Brandon G. Auger, CFA Officer, Associate Portfolio Manager
A strong recovery in the labor market from the spring lows is one of the most critical prerequisites of robust and sustainable economic recovery. Given the outsized importance of the labor market to the economic recovery, we continually evaluate and assess the state of the labor market as it adapts to the ever-changing conditions of the COVID-19 economy.
Currently, just eight months separated from the initial surge in layoffs, the labor market is profoundly improved but far from healed and—as is often the case—the devil is in the details. The unemployment rate has been cut in half from its 14.7% high in April to a current reading of 6.9% in October, and we have seen consistent monthly improvement in that metric. The speed at which the unemployment rate has improved has been both remarkable and widely unexpected. However, it obfuscates the fact that many previously employed individuals have dropped out of the labor force since February and are therefore no longer counted as unemployed. Adjusting for this (and for misclassification error), a more accurate representation of the unemployment rate may be closer to 10% (exhibit 1). Regardless of any necessary adjustments, the data shows continuous monthly improvement in the labor market since the early stages of the pandemic.
It is very typical for individuals to drop out of the labor force during tough times. Normally, it is attributed to people becoming discouraged with their job prospects. This discouragement leads them to stop searching for a job, which in turn removes them from the labor force tally and the unemployment rate. In this economic environment, however, it is complicated by public health policy. Many previously employed people are now compelled to stay at home to care for their children who are engaged in remote learning, which remains a prevalent policy around the country. This burden has largely fallen on women, who have seen their participation in the workforce fail to recover at the same rates as men. Moreover, women hold a disproportionate share of jobs in the hardest hit segments of the job market, including restaurants, hotels and personal services. With women representing nearly half of the total US labor force, any obstacle to women reentering the work force, including new remote learning responsibilities and weak recoveries in female-dominated industries, will serve as a meaningful drag on personal incomes and economic activity.
Looking more closely at the pandemic’s impact on employment in various industries reveals a wide range of outcomes that are concealed by headline figures. While all industries have suffered net job losses since March, specific industries bore the brunt of the pandemic while other industries saw only modest job losses (exhibit 2). The leisure and hospitality industry, which includes restaurants and hotels, saw the most dramatic job losses. Accounting for over 10% of all jobs pre-pandemic (the fifth largest employment sector), the industry currently has a 16.3% unemployment rate, the highest of any sector and far above the national unemployment rate. Leisure and hospitality workers are primarily low-wage earners, who therefore have a higher propensity to spend their income, rather than save it. Consequently, job losses in this industry can have a significant negative impact on overall consumer spending, which is a critical component of any sustained recovery.
Unfortunately, across most industries, the jobs of low-wage earners have been the most negatively impacted by the pandemic when compared against other cohorts. Not only were low-wage industries harder hit, but low-wage earners within every industry are generally not as able to work remotely as readily as higher-wage earners. Though the data shows an impressive recovery in low-wage payrolls over the past several months, the payrolls of the low-wage cohort remains far behind other cohorts in terms of the recovery to pre-COVID levels (exhibit 3). Exacerbating this issue is the fact that low-wage jobs are the most vulnerable to the prospect of the tightening economic restrictions that are beginning to become more prevalent as public health authorities battle rising case counts and winter arrives. However, if the current pace of improvement in the low-wage cohort were to continue, it is still on track to return to pre-COVID levels by the middle of next year.
Finally, it is necessary to better understand the nature and reason for the current levels of unemployment. Early in the economic crisis, the vast majority of layoffs were considered “temporary”. The lockdowns and stay-at-home orders, after all, were expected to be a very temporary policy and economic activity could be expected to quickly recover once the policies were lifted. Over time, as that initial expectation met a harsh reality, the share of job losses considered “temporary” has gradually fallen with each passing month as those switching to “permanent” continues to mount. In the most recent reading (October), the share of job losses classified as “permanent” exceeded the “temporary” furloughs (exhibit 4).
Overall, the US labor market has shown tremendous resilience in the face of unprecedented and challenging circumstances. There is no doubt that the remarkable recovery of the jobs market being illustrated by the headline economic data is very real and extremely encouraging. But it is always necessary to look beyond the headlines to better understand the complexities of what is happening underneath the surface of the labor market. We are increasingly optimistic on the economic recovery, but we keep a keen eye on the myriad complicating factors. Looking forward, further progress within the labor market hinges on progress toward a vaccine, which is an essential prerequisite to the full recovery of the economy and to all segments of the job market.
 The misclassification error wherein people are being classified as “employed but absent from work” instead of “unemployed on temporary layoff" per Morgan Stanley Research  Source: Morgan Stanley Research, “October Payrolls: Strong Recovery Continues”, November 6th, 2020
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