COVID | Economics & Growth | US
The recoveries that followed the recessions of 1992, 2001 and 2008-09 have often been called ‘jobless recoveries’. This was a term coined during George H. W. Bush’s tenure because the labour market was so slow to improve compared with previous recoveries (Chart 1a). People have offered a variety of reasons for this phenomenon, including globalization and outsourcing of work, a breakdown in union power, and the steady shift from manufacturing to a services-based economy.
But the monstrous spike in unemployment due to coronavirus lockdowns may offer another clue to why weak labour markets have burdened recent recoveries – and it may provide some insight into how the current recovery might proceed.
Labour Report Has Useful Granular Detail
One remarkable thing about the past two labour market reports is that the vast majority of unemployment is classified as temporary. Who knew that the Labor Department collected that little nugget?
It turns out the Bureau of Labor Statistics has been asking survey respondents whether a layoff is permanent or temporary since 1967. Temporary unemployment is normally due to factors like factories closing for retooling or businesses closing for holidays. It rarely attracts attention because it is relatively constant most of the time.
Within the overall unemployment rate there are several subcategories, including unemployment due to job loss, voluntary job leavers, and entrants to the labour force who are looking for work. The job loss category in turn is temporary and permanent unemployment.
Temporary Unemployment Recovers Quickly
The temporary component is fairly steady, between 10% and 15% of overall unemployment most of the time, but notably it spiked to nearly 25% during recessions before 1990 (Chart 1b) and then quickly recovered. However, during the last three recession, the temporary unemployment share stayed within its normal range.
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The recoveries that followed the recessions of 1992, 2001 and 2008-09 have often been called ‘jobless recoveries’. This was a term coined during George H. W. Bush’s tenure because the labour market was so slow to improve compared with previous recoveries (Chart 1a). People have offered a variety of reasons for this phenomenon, including globalization and outsourcing of work, a breakdown in union power, and the steady shift from manufacturing to a services-based economy.
But the monstrous spike in unemployment due to coronavirus lockdowns may offer another clue to why weak labour markets have burdened recent recoveries – and it may provide some insight into how the current recovery might proceed.
Labour Report Has Useful Granular Detail
One remarkable thing about the past two labour market reports is that the vast majority of unemployment is classified as temporary. Who knew that the Labor Department collected that little nugget?
It turns out the Bureau of Labor Statistics has been asking survey respondents whether a layoff is permanent or temporary since 1967. Temporary unemployment is normally due to factors like factories closing for retooling or businesses closing for holidays. It rarely attracts attention because it is relatively constant most of the time.
Within the overall unemployment rate there are several subcategories, including unemployment due to job loss, voluntary job leavers, and entrants to the labour force who are looking for work. The job loss category in turn is temporary and permanent unemployment.
Temporary Unemployment Recovers Quickly
The temporary component is fairly steady, between 10% and 15% of overall unemployment most of the time, but notably it spiked to nearly 25% during recessions before 1990 (Chart 1b) and then quickly recovered. However, during the last three recession, the temporary unemployment share stayed within its normal range.
It appears in recessions before 1990 that many companies put workers on furlough when business slowed then recalled them as the recovery took hold. That’s a big part of why the labour market soon rebounded. But in the last three recessions, employers have apparently taken advantage of recessions to restructure their workforces through permanent layoffs.
Repairing Permanent Unemployment Takes Time
To make the point another way, in Chart 2a we take an average of temporary unemployment across recoveries for the pre-1990 recessions and subsequent recessions, normalized to a base of 100% at the end of each recession. In the pre-1990 recessions, temporary unemployment returned to normal within a year of the recessions’ end. Temporary unemployment also improved in the year after the subsequent recessions, but far more modestly since there was only a small uptick in temporary unemployment.
The pattern for permanent unemployment is the more interesting one. For most of the first year after a recession, permanent unemployment is little changed for both the pre- and post-1990 periods. After that, the two periods diverge sharply. Permanent unemployment falls steadily for the pre-1990 recoveries as improvement in temporary unemployment runs its course. But for the post-1990 recoveries, it takes more than two years before permanent unemployment shows sustained improvement.
The short of it is that while temporary unemployment unwinds fairly rapidly, permanent or structural unemployment takes much longer to heal. And that problem has been far worse in recent recessions.
What Does This Mean for the Coronavirus Recovery?
There is so much that is different about this recession from any other post-war recession that predicting how it will play out is close to folly.
The good news is that we can expect temporary unemployment to fall rapidly as the US reopens and furloughed workers are recalled.
The more vexing question is how high does permanent unemployment rise? In a recent Macro Hive article, I suggested the 4% decline in the labour force in April was mostly due to people who wanted to look for work but couldn’t because of coronavirus lockdowns. Had they been counted as unemployed, the permanent unemployment rate could have doubled from 3.2% to 6.4%. Beyond that is a wide-open question: how many of the temporarily unemployed morph into the permanently unemployed in coming months?
The bad news, of course, is that wherever permanent unemployment settles, it will be slow to recover. Whether it follows a path more like pre-1990 recoveries or more recent recoveries is anyone’s guess. There are plausible cases to be made for both scenarios. If US companies do start bringing supply chains back to the US, they will likely need more workers in coming years. Or, if the coronavirus threat keeps percolating so that social distancing and other preventive measure depresses demand for many discretionary good and services, unemployment could remain elevated indefinitely.
We know Friday’s unemployment report will be record-setting bad. Just how bad will depend on whether permanent unemployment seems to be stabilizing or spiralling higher.
Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)