Interpreting Unemployment Data in the Time of COVID-19

Introduction

Since mid-March, record numbers of Americans have filed for unemployment insurance (UI) benefits. The United States swung from a 50-year low unemployment rate of 3.5 percent in February to a 70-year-plus record of 14.7 percent in April.  At the same time, initial unemployment insurance filings went from 201,000 claims during the week ending February 1 to a record high of around 6.9 million claims during the week ending March 28.

Concerns about the impact of the pandemic and social distancing policies on working Americans led to significant fiscal stimulus from Congress. The coronavirus relief bill, passed March 29, expanded the UI system substantially, broadening eligibility and adding a federally funded weekly supplement of $600 on top of state benefits. In addition, state governments were highly encouraged to reduce the work search requirement typically tied to the receipt on UI funds, and Fifth District governors complied.

UI Claims in the Fifth District

As shown in the chart below, initial state unemployment claims begin to significantly rise during the week ending March 21. Initial claims in the Fifth District increased from 14,274 the week ending March 14 to 233,153 the following week, breaking records across the Fifth District. Initial claims peaked nationally the week ending March 28 while Fifth District initial claims peaked the week ending April 4. For the following two months, the number of UI initial claims filed in the Fifth District fell steadily to a level of 127,500 during the last week of May. Since that time, initial claims have remained relatively stable and significantly above pre-COVID-19 levels, both regionally and nationally, with Fifth District initial claims remaining above 100,000 each week. During the week of July 18, 105,803 initial claims were filed—a 79.3 percent decline from the peak—but still 641 percent above the level during the week ending March 14.

In the week following the initial claim, and for the covered unemployment period that follows, a continued claim must be filed weekly in order to continue benefits. Continued claims is a better measure of the total number of people currently claiming state UI benefits. As discussed in a recent Regional Matters post, Fifth District states provide unemployment benefits for a period of time that ranges from 12 weeks to 26 weeks.

As shown in the chart above, continued claims in the Fifth District peaked at 1.7 million during the week ending May 2, a level more than 15 times higher than the number of continued claims in mid-March. Since the beginning of May, the level of continued claims has slowly declined. However, the total number of continued claims in the Fifth District for the week ending July 11 was only 27.3 percent lower than the peak and exceeded 1.2 million claimants.

Exhaustion of State UI Benefits and Transition to PEUC

The continued claims data shown in the chart above only include those who filed weekly claims for state UI. Those who don’t qualify for traditional state UI or who have exhausted their state benefits can apply for aid from the Pandemic Unemployment Assistance (PUA) and Pandemic Emergency Unemployment Compensation (PEUC) programs, both funded by the federal government and initiated via the coronavirus relief bill. PUA provides unemployment benefits to those who are not typically eligible, including those who are self-employed. PEUC provides 13 extra weeks of benefits to people who have exhausted their state UI benefits. Importantly, a person can only receive one of three benefits (i.e., UI, PUA, and PEUC) simultaneously.

In North Carolina, for example, state benefits are exhausted after only 12 weeks. UI recipients who were approved during the week of March 21 — the first week of extraordinarily high initial claims — would have exhausted state benefits after the week of June 13. The decline in state continued claims beginning in mid-June is shown in the chart below.

After exhausting UI, people who do not become employed likely move to the PEUC program. In North Carolina, the most recent data available for PUA and PEUC continued claims during the week ending July 4 totaled 341,839. When the PUA and PEUC continued claims figures are added to the 365,770 state UI continued claims, it shows that a total of 707,609 North Carolinians filed a continued claim from state UI, PUA, or PEUC programs during that week.

In the Fifth District during the week ending July 11, there were more people filing continued claims via PUA or PEUC (1,356,833) than via state UI (1,309,833). Most Fifth District recipients receiving benefits outside of traditional state UI filed a continued claim for PUA (1,161,404) versus only 195,429 for PEUC. However, the share of PEUC relative to state UI is expected to increase as people exhaust their state benefits, as seen in North Carolina. Since other Fifth District states provide UI payments for a longer duration than North Carolina, the effect is not yet as visible in other states. Many in South Carolina and Virginia will exhaust their benefits by the end of August, and barring a strong return of the labor market, those in the District of Columbia, Maryland, and West Virginia will shift to PEUC in larger numbers beginning in September and October.  As the financial burden of UI shifts from state governments to the federal government, typically analyzed state continued claims data alone will no longer be an accurate measure of labor market health.

Unemployment Rates in the Fifth District

Not surprisingly, the increase in initial claims coincided with a significant increase in unemployment rates. Unemployment rates across the Fifth District increased dramatically in the month of April, resulting in record highs for most states. Rates have steadily decreased since that time, and in June, the Fifth District unemployment rates were below that of the United States as a whole. In 2019, Virginia, Maryland, and South Carolina were the only the Fifth District states below the national average.

To be counted as unemployed by the U.S. Bureau of Labor Statistics, a person must not be working at all and must have actively searched for work in the past four weeks. This definition is critically important in the comparison of UI data and unemployment rates.

Interpreting Recent Changes in UI and Unemployment Data

The rate at which the unemployment rate dropped across the Fifth District may appear to be somewhat at odds with the unemployment claims data. Between the weeks ending May 16 and June 13, state continued claims fell by 8.4 percent in the Fifth District, while the number of unemployed decreased by 25.2 percent between May and June. If PUA and PEUC data were included, it would show an even greater difference between changes in the number of unemployed and changes in the number of people receiving some form of unemployment benefits.

So why, between May and June, did the official unemployment rate fall more rapidly than the number of people filing a continued claim for state unemployment benefits? The divergence cannot be fully explained by unemployed persons falling out of the labor force, which would lower the unemployment rate. The size of the labor force actually increased from May to June. While no single answer emerges, some of the difference may lie in partial unemployment insurance. Laws vary across the Fifth District, but if an employer reduces their typically full-time employee’s hours, the employee may be able to apply for partial unemployment benefits. For example, in North Carolina, one can collect partial UI if they “worked less than three customary scheduled full-time days in the establishment, plant, or industry … because of lack of work during the payroll week. …” In Maryland, people qualify for partial benefits if they have been reduced from full-time to part-time by their employer. Those individuals receiving UI benefits because of reduced hours would not be counted as unemployed because they are working some hours each week.

The lack of a work search requirement also contributes to the discrepancy. Before the pandemic, those who received UI benefits were required to search for work. During COVID-19, states have suspended job search requirements, so those receiving UI currently can do so without actively looking for work. As of August 1, no Fifth District states had reinstated the job search requirement for UI benefits. Many UI beneficiaries have been able to delay reentering the workforce because, as a previous Regional Matters post noted, many Fifth District UI recipients have been earning more on UI than they normally did while working due to the $600 supplement. Additional motivations not to work like reduced child care opportunities and an increased chance of contracting the virus, means that UI recipients have had less incentive to look for employment than they would have with a work search requirement. This has artificially lowered the unemployment rate, as you must be actively searching for work to be counted as unemployed and included in the labor force.

Another explanation for the gap between UI and unemployment could come from people who work more than one job, which, according to the statistics bureau, applied to 5.1 percent of all working Americans in 2019. People who lost one of their jobs may also qualify for partial UI benefits even though they never became truly unemployed. Consequently, there could be a considerable number of people defined as employed who are receiving UI benefits. It is possible that the number of people on UI through states, PUA, or PEUC will increase while unemployment (as defined by the statistics bureau) declines. In an era of partial employment and reduction in hours worked in some industries, the traditional unemployment rate can be misleading.

Other Measurement Complications with Unemployment

A person who is not working but also has not actively searched for work in the past four weeks is no longer counted in the labor force and falls out of the calculation, like a retired person or a stay-at-home parent.

The current economic and health crisis has complicated the unemployment measure used by the statistics bureau, as  openly discussed in their recent reports (see example from May). One complication is that a high percentage of people who lost their jobs during the crisis indicated that they believed the job loss was temporary. A Washington Post-Ipsos poll conducted in early May indicated that nearly 80 percent of laid-off or furloughed workers believed that they would be rehired by the same company after stay-at-home orders were lifted. If workers who have stopped working believe that they will be rehired into the same position, they have little incentive to look for a new job, especially if they receive enhanced unemployment benefits in the meantime. Because they are not actively searching for work, these people fall out of the labor force, leading to an underestimated unemployment rate. This could explain, at least partially, why the labor force participation rate remains considerably below the rate seen prior to the COVID-19 pandemic, at levels not seen in the United States in over 50 years.

The statistics bureau has also commented on measurement difficulties around classifying people who report that they are employed with a job but not at work during the survey period. Typically, these individuals are counted as employed because they are absent for reasons such as vacation or bad weather. In May, the statistics bureau noted that this measure remained at about twice the typical level seen during this time of year. Almost all the growth was in the “other reasons” category, as the COVID-19 pandemic didn’t fit well in the other categories. The statistics bureau acknowledged that many individuals in this group should have been categorized as unemployed on temporary layoff rather than as employed. The statistics bureau estimated that the unemployment rate would have been approximately three percentage points higher than reported in May if the workers had been correctly classified.

Unemployment in the Near Future

The July expiration of the $600 weekly UI supplement will clearly lead to changes in the dynamics around unemployment. Will people who have delayed looking for work due to the $600 supplement return to work quickly? Will people who believed their layoff to be temporary realize that it may be permanent and begin to look for a new job? Of course, for them to return to work, there must be jobs available. With regular changes in government social distancing mandates, the spread of COVID-19, and the unique challenges many families are facing, there is no clear answer. In fact, it is possible that the unemployment rate may increase as people who dropped out of the labor force return to their job search. This return to the job search is especially likely as the work search requirement for UI benefits will presumably return in the near future. While no Fifth District states have announced a return to work search requirements, such requirements were reinstated in early July in both Missouri and Texas.

Conclusion

COVID-19 has forced a closer look at how the United States measures unemployment. Initial UI claims have exceeded the prior all-time record of 695,000 (October 1982) in every week since March 21. The tsunami of job losses, the creation of PUA and PEUC, the institution of the $600 supplement, and the elimination of the job search requirement bring unique challenges to the measurement of unemployment. While the unemployment rate has declined sharply since April, the number of people receiving UI benefits has declined much less dramatically. In the age of COVID-19, a falling unemployment rate may not be synonymous with an improving labor market; normally trivial technicalities of measuring unemployment are exacerbated by unusual crises such as the present. So how can we know the state of unemployment in our economy? Careful examination of various data sources, such as PUA claims, PEUC claims, continued UI claims, the rate of full-time employment, labor force participation rates, and other measures will be needed to examine the full picture.

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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.