COVID-19 has taken a toll on public health and the economy. While our leadership reckons with the crisis, the numbers have continued to climb in terms of the damage done. Shelter-in-place restrictions are showing signs of working to mitigate the spread of the virus, but the concomitant damage done to our economy and the resulting unemployment numbers will likely be with us for a while. GLG talked to Betsey Stevenson, the former Chief Economist at the U.S. Department of Labor, to get her take. This interview is condensed and edited for clarity.
Can you define what it means to be unemployed under the government’s definition?
The basic definition is you must be part of the working-age population, so you need to be 16 years old or over. You need to not be working, and you need to be actively searching for work and able to accept a job if offered. Finally, if temporarily laid off or furloughed, you are also counted among the unemployed.
This definition seems simple, but it’s not always clear who is “actively searching for work.” Workers who are permanently laid off and not looking for work until after the crisis ends would not be considered unemployed under Bureau of Labor Statistics (BLS) classifications. These marginally attached workers who want to work but are not currently looking are a significant reason to examine some broader definitions of what it means to be unemployed.
In March, we saw the number of unemployed increase by 1.35 million, but the number employed fell by 3 million. We also saw an unusual increase of people who were employed but not at work for a reason the interviewer classified as “other.” There were 6.4 million employed people not at work during the survey reference week; BLS analysis suggests roughly 1.4 million of them likely should have been classified in March’s unemployed.
What are your best- and worst-case scenarios for where the unemployment rate might go?
Right now, the question isn’t so much what the unemployment rate might be in the short term because there will be many temporary layoffs from which people will expect to be recalled. This will certainly help us understand estimates for GDP for Q2, but the real issue is how many jobs are being permanently destroyed.
There are four reasons it’s so hard to guess what’s going to happen in employment now. First is the demand loss due to shelter-in-place, which is soon ending or going to end in many areas. Second is demand loss due to fear. This may worsen because many people in surveys say they’re fearful that states are reopening too soon or that proper safety precautions are not being taken in their area. They’ll be afraid to venture out even once the stay-at-home policies end. Third, there’s demand loss due to loss of income, something that’s likely to persist for quite some time. Fourth, we see some supply chain problems. If you put all those things together, unemployment becomes self-perpetuating. We create more demand loss due to loss of income. We create more job destruction, and the two are permanent.
Thinking about employment rates in 2021 is in some ways more important but harder to forecast than trying to think about the number we’ll see in April. The Congressional Budget Office is currently forecasting 9.5% unemployment at the end of 2021, but in the short term, it depends on whether you look at the top-line BLS unemployment rates or at the decline in employment reported. I think we’ll see between 15% and 25% in April, depending on how many of those things you take into account. If you take them all, we can easily see the broadest measure of unemployment growing up toward 25%.
Can you discuss how underemployment has trended leading up to 2020 and how it’s trending now? Where do you see that going?
It’s well known that the BLS definition of underemployment is working part-time for economic reasons. You are not getting the hours you want. We saw that number double in the last recession. In 2008, underemployment moved faster than unemployment. People started losing hours before lots of people were laid off. We saw a doubling of people working part-time for economic reasons, and that number stayed consistent until 2012, when we saw a sustained decline to where it looked like what we had seen prior to the 2008 recession.
That number shot up just in the last month. It’s likely to increase even faster than it did in the 2008 recession. In some sense, it’s a sign of good news. Right now, what we see in terms of the underemployed are people whose employer has kept them on payroll but cut their hours. The hope is that employers will bring back more furloughed employees than they need, giving more people part-time work, rather than bringing fewer people back full time. This will preserve the relationship between the employer and the worker. It will also make it easier for an employer to scale up without having to search for new workers.
If the Great Recession of 2008 is instructive, how should we think about impact on wage growth, both in the near and long term?
Before the 2008 recession, we had 10 years of remarkable employment growth and a really tightened labor market. But we didn’t see the kind of wage growth many would have expected out of that. Although in recent years we’ve seen something similar. The current crisis will undoubtedly inhibit wage growth. We’ll see a need for fewer workers.
In the end, it’ll depend on workers’ response. What kind of jobs are people willing to do and at what wage? How fearful are people? Traditionally, we see people who are in high-risk occupations – like construction – demanding higher pay, Now, retail, grocery, and healthcare are much higher-risk professions than before. Will we have to pay people more to do those kinds of jobs? Or is that going to be offset by the fact that there aren’t enough jobs to go around?
There’s also some potential for public policy to drive wage increases. Personally, I don’t think that when unemployment’s rising, it’s a good time to pass a minimum wage. But not everybody agrees. I have certainly seen some agitation for a higher minimum wage and some public policy pushing for the idea of hazard pay, where we mechanically force an increase in wages for people who are now in newly hazardous occupations. And so those things could raise wages, even if market pressures are pushing wages down.
What parts of the economy do you think are experiencing the greatest impact?
Consider manufacturing. You might think it’s easier for us to get back to full manufacturing. That’s an industry where they’re used to adopting safety protocols and safety standards. If you’re normally operating a plant where you don’t want people breathing in hazardous chemicals, it’s easier to establish protocols around coronavirus. But if you’re a restaurant, you never thought about that at all.
The demand decline from loss of income is going to hit durables hard. We’re going to see a huge decrease in consumer expenditure for a while. We just saw in the Q1 estimate of GDP a big increase in savings amid a big decrease in consumer spending. Expect that number to get even bigger for Q2.
In retail, the biggest thing we’re going to see is consolidation. We’re likely going to lose a lot of small mom-and-pop shops. The bigger conglomerates, like Amazon, are going to amass even more market power. This isn’t even considering the technological shift. More people than ever are shopping online, and that’s likely to continue so that retail won’t return to the way it was prior to the pandemic. When you put the demand shock from the loss of income and the demand shock from the fear of catching a virus together, you get a dramatic shift in the way people shop and what they want to buy, and that’s likely changing preferences and thus what people will want to buy.
About Betsey Stevenson
Betsey Stevenson is a Professor of Economics and Public Policy at the Ford School, with a courtesy appointment in the Department of Economics. She is also a research associate with the National Bureau of Economic Research and a fellow of the IFO Institute for Economic Research in Munich, and she serves on the Executive Board of the American Economic Association. Betsey was a Member of the White House Council of Economic Advisers from 2013 to 2015, where she advised President Obama on unemployment; labor force trends, such as the future of work; and social policy issues. She served as the Chief Economist of the U.S. Department of Labor from 2010 to 2011.
This article is adapted from the May 1, 2020, GLG teleconference “Teleconference: U.S. Employment Outlook – Impact of COVID-19.” If you would like access to this teleconference or would like to speak with Betsey Stevenson or any of our more than 700,000 experts, contact us.
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