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Does the U.S. National Unemployment Rate Accurately Describe Labor Market Conditions during the Covid-19 pandemic?

by Anthony Chan about a year ago in finance

U.S. Labor Markets

To answer this question, we go behind the scenes of this iconic statistic to garner a more accurate read of actual U.S. labor market conditions. First, it is important to mention that the U.S. Unemployment rate jumped from 3.5% in Feb. 2020 (pre-pandemic) to a peak of 14.8% in April 2020 and has since dipped to a much more favorable 6.3% reading as of Jan. 2021. On the surface, some may be tempted to interpret this movement as signaling that we are getting closer to declaring victory against the worse labor market collapse since the Great Depression in 1929!

However, just beneath the surface, what we see is that an unequal distribution of jobs between men and women was prevalent even before the pandemic made its debut. According to the Bureau of Labor Statistics, if we add the total number of individuals that were working as a share of those that were either working or looking for a job, the labor force participation rate stood at 69.2% (for men) versus 57.8% (for women), respectively even before the start of the pandemic in Feb. 2020.

The data also reveals that men held 53.1% of all U.S. jobs versus 46.9% for women. This should be somewhat troubling, given that the World Bank estimates that women make up about 50.5% of the U.S. population versus 49.5% for men. This disproportionate outcome is also underscored by the fact that the average woman earns only about 81% of U.S. average male compensation according to the Bureau of the U.S. Census. These figures become even more critical when we examine how job dislocations were distributed across both genders during the Covid-19 pandemic.

Taking a closer look at how U.S. labor markets fared during the pandemic, the Bureau of Labor Statistics reported that the National Unemployment Rate declined from its peak of 14.8% (April 2020) to 6.3% (Jan. 2021). The good news is that the number of people counted as being unemployed dropped by 13 million people over this period. Unfortunately, an individual can drop off the unemployment rolls by either finding a job or by simply stop looking for a job. And what the latest available data revealed is that a whopping 4.2 million (from both genders) have stopped looking for employment during this period and were therefore not counted as being unemployed. Such actions undoubtedly put downward pressure on the computed Unemployment Rate. To be sure, if those 4.2 million individuals were counted as unemployed (since after all, none of them held jobs) – the actual Unemployment Rate as of Jan. 2021, would equal 8.9% instead of the 6.3% rate computed by the Bureau of Labor Statistics.

Next, when we disaggregated the data by gender, the figures paint an even dimmer picture. While the number of unemployed men increased by 2.3 million (compared to their pre- Covid-19 readings) versus an increased figure of 2.0 million for women – the drop in labor force for women was 700-thousand larger relative to the comparable figure for men. Therefore, after adjusting for the larger decline in the U.S. labor force for women versus men --- the numbers revealed that (compared to our pre-Covid-19 readings), 4.5 million fewer women were employed today, versus a comparable figure of 4.1 million for men. This phenomenon occurred despite the fact that women outnumber men on the population front, and already held fewer jobs relative to men even prior to the start of the Covid-19 pandemic.

Why is this happening?

As the father of three adult daughters, I am told (and the data support this view) – women tend to be more inclined to leave their jobs to care for children when child-care is not available or when a family member is required to care for a sick child or parent.

Sadly, during the Covid-19 pandemic, almost one-third of all child-care jobs disappeared according to the Economic Policy Institute. And since most of the child-care centers operating in the U.S. are represented by about 700 thousand small business enterprises (running on shoe-string budgets), many were forced to close as many State and Local governments issued “Stay-At-Home-Orders,” during the pandemic. It is important to note that shutting down many of these small business (who still were responsible for their fixed costs of rent and insurance) was a potential death blow for many of them. A recent survey by the National Association for the Education of Young Children revealed that as many as 38% of these child-care facilities would not remain solvent if such closures lasted more than 30 days.

With as many 4.5 million child-care slots (or about half of total U.S. child-care slots) at risk of permanently disappearing, (according to a recent study by the Center for American Progress), the plight of women in the U.S. labor force (which account for almost half all U.S jobs) becomes even more problematic. In fact, even before the Covid-19 pandemic struck the U.S., the Economic Policy Institute estimates that inadequate child-care options have typically caused U.S. families to forego up to $35 billion in lost income each year.

Why doesn’t this Child Care Emergency Receive Greater Attention?

Perhaps it’s because only 7 million U.S. households (out of a total of 128.5 million U.S. households) have children under the age of 5 according to data from the U.S. Bureau of the Census. This suggests that only 5.4% of U.S. households are in critical need of child-care. Nonetheless, if half of the U.S. child-care slots were to disappear from our already frayed child-care underlying infrastructure, we can quickly estimate that as many as 3.5 million jobs could be placed at great risk. Perhaps, it should come as no surprise to learn that approximately, 4.2 million workers have dropped out of the U.S. labor force during this pandemic. Unlike in many countries around the world which offer subsidized universal child-care options --- U.S. child-care is supported by U.S. households that spend about $42 billion per year while the Federal, and State and Local Governments contribute $22.2 billion and $11.8 billion, respectively (according to data from the OECD and the Economic Policy Institute).

Still the hope and expectation are that the $10 billion allocated towards child-care in the December 2020 stimulus bill and the additional $40 billion being currently proposed by the Biden $1.9 Trillion dollar stimulus package (pending in Congress) will help this badly damaged sector recover. In the latest $40 billion dollar proposal to aid child-care (by President Biden), $25 billion will go to child-care providers to help them recover prior losses and to help them defray the increased costs associated with the pandemic. The remaining $15 billion will go to low-income households to help them with their child-care expenses.

Summary and Conclusions

After a meticulous review of the multiple factors impacting U.S. labor markets, we are led to conclude that the National Unemployment Rate greatly understates the weakness in U.S. labor market conditions. Until we fully regain the large number of child-care slots that were lost during the pandemic, it will be very difficult to bring back many of the 4.2 million workers that have dropped out of the U.S. labor force and stopped looking for jobs since the start of the pandemic, along with some of the other 4.4 million unemployed workers that also lost their jobs during this period.

finance

About the author

Anthony Chan

Chan Economics LLC, Public Speaker

Chief Global Economist & Public Speaker JPM Chase ('94-'19).

Senior Economist Barclays ('91-'94)

Economist, NY Federal Reserve ('89-'91)

Econ. Prof. (Univ. of Dayton, '86-'89)

Ph.D. Economics

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