The Bad and the Great News about Unemployment in May

 

My economist friend Jack Tatom wrote the following on Facebook and gave me permission to share. For background, see my “Why the Drop in Unemployment Did Not Surprise Me,” June 5. It’s pretty involved and you might have to pause at various points to take it in, but it’s by far the best explanation I’ve seen. Here goes:

On Friday, June 5, the Bureau of Labor Statistics (BLS) announced the Employment Situation for May showing that the nation’s unemployment rate had declined in May from 14.7 percent to 13.3 percent, a shock to many who had expected a fall in employment of over 9 million and a rise in the unemployment rate to 20 percent. I was not among the shocked. I had expected employment to rise very sharply due to a reduction in the number unemployed.

The BLS added a footnote to their May report that indicates there had been an error in data submitted by survey takers who had counted many people as employed instead of as unemployed. The latter was the explicit instruction BLS had given for the treatment of furloughed workers who did not work during the previous week. According to the BLS, had the surveys been correctly completed, the April unemployment rate would have been shown as 19.7 percent and the rate would have fallen to 16.3 percent in May. [DRH note: Note that that still is a large fall in the unemployment rate; I believe it’s the largest one-month fall in recorded U.S. history.]

So, what happened and what does this mean? First of all, it means that in both months unemployment and the unemployment rate were higher than previously thought. That’s the bad news. The 20 percent unemployment rate expected for May nearly occurred in April. The good news is that this data shows the turnaround in the economy was actually bigger than the official data indicate. The official reported data show a decline of 1.4 percentage points in the unemployment rate; the actual decline that the BLS indicates occurred is more than twice as large as the official data shows.

Based on the data released, my calculations indicate approximately 7.7 million furloughed workers were “mistakenly” treated as employed in April but should have been treated as unemployed. Instead of the 18.1 million reported in Table A-11 of the Employment Situation for April, the correct number was about 25.8 million. In May, the Table A-11 shows a 15.3 million on-furloughed reduction in the overall number unemployed. Using the revised data based on the footnote to the BLS report, it now appears that the decline in unemployment in May due to falling numbers of unemployed workers on temporary layoffs was 5.7 million workers instead of the officially reported 2.7 million. This larger return of furloughed workers to employment again accounted for more than all of the approximately 5.0 million increase in overall employment implied by the footnote. Five million more workers returning to work in May is dramatically more than the continuing decline expected a week ago by others or even the 2.1 million official gain reported on Friday. That is not good news; it is great news.

What about the decline in employment expected by nearly all analysts and the press? Buried in all these numbers is a decline in employment for workers who were not on furlough that was swamped by the return of formerly furloughed workers. In the official data, the reduction of unemployed and furloughed workers was 2.7 million, but the reduction in the unemployed was 2.1 million. The difference is others who were not furloughed but added to the number unemployed. When the corrected measures are used, furloughed workers declined by 5.7 million, larger by about 0.7 million than the overall approximate number of 5 million reduction in overall unemployment (different from official measures due to rounding error). So there was a decline in employment in May that was overwhelmed by the return of furloughed workers observed in April and back in employment by May.

Where do we go from here? Depends on to whom “we” refers. The BLS official view is not to tamper with suspected errors in the collected surveys. So, whether BLS will adjust the official data in the future remains to be seen. But where the economy goes is more certain. Given the opening of states’ economies in late May and early June, the accelerating opening of businesses suggests even larger increases in employment and declines in the unemployment rate in June and the rest of the summer.

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Why the Drop in Unemployment Did Not Surprise Me

 

Yesterday on Facebook, I commented on someone’s post that I expected the unemployment rate for May reported today to be below 15 percent. I was right. It declined from 14.7 percent to 13.3 percent.

Why did I think that? Because a day earlier I had read an excellent article by my FB friend (and actual friend) Jack Tatom, a first-rate economist who spent much of his career at the St. Louis Fed. I got to know him during the glorious 6 months in 1994 when I was at the late Murray Weidenbaum’s Center for the Study of American Business at Washington University in St. Louis.

The article is Jack Tatom, “Don’t believe the overstated ‘headline estimates’ of unemployment,” The Hill, June 2.

Here’s an excerpt:

Since COVID-19 deaths began to rise in mid-March, people have awakened every Thursday to the latest report of the number of unemployed associated with virus-related shutdowns. A recent “headline estimate” of job loss was 40.8 million people, but a more reasonable and accurate number is less than half that. The overstated loss in employment of 23 million people is large and grows every week.

The headline estimate is based on adding the number of “initial claims” for unemployment compensation, filed with state unemployment insurance offices each week, to the total from the week before. The report is issued by the U.S. Department of Labor’s Employment and Training Administration for the week ending the previous Saturday. But each week, the same report includes the continued claims for unemployment — called insured unemployment — which includes those who claim they were unemployed for at least a week and who are due unemployment compensation.

People who file initial claims are often subsequently revised off the rolls because their claim was invalid or because they obtained jobs before they could claim their first weekly benefit. Each week some of the past unemployed drop out of the “continued claims” data because they find new jobs or, these days, are called back to existing ones, and are no longer eligible for unemployment compensation.

I had been like many people in adding the weekly unemployment insurance claims. I had thought that pretty much everyone who applied for unemployment insurance got it and also that very few of those people would have been called back to work by now. It looks as if I was wrong on both counts. That’s why I quickly revised my view on Wednesday.

Now it’s true that nowhere in the article does Jack say that the number of new jobs would rise by over 2 million. I’m guessing he expected a rise–my own gut feel was 500,000–but I’m guessing also that this rise surprised him. What’s not that surprising is that the unemployment rate fell.

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