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US policymakers lose faith in official unemployment rate

When Brianna Kipnis was laid off from a fitness start-up last June, she thought it would be nice to take a month off before returning to the jobs market. She cancelled the lease on her New York City apartment and moved in with her parents in neighbouring New Jersey.

One month turned into nine and, with the pandemic still raging, Kipnis drifted out of the labour force of the world’s largest economy as she gradually lost hope in her employment prospects. 

Kipnis, 32, is one of millions of Americans who have stopped looking for work during the pandemic and is therefore uncounted in the official unemployment rate, which has plunged to 6.3 per cent from 14.8 per cent in April.

“It’s very discouraging,” she says. “To try to stay motivated and positive is one of the harder things right now.”

The hopelessness felt by Kipnis and many others is one of the reasons that US policymakers, from the Federal Reserve to the Biden administration, have lost faith in the unemployment rate as an indicator of the strength of the jobs market. 

The rapid decline in the US jobless rate has so far exceeded the forecasts of private sector economists and Fed officials alike. The latest reading, for February, will be published on Friday.

But the headline figure has obscured far less encouraging trends in America’s labour market, and is now considered an incomplete and unreliable guide to the trajectory of the US recovery. 

Brianna Kipnis

“Published unemployment rates during Covid have dramatically understated the deterioration in the labour market,” Jay Powell, the Federal Reserve chair, said during a speech last month, noting that a more realistic unemployment rate was closer to 10 per cent.

The drop in the unemployment rate has been partly driven by misclassification errors because of inaccurate survey responses during the pandemic. But, most importantly, it has been distorted by the plummeting number of Americans participating in the labour force.

Since the start of the coronavirus crisis, the US labour force has lost 4.3m people, including 2.5m women, who are neither in work nor searching for it. Little or no improvement has been made in those numbers since last summer.

Powell noted that “fear of the virus and the disappearance of employment opportunities in the sectors most affected by it” were the primary causes of the exodus from the labour force, along with virtual schooling that had forced many parents to stay at home.

Line chart of Unemployment rate (%) showing The unemployment rate has declined steadily since April
Line chart of Civilian labour force (m) showing Millions of Americans have dropped out of the labour force

Economists say that Americans who have left the workforce are a combination of older workers, who retired early because of the pandemic and are less likely to come back, and younger employees who are waiting for brighter times in the hope that their skills do not erode in the meantime.

The loss of confidence in the main jobless rate as a definitive economic indicator also has big policy implications.

Even if the US unemployment rate continues its rapid descent in the coming months, the Fed has said it will not start removing its monetary support for the economy by increasing interest rates until full employment can be measured by a much broader range of measures, which will almost certainly include labour force participation.

This stance is the result of a big shift in thinking at the US central bank over the past decade away from pre-emptive tightening based merely on fears of inflation spikes.

“The Fed has definitely been highlighting and putting emphasis on not looking at the unemployment rate as the only gauge of labour market health,” said Lydia Boussour, an economist at Oxford Economics.

The Biden administration has also largely ignored the quickly falling US unemployment rate, as evidenced by its push to pass a $1.9tn fiscal stimulus package. The White House says the relief bill is justified because of the millions of Americans who are still out of work and the lingering devastation of the crisis on small businesses and low-income households.

“Success to me would be if we could get back to pre-pandemic levels of unemployment and see the re-employment of those who have lost jobs in the service sector,” Janet Yellen, the US treasury secretary, said at a New York Times event last month.

Economists expect that the US outlook will brighten with the rollout of vaccines and extra fiscal support, and that the labour force withdrawal should stop once Americans find it easier to secure jobs and become more confident searching for them.

The fear is that a significant number of people will never return — and will be part of along-term economic scarring left by the pandemic.

“Whether the recent dropouts re-enter the workforce — as they eventually did post-global financial crisis — is key to how much slack remains in the labour market,” Michael Pearce, an economist at Capital Economics, wrote in a note this week.

As for Kipnis, she has spent much of her time out of work providing childcare for her sisters, both of whom are healthcare workers. She is working to rekindle her job search but says that if she does not get any serious leads after a few weeks of applying aggressively she will take another break.

“I do love working and using my brain in that way, strategising and being able to build something,” Kipnis says. “So I think I’ve just gotten to a point where I’m ready to use my brain again in that way and have a challenge again.”


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