Stunning Jobs Report Might Not Be as Good as It Looks

Economic Report Monitor #38

June 5th, 2020

A huge jobs report closed out the week with a fantastic surprise as the Bureau of Labor Statistics reported employment rising by 2.5 million jobs in May beating expectations by a lot. The improvement was a result of reopening by some states as leisure and hospitality jobs saw a sharp rise. The unemployment rate fell 13.3%, down -1.4%, in a huge reversal of sentiment. Temporary layoffs saw a huge drop of 2.7 million as people were up to work after 16.2 million workers were temporarily unemployed in April. The labor force participation rate increased 0.6% to 60.8%, another trend that was reversed. The number of people employed part-time for economic reasons was still at it elevated level from March and February, 10.6 million, suggesting there is still a lot of weakness in the labor market due to restricted cash flow. Businesses want to keep people employed, but utilization is not high enough to support a lot of full-time workers.

Taken as it is, the job report is an extremely optimistic economic data point, and the markets showed that as stocks shot up on Friday. However, the complications of the COVID-19 outbreak and uniqueness of the crisis forces us to consider some caveats:

• The BLS noted in its report that response rates during the COVID-19 pandemic have been noticeably lower than average. Specifically, the household survey, which is used to calculate the overall unemployment rate, saw a 67% response, 15% lower than months prior to the pandemic. There's no exact reason why a third of respondents were unresponsive, but it could lead to more sampling error.
• With the uniqueness of this situation, the definition of being "employed" has had to shift to accommodate social distancing guidelines. The BLS's definition, " workers who are paid by their employer for all or any part of the pay period including the 12th of the month are counted as employed, even if they were not actually at their jobs," restricts employment to whether or not someone is earning a paycheck. That may include people who are still with their employer for the time being but fails to capture the reduction in productivity and fragility of the job. These "jobs" which lead to no output but cost firms cash flow will be the most in danger of a prolonged crisis where revenues don't recover and businesses go bankrupt.
• The final concern is hidden deep inside the May jobs report's FAQ. The BLS reports that there was likely some misclassification of workers caused by some confusion in the survey. In particular, individuals "who were themselves ill, under quarantine, or self-isolating due to health concerns, people who did not work during the survey reference week (May 10–16) due to efforts to contain the spread of the coronavirus" might have been counted as "employed but not at work" when they should have received the "unemployed on temporary layoff" designation. This reason for this ties into the second concern above where the measure of employment relies on wages being paid. The BLS estimates that if these misclassified individuals, about 4.9 million of them, were marked as unemployed, the actual unemployment rate would have increased 3.1% to 16.4%.