Why US unemployment is even worse than the official numbers say

Rebecca Stropoli | May 13, 2020

Sections Economics

Collections COVID-19 Crisis

The COVID-19 crisis has sent the US jobs market reeling. As of April 16, more than 22 million workers had filed unemployment claims since the shutdowns began in March. 

But the real unemployment figures are likely higher than reported, suggests research by University of Texas’s Olivier Coibion, University of California at Berkeley’s Yuriy Gorodnichenko, and Chicago Booth’s Michael Weber. Despite catastrophic job losses, an increase in workers dropping out of the labor force altogether may mean the official unemployment rate is misleadingly low, they argue.

To track the pandemic’s effect on unemployment, the researchers used an ongoing survey, conducted by Nielsen, of households that participate in its Homescan panel, studying three key measures typically tracked by the Bureau of Labor Statistics (BLS): the unemployment-to-population ratio, the unemployment rate, and the labor-force-participation rate. 

During recessions, as the employment-to-population ratio falls, the unemployment rate typically rises, and vice versa. But in more severe recessions, a higher number of discouraged out-of-work people may stop looking for employment. In this case, while the employment-to-population ratio is low, the unemployment rate doesn’t rise at the same rate, as there are fewer people who are an active part of the labor force. 

The researchers tracked surveys prior to and during the pandemic. They find that the employment-to-population ratio had fallen by around 7.5 percent in April, which meant almost 20 million jobs had been lost as of April 6, far more than the estimated 16.5 million that had been reported. State governments’ inability to process such a crushing number of claims, coupled with the fact that many workers aren’t eligible for unemployment benefits, may account for the underestimation, the researchers note.

Twenty million jobs lost at that point should have led to a 12.2 percentage point jump in the unemployment rate, the researchers write, which would translate to about a 16 percent unemployment rate if all laid-off workers were searching for new jobs. However, using the survey data—and building an unemployment model similar to the BLS’s, which includes only unemployed people looking for work—they find an increase of just 2 percentage points. At the same time, they see a decline in the labor-force-participation rate of almost 8 percentage points. In the span of just one month, this rate far exceeded the cumulative three-percentage-point decline experienced from 2008 to 2016. 

The survey indicates that many of these workers simply chose to retire early. The percentage of people claiming they were retired rose from 53 percent in the precrisis survey to 60 percent in the latest survey. “Given that the age distribution of the two surveys is comparable, this suggests that the onset of the COVID-19 crisis led to a wave of earlier than planned retirements,” the researchers write. “With the high sensitivity of seniors to the COVID-19 virus, this may reflect in part a decision to either leave employment earlier than planned due to higher risks of working or a choice to not look for new employment and retire after losing their work in the crisis.”

Historically, few people have returned to the labor force after retiring, and Weber does exercise some caution in assuming this will be the case now. The crisis is unprecedented and in its early days, so it’s possible some workers claiming to be retired may ultimately return to work, along with others who may have stopped looking for work only temporarily. “If you say you have entered retirement and, in the end, you realize you don’t have enough savings, once the economy gets better, you may go back into the labor force,” he says.

If the patterns align with historical norms, that’s unlikely to happen, however. And if those newly retired workers stay out of the labor force, the United States is more likely to see a longer recession, rather than a swift, sharp—or V-shaped—recovery.