaccinations proceeding slower than typical flu vaccinations, and with more COVID-19 variants emerging, we should do absolutely everything in our power to increase the vaccinated population as rapidly as possible. The options range from approving new vaccines to shifting to a “first doses first” approach or even using half-doses. I’d argue that the correct answer is “D: All of the above.” We have the means to solve this problem; we just need to get bureaucracy out of the way.

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