Labor markets during the Covid-19 crisis: A preliminary view

The arrival of the Covid-19 virus and the policy responses to it have led to unprecedented numbers of initial claims for unemployment insurance benefits since early March 2020 in the US. But potential difficulties in state governments’ ability to process so many claims in such a short period, combined with the fact that many workers are ineligible for unemployment benefits, has led to concerns that total job losses are being understated by these numbers.

Using new ongoing large-scale surveys of US households much like the monthly national Current Population Survey, we identify three key facts about recent developments in the US labor market.

First, the share of adults employed has fallen very sharply, from 60% of the population down to 52%. This decline in employment is enormous by historical standards and is larger than the entire decline in the employment-to-population ratio during the Great Recession. Given that the US civilian non-institutional population is approximately 260 million people, this drop is equivalent to 20 million people losing their jobs.

Second, we find a much smaller increase in the unemployment rate, about 2 percentage points. While this increase is the single biggest one-month jump in the unemployment rate since the national survey was first implemented in 1948 (the previous high was 1.5 percentage points during the national steel strike in 1949), it corresponds only to about one-third of the increase observed during the 18-month long Great Recession. For comparison, if all 20 million newly non-employed people, as measured by the decline in the employment–population ratio, were counted as unemployed, we would have found an increase in the unemployment rate from 3.5% in March 2020 to 16.4% now, the highest level since 1939.

The reason for the discrepancy between the two measures is that many of the newly non-employed people report that they are not actively looking for work, so they do not count as unemployed but rather as having exited the labor force. Consistent with this, third, we also find an extraordinary decline in the fraction of the population that is working or looking for work (the labor force participation ratio), from 64.2% to 56.8%. The Great Recession of 2008–2009 was followed by a historically large decline in participation through 2016 of 3 percentage points. But even that large cumulative decline in participation over an eight-year period is dwarfed by the historic decline in participation that we document.

Why are so many unemployed choosing not to look for work now? Prior to the crisis, most respondents out of the labor force claimed that it was because they were retired, disabled, homemakers, students, or did not need to work. At the height of the Covid-19 crisis, with a much larger number of people out of the labor force, we see declines in the share of those raising children and the disabled, but a large increase in those who claim to be retired, from 53% to 60%. This makes early retirement a major force in accounting for the decline in labor force participation and suggests that the onset of the Covid-19 crisis led to a wave of earlier than planned retirements. This wave may be the first of many more permanent economic changes brought on by Covid-19. Whether it is borne up in future surveys, and whether it is indicative of developments in other wealthy countries, remain to be seen.

Olivier Coibion is an an Associate Professor of Economics at the University of Texas at Austin, USA.
Yuriy Gorodnichenko is Quantedge Presidential Professor in the Department of Economics at the University of California, Berkeley, USA
Michael Weber is a Senior Economist at the World Bank