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Gauging Unemployment Rates When Workers Are on the Sidelines

Regional Matters
February 26, 2021

Labor market movements in 2020 were dramatic. The unemployment rate in the United States went from a 50-year low of 3.5 percent in February to a high of 14.8 percent in April. By January 2021, the national rate had fallen to 6.3 percent. The national trend was consistent across states—historic or near historic lows in February to record highs in April—to somewhere in between by the end of 2020 (the most recent state data is for December). However, each state in the Fifth Federal Reserve District looks slightly different with respect to its current unemployment rate and unemployment rate changes. Moreover, it is important to consider how many people are no longer in the labor force and what that means for the labor market dynamics across states.

The National Unemployment Dynamics

According to the Bureau of Labor Statistics (BLS), for a person to be categorized as unemployed, they must not be working, must be available to work, and must have looked for work in the past four weeks (unless on temporary layoff with an expectation to return). If a person without a job has not recently searched for one, then they are considered out of the labor force rather than unemployed. Since the labor force is the sum of the employed and the unemployed, and the unemployment rate is the number of unemployed divided by the labor force, movement of these individuals out of the labor force affects the reported unemployment rate.

As the national unemployment rate spiked from February to April 2020, the labor force participation (LFP) rate—which is the share of the population that is in the labor force—plunged from 63.3 percent to 60.2 percent. In fact, the April LFP rate reached its lowest point since the early 1970s, although it has since rebounded to 61.4 percent. Of course, labor force participation has been declining for decades, primarily due to our aging population. But in 2020, much of the decline was an outcome of the economic upheaval caused by the COVID-19 pandemic. According to the BLS, “The number of people not in the labor force who currently want a job nearly doubled in April, as the impact of the pandemic kept many individuals from engaging in labor market activity.” In April 2020, more than 9 percent of people not in the labor force wanted a job. That share has since fallen to 7 percent as of January 2021, but it remains well above the pre-pandemic share of about 5 percent.

What About Our States?

One of the success stories of Fifth District state labor markets in the past decade has been South Carolina. In 2010, South Carolina had one of the highest unemployment rates in the country. By February 2020, the state unemployment rate had fallen to 2.5 percent—one of the lowest in the country. Despite a significant jump in South Carolina’s unemployment rate to more than 12 percent last spring, the state again holds the lowest rate in the Fifth District. However, the LFP rate in South Carolina has fallen over the past year. (Interestingly, South Carolina maintains one of the lowest LFP rates in the country. In the Fifth District, it is only higher than West Virginia, which has the lowest participation rate in the country.) Unfortunately, we do not have data at the state level to disentangle the reasons for the decline in South Carolina’s LFP rate in 2020 and compare it to other states in the district. We can try, however, to scale the extent that LFP changes have affected unemployment rate changes in states.

For example, if we were to assume that without the pandemic, South Carolina’s December 2020 LFP rate would match the 58.3 percent rate in February 2020,  and that any decline in the labor force should be considered an increase in the number of unemployed, then the South Carolina unemployment rate would be 7.9 percent in December rather than 4.6 percent. Using the same calculation, the U.S. December unemployment rate would be 9.4 percent rather than 6.7 percent. Thus, even accounting for labor force participation, the South Carolina unemployment rate would be lower than the United States, but the margin between the two would shrink. Comparing South Carolina unemployment to other Fifth District states provides the same result: even accounting for changes in LFP, South Carolina would have the lowest unemployment rate, but the gap would shrink between it and other states.

Making the same assumptions about LFP would create even starker changes in Maryland and Virginia unemployment rates. In December 2020, Maryland’s LFP rate was 65.6 percent—more than 3 percentage points lower than it was in February 2020 (although Maryland’s LFP rate has been very volatile in the past year). Holding LFP constant at February’s rate and assuming an unemployment increase, would leave Maryland with a 10.6 percent unemployment rate in December—much larger than the reported 6.3 percent and the highest unemployment rate in the district. Virginia, too, has seen labor force participation fall notably even since April, standing at a near record low of 63.7 percent in December. The Virginia unemployment rate has been lower than the U.S. rate for decades and in December, at 4.9 percent, the rate was well below the U.S. rate of 6.7 percent. Accounting for the decline in labor force participation would leave the state with a 9 percent unemployment rate, thus shrinking the December gap between Virginia and the United States to 0.4 percentage points.

There are caveats to assuming that the labor force decline should be entirely an unemployment increase. For example, we have an aging population, and the LFP rate might not return to its February level due to continued retirement in the baby-boom generation. Furthermore, when evaluating non-employment at the national level, more robust ways exist to account for those out of the labor force. For example, the Hornstein-Kudlyak-Lange Non-Employment Index includes the unemployed (short- and long-term) and those out of the labor force in its measure of unemployment, weighting them by their propensity to re-enter employment.

The purpose of this article, therefore, is not to suggest that our calculations represent true unemployment, but to emphasize the importance of considering those who are no longer in the labor force when evaluating a state’s labor market based on changes in its unemployment rate. The long-term effect of the pandemic on our nation’s workers is not yet known, but regardless of the pandemic, our regional and national economic growth will depend upon getting people back to work.