The COVID-19 pandemic brought with it a massive shock to the labor market, as many businesses have either shut down or experienced a drastic shift in demand. However, the picture may not be as bleak as it looks at first glance, says Chicago Booth’s Matthew J. Notowidigdo. Breaking down the headline unemployment figure, he finds that permanent layoffs have remained well below levels they reached during the 2008-09 financial crisis, job vacancies have recovered well, and temporarily laid off workers are being reemployed at high rates. These indicators, he says, suggest an encouraging trajectory for the unemployment picture over the coming months.
Each jobs report, you see the headline unemployment rate. That’s all unemployed workers. Those are workers who’ve been permanently laid off. Those are also workers who are on temporary layoff who are waiting to get recalled. They’re all grouped together. And that’s what gives us the headline unemployment rate.
What we do in our research is we decompose that into how many workers are on permanent layoff and how many workers are on temporary layoff. And what you see is that the share of workers that are unemployed that are on permanent layoff still remains relatively low. It hasn’t gone up anywhere close to as much as it did during the Great Recession. And workers who are on temporary layoff are still finding jobs very rapidly.
And so what we do in our paper is we work on a very simple model that labor economists use to understand the labor market. We run through the numbers of what’s been happening in the past several months, and we make some predictions about what we expect to happen over the next several months if, sort of, we end up experiencing business as usual. And by business as usual, I mean we don’t experience a second major lockdown, or a second wave or a third wave of infections. We expect to sort of keep going along as we have been over the past several months.
And what we find, according to our projections, is we find a pretty rapid recovery of the unemployment rate that is actually quite a bit more optimistic than a lot of forecasts we’ve seen from professional forecasts, as well as from other groups like the CBO and the Fed. And you might ask, Well, where’s that coming from? What in our model is giving us this relatively optimistic prediction about the unemployment rate over the next several months? And it comes from three things.
The first is it comes from the fact that job vacancies, while they dropped very sharply during the first few months of the COVID-19 recession, actually recovered fairly rapidly, and have come back almost to where they were a couple of years ago. And so by that measure—the measure of open job vacancies that workers, if they were searching, could go try to find—by that measure, the labor market looks to be in pretty good shape.
The other measure we look at is the job separation rate—so how many workers are being laid off. Workers continue to be laid off each month, but most of those layoffs are still temporary layoffs. The number of workers who’ve been permanently separated, that hasn’t surged anywhere close to where it was during the Great Recession.
And then lastly, we see that the reemployment rate of workers on temporary layoff also remains very high.
So all three of these reasons—the relatively low job separation rate, the relatively healthy job vacancies numbers, and the fact that workers on temporary layoff are being reemployed at pretty high rates—lead us to the conclusion that the unemployment rate, in our expectation, we expect it to continue to recover gradually over the next several months.
What we’re paying the most attention to is, what’s happening to job separations? How many workers are ending up permanently laid off? Each jobs report, that’s what we’re going to pay a lot of attention to. Vacancies look like they’re holding pretty stable, and we don’t expect to see vacancies deteriorating anywhere close to what they looked like during the Great Recession.