COVID-19 Diary Number 3 (April 20, 2020)

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Photo by Nathan Cowley on Pexels.com

The unemployment rate reported by the Labor Department for March understates, by a long shot, the nation’s economic pain.  According to the official report, non-farm payrolls last month fell 701,000 and the rate of unemployment rose from 3.5 percent in February to 4.4 percent. The actual figure is that closed businesses and quarantines likely reduced payrolls nationwide by 12 million in the last the last two weeks of March alone.  During that time other Labor Department reports show that more than 10 million applied for unemployment benefits, something for which not all the unemployed qualify.  Because the workforce of the United States numbers some 165 million people, those new claims at least added some 7.5 percent to the existing unemployment rate, conservatively making the more likely number of unemployed in March closer to 12 percent of the existing workforce.  The figure has grown in April and will grow as the emergency constraints remain in place.

Lovers of conspiracies will accuse the authorities of intentionally understating the economic pain.  But the real reason is far less dramatic.  The Labor Department missed the extent of Labor Force damage because it bases its calculations on two surveys that are taken in the middle of each month, one of households, the other of employers.  The first asks a sample of the population whether they are working, and if not, whether they want to work.  Those working, and those who are out of work but seeking a job, give the Labor Department a fix on the size of the nation’s willing workforce each month.  Those out of work but who seek it count as the unemployed, which the Labor Department states as a percentage of the workforce. The second survey asks employers about the number of people on their payroll.  Because the worst effects of the lockdowns and quarantines did not develop until late in March, the Labor Department’s mid-month surveys simply missed most of the impact of the situation.

That will not be the case for April.  The mid-April surveys will capture the full brunt of what has already happened.  But these surveys will mislead in a different way: In addition to workers who lost their jobs in early April, we will see the accounting for the tremendous drop in payrolls that occurred in late March but which that mid-month surveys missed.  The report for April will then show a shocking surge in unemployment, much of which really occurred in late March.  Observers will be led to believe the sudden damage was all done in April and thus see an acceleration in labor market damage that probably will be far in excess of what is likely for the April part of the surveys, though the ongoing damage will undoubtedly become more severe.

I have described here a technical problem with statistical techniques that in most environments are more than adequate for the tasks set to them.  But in this pandemic environment, the misleading nature of these figures can have real-world effects on perceptions of the state of the economy and on public as well as business confidence.  The burden is on the Labor Department and the Trump administration to clarify the figures so the public is not misled in April and again in May when the responses to the April survey become available.

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