Friday, January 22, 2021

America's Real Unemployment Crisis

A recent speech by Federal Reserve Governor Lael Brainard at the Canadian Association for Business Economics gives us a sense of just how severe the COVID-19 pandemic has impacted the American labor force.  Let's look at some key excerpts.


The speech entitled "Full Employment in the New Monetary Policy Framework" opens by noting that the Federal Reserve began an in-depth review of its monetary policy framework two years ago, prompted by the following long-run economic features:


1.) price inflation is much less sensitive to labor market tightness than historically—that is, a flat Phillips curve.


2.) the equilibrium interest rate is much lower than in the past.


3.) the trend underlying inflation has moved somewhat below 2 percent.

Apparently, it is a whole new economic reality out in the real world.


Brainard notes that these three factors have reduced the amount that the Fed can cut interest rates to buffer the economy, weaken inflation expectations and, most importantly, lead to worse unemployment and inflation outcomes.  This is quite obvious when one looks at this chart which shows the Fed Funds Rate over the past few decades:


....and this chart showing the Fed Funds Rate over the past few years:

As I have stated in previous postings, the Fed has effectively painted itself into a "policy corner" from which there is no easy exit without the use of experimental monetary policies.


Here's what Brainard had to say about the current state of employment in the United States with all bolds being mine:


"The COVID-19 pandemic is exacerbating disparities, and employment remains far from our goals. Last Friday's payroll report highlighted the effects of the resurgence of the virus, with the first overall decline in payrolls since April and a stark 498,000 decline in leisure and hospitality jobs. Overall, payroll employment is still nearly 10 million jobs below its February level. If we adjust the 6.7 percent headline unemployment rate for the decline in participation since February and the Bureau of Labor Statistics estimate of misclassification, the unemployment rate would be 10 percent, similar to the peak following the Global Financial Crisis.


The damage from COVID-19 is concentrated among already challenged groups. Federal Reserve staff analysis indicates that unemployment is likely above 20 percent for workers in the bottom wage quartile, while it has fallen below 5 percent for the top wage quartile.  Black and Hispanic unemployment stood at 9.9 percent and 9.3 percent, respectively, in December, while White unemployment was 6.0 percent. Labor force participation for prime-age workers has declined, particularly for parents of school-aged children, where the declines have been greater for women than for men, and greater for Black and Hispanic mothers than for White mothers."


Here is a graphic showing the headline unemployment rate since the end of what was then the Great Recession:


Here is a graphic showing the number of non-farm employees:


While the number of employed Americans has risen from its COVID-19 recession low of 130.303 million, at  its current level of 142.624 million, it is still 9.839 million below its pre-COVID-19 recession level.


While the headline unemployment rate has shown improvement since the depths of the COVID-19 recession in the spring of 2020, as shown here, the number of American workers that have been unemployed for 27 weeks and longer is not improving and is just below its Great Recession record level:


So, what does Brainard have to say about the American employment situation and what actions will be necessary to see it improve? Here is his number one solution:


"The outlook will depend on the path of the virus and vaccinations. While the number of new cases is high and rising, the distribution of multiple effective vaccines is under way."


He also states the following, again with bolds being mine:


"We are strongly committed to achieving our maximum-employment and average-inflation goals. It is too early to say how long it will take. The Committee has stated clearly that it needs to see substantial further progress toward our goals before adjusting purchases. The economy is far away from our goals in terms of both employment and inflation, and even under an optimistic outlook, it will take time to achieve substantial further progress. Given my baseline outlook, I expect that the current pace of purchases will remain appropriate for quite some time. Of course, the outlook is highly uncertain, and forecasts are subject to revisions—a key reason why our forward guidance is outcome based and tied to realized progress on our goals.


The recovery thus far has been uneven, and the path ahead is uncertain. We remain far from our goals, with core PCE inflation only at 1.4 percent and payroll employment nearly 10 million below its pre-pandemic level. The Committee's forward guidance will help keep borrowing costs low along the yield curve for households and businesses, improve inflation outcomes, and enable the labor market to heal, leading to a broader-based and stronger recovery. The strong support from monetary policy, together with fiscal stimulus, should turn the K-shaped recovery into a broad-based and inclusive recovery that delivers full employment."


It is interesting to see a Federal Reserve insider admit that the unemployment rate in the United States is far, far worse than what the headline numbers would suggest and that the Fed's actions since the COVID-19 pandemic was declared and government shuttering of the economy took place have been less than successful with the Fed admitting that "we remain far from our goals".


Millions of unemployed and desperate Americans would wholeheartedly agree.


  1. While COVID has amplified the problem, the background US policies of free trade and open borders have created strong deflationary pressures, so that the low interest rates set by the Fed no longer have any inflationary effect. In fact, they are merely holding off deflation and and a major depression. Of course, dumping money ($2 T) into an economy that is not producing actual goods looks like a recipe for hyperinflation a la Weimar. But I think the long term trend is deflation/depression with the immiseration of the working class.

  2. I couldn't agree more. A recent study is showing that the long-term impact of the massive increase in American unemployed will have a substantial impact on longevity as well.