The Economic Recovery Is a Slowing Swoosh

The September jobs report released by the Bureau of Labor Statistics (BLS) on Oct. 2 shows that the economic recovery continues, but at a steadily decreasing rate. Ordinarily, 661,000 net new payroll jobs added month-over-month would be a cause for jubilation, but that increase is only half the number of long-term jobs added between July and August. Meanwhile, there are 10.7 million fewer payroll jobs than existed in February 2020, before the coronavirus pandemic reached the United States. In other words, although employment continues to increase as the economy adjusts to the new environment, many unemployed workers still face a grueling recovery.

Unemployment

One of the slightly unexpected items from September’s jobs report was another large decrease in the official unemployment rate (U-3), from 8.4 percent to 7.9 percent. Based solely on this metric, the recovery seems to be proceeding quite nicely. But there are several caveats that need to be considered.

First, the BLS is quick to point out that the unemployment misclassification problem the agency first flagged in the March jobs report continues to affect the estimated unemployment rate. This problem is caused by respondents telling government surveyors that they are absent from their jobs, rather than on temporary furlough. The problem is much smaller than in previous months, but if the estimated increase in people classified as absent were instead considered to be misclassified furloughed workers, the actual unemployment rate would be about 0.5 percentage points higher.

Second, some workers responded to the pandemic by dropping out of the labor force completely—they haven’t even tried searching for a new job after being laid off. As a result, the standard unemployment statistics don’t count them. The BLS estimates that 164.5 million people were in the labor force (defined as the group of people working or actively looking for work) in February 2020, compared to 160.1 million in September. If the 4.4 million workers who left the labor force were considered to be unemployed, the official unemployment rate would be 2.4 percentage points higher.

I’ve been calculating the combined effect of the misclassification error and the labor force shrinkage since the April jobs report exposed the latter problem. I call the new metric the “pre-pandemic comparable unemployment rate” (U-3_PPC), and it totaled 11.1 percent in August, before declining to 10.8 percent in September.

However, even the pre-pandemic comparable unemployment rate doesn’t tell the whole story, since the pandemic may have motivated older workers to retire early, either by claiming their Social Security benefits or by dipping into their tax-advantaged retirement plans. Indeed, research from the New School suggests that a higher proportion of retirement-age workers than younger workers left the labor force from March through June. And other research by Olivier Coibion, Yuriy Gorodnichenko, and Michael Weber found that much of the decrease in labor force participation was owing to worker retirements. These results suggest that simply comparing the current size of the labor force with the pre-pandemic labor force may not be sufficiently accurate in estimating the “true” unemployment rate.

An alternative is the “comprehensive jobless rate” (U-CJR) that I described in previous Mercatus research. It provides the highest feasible estimate of joblessness by counting everyone who reports wanting a job, regardless of whether the individual has recently searched for work or is currently available to start a job. The U-CJR was 12.2 percent in August and declined to 11.8 percent in September.

None of these unemployment metrics are sufficient by themselves, but in conjunction they can provide a fuller understanding of labor market changes. The general conclusion from September’s jobs report is that while declining unemployment is welcome news, we still have far to go. This is especially true given recent announcements of major layoffs, the effects of which aren’t contained in the September report.

Major and Minor Layoffs

There has been a steady drumbeat of major layoff announcements over the last few weeks:

• Walt Disney Co. announced last week that continuing coronavirus restrictions in California and low theme park attendance rates have prompted the company to permanently lay off 28,000 employees who were on temporary furlough.
• United and American Airlines said they would lay off a combined 32,000 employees owing to continued low demand for travel.
• Kohl’s announced a 15 percent cut to its workforce, estimated to be 18,000 jobs.
• Allstate Corp. announced it would lay off 3,800 employees as it restructures following the acquisition of rival insurance provider National General Holdings Corp. earlier this year.

These announcements are in addition to the steady stream of layoffs caused by small business failures. Consumers have been slow to resume their pre-pandemic consumption patterns, meaning that many restaurants, coffee shops, bars, and similar service-industry businesses are either scaling back operations—decreasing their need for workers—or shutting their doors forever.

This effect is seen in September’s increase in the movement of workers from employment to unemployment. Although net unemployment decreased by almost 1 million, 2.5 million workers lost their jobs compared with 1.9 million workers in August. For comparison, pre-pandemic month-over-month job losses averaged 1.5 million, while post-pandemic job losses peaked at 17.5 million in April. These September job losses are likely permanent layoffs as opposed to the spring’s temporary furloughs.

Remote Work and Migration

One increasingly important driver of small business layoffs is office workers’ shift to remote work and even migration to new communities. Before the pandemic, remote work had been gradually reshaping office culture, but as I wrote last month, the coronavirus has accelerated the future’s arrival. From dry cleaners to lunch counters, local businesses have taken a hit.

Twenty years ago, Frances Cairncross’s book The Death of Distance revolutionized thinking around the effect that the internet would have on future economic patterns. It’s fair to say that the increased connectivity offered by smartphones, better video conferencing, and software enabling greater integration of remote team members’ work has only accelerated the initial effect forecast by Cairncross. There has been valid criticism that communications technology cannot solve all kinds of distance—it’s hard to hug someone through Zoom. Still, tech companies such as SpaceX, with its growing constellation of Starlink satellites, are continually improving commercial, employment, and educational connectivity. This means we should expect the current trends toward remote work to continue rather than reverse after the pandemic.

Empowered by their new freedom, office workers around the US are moving to more desirable locations to be nearer to family, enjoy a lower cost of living, gain access to greater natural amenities, or simply get a larger home with more working space. These moves might be within the same metropolitan area, as households shift from more expensive urban housing to lower-cost suburbs, but the evidence suggests that a fair number of interstate moves are also in progress. Regardless of the distance of the move, the increased housing demand—assisted by record-low mortgage interest rates—has fueled a national real estate boom. Year-over-year home sales in August rose by 10.5 percent, while construction of new homes has similarly increased.

More and more companies are indicating greater cultural acceptance of remote work arrangements as well. Indeed, some see the trend as a solution to their pre-pandemic talent shortages and appreciate the potential cost savings enabled by employing workers in lower-cost-of-living areas.

Migration Shifts Previous Demand Patterns

This unexpected migration can have substantial indirect effects on both the areas that workers are leaving as well as their new communities. For example, New York City apartment prices have hit a four-year low, and only 10 percent of Manhattan workers have returned to their offices since the pandemic hit, hurting sales at local businesses and restaurants. Similarly, the San Francisco Bay area is seeing rental cost declines of up to 15 percent. These changes might help improve affordability in some of the most expensive housing markets in the nation, but at the cost of fewer employment opportunities for the service workers who cater to office workers.

Meanwhile, the suburban and rural communities enjoying the influx of generally higher-income remote workers are seeing the opposite: housing prices are increasing, but economic activity also is increasing in response to the new arrivals’ desire for urban-centric services, such as increased dining options.

Importantly, it doesn’t take massive amounts of migration to have a noticeable economic impact. This is because as demand for housing and services approaches the limit of available supply, the effect on prices is likely to be nonlinear—meaning that relatively small changes can still have large effects. The increased prices then spur suppliers and workers to enter the market to provide more of the goods and services that are in short supply.

What Will the Future Look Like?

The short version of the long story is this: The US faces a long recovery from the pandemic recession, and it will be particularly difficult for those service workers whose industries will see diminished consumer demand for an extended period. Those workers will likely have to change locations, careers, or both to have a better chance at finding new employment. This hardship will be exacerbated by the new economic patterns created by the movement of remote workers around the country. But these changes also bring with them new opportunities, especially for those rural and suburban areas that have lower costs of living or greater natural amenities. The future will not look like the recent past, but that doesn’t have to be a bad thing.

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