What’s the REAL Unemployment Rate? Introducing the “Pandemic Furlough Rate”

While no single statistic can tell the whole story, the pandemic furlough rate attempts to give a more accurate labor market picture

The US unemployment rate soared to 14.7 percent in April, the highest since the Great Depression, as the full impact of the coronavirus started to become clear.

However, the unemployment rate alone isn’t sufficient to understand the coronavirus’s effect on the labor market. A statistic that measures the changes in employment (e.g. job losses and furloughs, as well as reductions in working hours) since early February would provide greater clarity. But no single metric is capable of telling the whole story because the economic effects are too complex.

For that reason I’m suggesting a new metric, which I’ll call the “pandemic furlough rate.” The name highlights the fact that much of the increase in unemployment is through furloughs—temporary layoffs or reduced hours—rather than permanent job losses.

As of May 2, the national pandemic furlough rate (PFR) stood at 17.7 percent. This means that 17.7 percent of the pre-coronavirus labor force (as of February 2020) has filed for unemployment insurance. There are important limitations on the available data. For instance, the PFR doesn’t account for:

  1. workers whose claims for unemployment insurance have been delayed by over-burdened state unemployment insurance systems;
  2. freelance independent contractors whose unemployment insurance claims have been delayed because state unemployment insurance systems have had to be re-engineered to enable their filing; and
  3. workers who initially filed for unemployment insurance but have since returned to working normally.

The PFR is a short-term metric—it is only useful for the duration of the public health crisis to help understand the proportion of workers affected. The difference between temporary furloughs and permanent layoffs is one of the most important elements of the current economic downturn, and makes it less comparable with previous recessions.

During most recessions, the increase in unemployment generally comes from layoffs or reduced hiring (or both) rather than furloughs. In fact, the reduction in hiring is a core reason why the employment recovery following the Great Recession seemed to take so long. It takes time for businesses and workers to establish brand-new relationships through a process of searching, sorting, selecting, and subsequently gearing up to full productivity. In comparison, the recovery from this recession shouldn’t face the same headwinds because most workers and employers are maintaining those relationships.

However, if businesses start closing due to the loss in consumer spending, the temporary furloughs could turn into permanent layoffs. We’ve seen some of this already, especially in the leisure and hospitality industry. But so far, the aggregate effect hasn’t risen to the level we’ve experienced in previous recessions.

A deeper dive into the pandemic furlough rate

The PFR is a ratio produced from a relatively simple calculation. The numerator is the estimated number of net pandemic-related initial filers for unemployment insurance, while the denominator is the size of the US labor force from February 2020, before the coronavirus pandemic hit (164.5 million).

To start, I use the actual number of weekly initial claims filings (the “not seasonally adjusted” value). Seasonal adjustments are appropriate when accounting for the predictable ebbs and flows of seasonal employment throughout a normal year. For example, it may be appropriate to apply a 10 percent seasonal adjustment to a normal data point to make it comparable to other months. However, applying that same 10 percent seasonal adjustment to a data point that is unexpectedly 25 times larger than typical isn’t useful.

I subtract from this value the average seasonally adjusted value of weekly initial claims filings from 2019 (218,000) to produce an estimate of the net-above-normal number of weekly initial claims filings.

The running sum of net-above-normal weekly initial claims filings represents the coronavirus’s estimated effect on the labor market. As of May 2, 29.2 million pandemic-related, initial applications for unemployment insurance had been filed:

Benefits and shortcomings of the pandemic furlough rate

The PFR is useful, but just like any other statistic, it’s incapable of telling the whole story. There are three major shortcomings.

First, it’s limited by state unemployment agencies’ ability to process new claims, meaning that like almost every other economic metric, it’s backward-looking. The PFR will be underestimated to the extent that overburdened state unemployment agencies have a backlog of claims filings due to system bottlenecks, claimants improperly filling out the forms, or forms not even being available, as in the case for independent contractors. As a result, the current PFR rate of 17.7 percent probably actually occurred back in April or even March.

Next, it doesn’t distinguish between workers who are completely out of work versus those whose hours have been reduced. Over the last month, however, it seems likely that most of those counted have not worked at all.

Finally, the metric is designed to only increase, never decrease, in order to estimate the total number of US workers who have had their employment affected by the pandemic. A separate statistic will be needed to estimate the contemporary effect as state economies are permitted to reopen and customers gradually feel safe enough to engage in broader commerce again.

The PFR also has several benefits over the headline unemployment rate.

For starters, it counts those who are still working but have had their hours reduced (workers become eligible for unemployment insurance if their hours are reduced through no fault of their own). Because Federal Pandemic Unemployment Compensation (FPUC) provides an additional $600 federal payment along with weekly state unemployment insurance payments, many workers whose hours were reduced will have been motivated to file.

Second, the headline unemployment rate is affected by the contemporary size of the labor force. If the labor force decreases, the same number of unemployed workers will produce a larger unemployment rate. If the current number of unemployed workers (23.1 million) were divided by the size of the February labor force (164.5 million) rather than the April labor force (156.5 million), the headline unemployment rate would be estimated as 14.0 percent rather than 14.7 percent.

The effect of the coronavirus should arguably be compared against the previous state of the economy, rather than the unexpected and uncertain economic changes that have taken place over the last three months. That is why the PFR calculation uses the size of the labor force from mid-February.

Finally, there are many workers in the Bureau of Labor Statistics data who seem to be improperly coded as “employed, but absent from their job” who should be counted as “on furlough” instead. As a result, the headline unemployment rate is underestimating the true effect of the coronavirus.

Another tool, but not the only one

In short, the PFR should be regarded as a complement to the headline unemployment rate, rather than a replacement. The numbers aren’t completely comparable since they examine different groups of workers, but adding the PFR to the pre-pandemic unemployment rate of 3.5 percent provides one estimate of the “real” unemployment rate: 21.2 percent.

It’s worth reiterating that no single unemployment statistic can tell everything about the health of the labor market because of the complex web of relationships that a market economy enables. But the pandemic furlough rate attempts to give a more accurate picture of the state of the labor market right now.

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