Original article: Don’t Cheer Too Soon. Keep an Eye on the Core Jobless Rate (Jed Kolko, New York Times, June 15)
In the first week of August, we received what looked like good news: a drop in the unemployment rate in July, for the third month in a row. It would seem calls for celebration are in order. But before we bring out the balloons, there’s more than meets the eye in those numbers. Baked into the unemployment rate is something particularly relevant to the current crisis — temporary employment. And temporary unemployment hides a less rosy employment outlook.
Here’s why: think of a restaurant worker who was temporarily sent home in April. This person wasn’t working and was counted in the April unemployment rate. But that worker still had the prospect of returning to work and, sure enough, returned to their job in July as the economy slowly reopened. Therefore, this person was no longer factored into July’s unemployment rate.
As temporarily unemployed workers return to work, the unemployment rate drops. But isolating the portion of those out of work who are permanently unemployed paints a more accurate picture of those suffering longer-term. This is why what Indeed’s chief economist Jed Kolko calls the “core unemployment rate” — what is left when we strip away the temporarily unemployed — is so important. And, as he explained in a recent article for The New York Times, he’s not ready to celebrate. "Even though many of the people who were furloughed in the spring have gotten their jobs back or still might, others don't have a job to go back to,” Jed explains. Recently we caught up with Jed to learn more.
Core unemployment: Telling us a different story
Included in core unemployment are the following groups: permanent job losers; job leavers; people returning to or entering the labor force; and the “marginally attached.” This last group — defined as those who are able and want to work but haven’t looked for a job in the past four weeks — is another nuance of the traditional (or “headline”) unemployment rate. The core unemployment rate does include the “marginally attached.”
The graph above shows how the headline unemployment rate and the core unemployment rate have varied since 2000. During that time period, the two have never been more different than in recent months, largely due to the high number of temporarily unemployed workers included in the headline recent unemployment rate. According to Jed, "One of the biggest unknowns in the labor market is how many of those temporarily unemployed people will get their jobs back, and how many will lose their jobs and have to start searching for a new one."
When we look at core unemployment on its own in recent months, despite the drop in the overall unemployment, things aren’t quite rosy — core unemployment consistently rose from February to June, then saw a slight drop in July.
So what’s going on here? As outlined earlier, many people are temporarily unemployed right now due to rapid and extreme declines in sectors such as travel. In July, 56% of those unemployed were temporarily unemployed — they already had a set return to work date or they expected to return within the next six months. That temporary share of unemployment reached a high of 78% in April.
For context, prior to the pandemic, the percentage of unemployed workers who were temporarily unemployed was never more than 25% of total unemployment. The current proportion of those temporarily employed varies wildly by sector, reflecting the unequal effect of the coronavirus crisis on different industries. In July, some sectors (like education and personal services) showed over two-thirds temporary unemployment while in others — tech and legal — less than half of unemployment was temporary. As Jed puts it, "In sectors that had to shut down, more of the unemployment was temporary."
The core unemployment rate doesn’t show the same variation. It is more consistent across industries, meaning long-term suffering may be more evenly distributed across sectors.
Proceeding with caution
Temporary unemployment will eventually decline, though, for one of two very different reasons: because people are going back to work or because people have lost their jobs permanently. These are obviously very different stories.
If temporarily unemployed workers are brought back (for example, when a hair salon reopens), we will see things on the unemployment front change quickly and for the better. Those workers won’t be facing long-term unemployment; they will more likely have health insurance and be able to pay their bills. These are good outcomes for individuals and the economy at large.
Long-term unemployment is a big blow to individuals, obviously, but also to the economy. As Jed puts it, "The core unemployment rate is the economic pain that won't fix itself even if the virus comes under control.” Overall, just because we see unemployment dropping, Jed says it’s too early to get our hopes up.