Back to Work?

Job growth is stronger than expected, but the next COVID-19 wave looms

It’s a difficult time to be the president-elect. The national labor market has 10 million fewer jobs than it did in February; the United States seems to be following in the footsteps of Europe, which has seen another, much larger, wave of COVID-19 infections; and Congress looks likely to be divided, complicating any further federal government response.

That said, the October jobs report from the Bureau of Labor Statistics offers some surprising nuggets of good news:

  • Net job growth over the past three months may have been better than previously understood.
  • The unemployment rate unexpectedly fell a full percentage point, to 6.9 percent.
  • The number of people reporting they were back at work rose by 2.2 million, and most of this increase is attributable to a 1.4 million decrease in the number of workers who were temporarily furloughed.

The news is even better if you dig a bit deeper.

The Hopeful Story Behind Slowing Job Growth

Economists (including myself!) have engaged in much hand-wringing over the slowing rate of monthly job growth. After losing over 22 million jobs in the first two months of pandemic business closures, the labor market surged back by gaining 2.7 million, 4.8 million and 1.8 million payroll jobs in May, June and July, respectively. But job growth has since slowed, with September and October only contributing 672,000 and 638,000 additional payroll jobs.

However, the situation is not quite as dire as it first seems because the public and private sectors have been on different trajectories over the past few months. Private-sector net job growth has been steady since August, adding 900,000 to 1 million jobs per month. Government net job growth has seen greater fluctuation over the same period, adding 465,000 jobs in August—largely due to hiring for short-term census jobs (238,000) and state and local education hiring (153,000)—but shedding 220,000 and 268,000 jobs in September and October as most of those census workers were laid off, along with almost 450,000 state and local school employees.

In short, net job growth in August (1.4 million) looks larger than deserved because of the census hiring. Meanwhile, September and October look worse because of the census and school layoffs.

The census hiring and layoffs were expected to befuddle the jobs report for a few months, as typically happens each decade. Nor were the education layoffs much of a surprise, as cash-strapped school districts cut in-school support staff who aren’t currently needed due to remote instruction. And while the education-related layoffs are undoubtedly difficult for these workers and their families, from an economy-wide perspective many of these jobs will likely be reinstituted when schooling returns to normal after the pandemic.

Accounting for the census disparities, and considering that many of the education jobs will likely return, it appears that job growth has been stronger than commonly understood. Net new job growth appears to have stopped its downward plunge, plateauing at around a million jobs per month over the past three months.

The November jobs report will shed light on whether this is indeed a trend or a temporary shelf, but for the moment the labor market recovery looks somewhat better than many economists and pundits feared. If the recent rate of monthly job growth is consistent, then it’s possible that the labor market could be approaching full recovery by next year at this time. But consistent growth is unlikely, given the potential for subsequent COVID-19 waves on the one hand and the possibility of a vaccine on the other.

Workers Are Returning to Their Jobs

The biggest news out of October’s jobs report is the startling drop in the official unemployment rate (U-3), from 7.9 percent to 6.9 percent, with the number of employed workers rising 2.2 million month over month. Part of this decline in the unemployment rate is attributable to the previously discussed net total job growth, but the lion’s share is due to a 1.4 million decrease in the number of temporarily furloughed workers.

Similar to the slowing rate of job growth, economists have been worried that workers on temporary furlough—which have represented the majority of pandemic job losses—would eventually be laid off permanently as the speed of the recovery slowed. The decrease in temporarily furloughed workers could indicate that they were permanently laid off, but this doesn’t seem likely for a few reasons.

First, last month the number of “permanent job losers” decreased slightly, suggesting that the furloughs weren’t becoming permanent. Second, the number of people who said they wanted a job but who weren’t counted as part of the labor force (because they aren’t working or actively looking for a job) also fell. Lastly, the number of people not working who said they didn’t want a job similarly fell, suggesting that the furloughed workers weren’t permanently laid off and then completely gave up on the idea of getting a job.

Taken together, this evidence indicates that most of the workers no longer counted as furloughed have likely been rehired by their previous employers or found new jobs, rather than becoming permanently unemployed. That’s heartening news, especially considering the widespread reports of new layoffs during September and early October.

Lastly, the comprehensive jobless rate (U-CJR) continues to fall alongside the official unemployment rate. The U-CJR measures the highest possible level of joblessness by counting everyone who says they want a job, regardless of whether they’re actively looking for employment or currently available to start a job. It declined 1.2 percentage points to 10.6 percent in October.

More Than Just a Blip in the Numbers

A reasonable counterargument to this good news would be that the BLS survey data, especially the household survey, can be “noisy,” showing unexpected variation that doesn’t necessarily accurately reflect reality. If true, this argument might imply that my rosier-than-expected outlook on these employment statistics is unwarranted. That could certainly be the case here, but there’s reason to suspect otherwise.

The BLS reports that the response rate to the household survey has nearly recovered to its pre-pandemic average. Lower response rates in the spring and summer caused greater uncertainty regarding the accuracy of the estimates derived from the survey. But with near-normal response rates, this problem should be mitigated. It’s possible that the pandemic might create a particular bias in the data collection, such as generally increasing the number of respondents from one group while decreasing those from another, but this is the sort of thing that the experts at the BLS are on the lookout for.

Furthermore, the response rate to last month’s establishment (business) survey is actually higher than usual. While this is somewhat unexpected, it means that the estimates of net payroll job growth will likely be even more accurate than usual.

What’s That Light at the End of the Tunnel?

It’s reasonable to ask whether all of this means that we’ve turned a corner and that the labor market recovery will proceed at a steady pace from here on out, just as it did following the Great Recession. Unfortunately, that doesn’t appear likely.

The rate of COVID-19 cases is rising again in the United States, following a pattern seen over the past month in Europe, where the infection rate has skyrocketed with the advent of colder weather. Some European countries have reimposed business shutdowns, and US cities and states are starting to consider the same. If this next wave sparks another period of business closures, it will certainly push the recovery backwards, but it’s also true that without reasonable safety measures that reassure the public, the economic recovery won’t move forward either.

So, while we should be reassured that the recovery is going a bit better than previously understood, at the same time we should be wary of what the next wave of COVID-19 will bring. In any case, President-Elect Biden has a hard job ahead of him.

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