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These posts examine local, regional and national data that matter to the Fifth District economy and our communities.

Regional Matters

April 13, 2020

COVID-19: Unemployment Claims and Unemployment in Virginia

Introduction

The economic disruption brought on by the coronavirus pandemic has been abrupt and severe. The first glimpse of the extent of the disruption in the U.S. and in Virginia has been through record numbers of unemployment claims. But what might this mean for other employment data that will emerge in the next month? Where might we see the Virginia unemployment rate go?

What Are Unemployment Claims?

When a person becomes unemployed, they can file for unemployment benefits through the unemployment insurance program, which is a joint federal-state program that provides temporary financial assistance. To be eligible, workers must not only be unemployed through no fault of their own, they must meet eligibility requirements that are determined by the state through which they are filing. Data are collected on these "initial" claims—claims filed by an unemployed individual after a separation from an employer. A person who has already filed an initial claim and experienced a week of unemployment then files a continued claim for the next week of unemployment—continued claims are also referred to as "insured unemployment." Initial claims are released publicly through the Department of Labor the Thursday following the week of the claims data. Continued claims for the week are released with a two-week lag.

Sometimes, the federal government steps in with mandates and funding regarding the qualification, amount, and length of time unemployment insurance benefits should be offered. For example, the legislation passed on March 31, 2020, included an expansion in eligibility to the self-employed, freelancers, and those who have to voluntarily quit their job due to COVID-19, as well as an increase in the benefit amount and the length of time a person is eligible.

The National Employment Situation

In February, there were 5.8 million unemployed people in the U.S., amounting to an unemployment rate of 3.5 percent, measured relative to the labor force. Continued claims were more or less constant at around 1.7 million (a historic low) until the week that ended March 14, when continued claims rose 5 percent thanks to a sharp (33 percent) increase in initial claims. In the week that ended March 21, initial claims rose to 3.3 million, and in the week ending March 28, there were 6.8 million initial claims filed in the nation. This is a shocking increase—the prior peak in initial claims was 695,000 claims filed in one week in October 1982. The most recent data, as of this post, showed another 6.6 million claims filed the week that ended on April 4. See chart below.

On April 3, the Bureau of Labor Statistics reported that, on net, employment was down by 701,000 jobs in March (about two-thirds of which were in the leisure and hospitality sector) and the unemployment rate had risen to 4.4 percent.

Many analysts and economists have been attempting to project where unemployment will be by the summer. The St. Louis Fed, for example, has calculations that range from 27.3 million workers to 66.8 million workers who are at a "high risk" for layoff because they are in occupations likely to be affected by social distancing measures or because they work in jobs that require tasks performed in close proximity to others. For example, 17 million people in the United States work in the "leisure and hospitality" industry, and around 85 percent of that 17 million is in accommodation and food services: We know anecdotally and from industry breakdowns of unemployment claims that those businesses, such as hotels and restaurants, are most affected by social distancing measures. Extrapolating, one could arrive at an unemployment rate of 30 percent in the second quarter. This is an extreme forecast—and higher than most economists and policymakers anticipate—but almost all forecasts have unemployment in the U.S. of over 10 percent in the second quarter of 2020.

What About Virginia?

Estimates for the number of unemployed at the state level are calculated differently than the national numbers, primarily to compensate for the smaller sample size of households at the state level. (For more information, see here.) But, as was the case for the national data release on April 3, the March state employment release on April 17 will only tell a piece of the Virginia labor market story of March 2020. The data collection that results in the unemployment rate happens during the week that includes the 12th of the month. Thinking back, March 12 was still a relatively normal day in Virginia. The governor did not give the order to close schools (for two weeks initially) in the commonwealth until March 13.

The situation in Virginia mirrors that of the nation. The chart below shows the increase in initial unemployment claims, although in Virginia that increase began in earnest the week that ended March 21. In the last week of data that we have—the week ending April 4—there were 165,332 (unadjusted) initial unemployment claims submitted in the state. This peak is almost 10 times the prior peak in October 1990.

So what kind of unemployment rate might we see in the state jobs report that comes out on April 17? In February 2020, Virginia had 117,266 unemployed (seasonally adjusted) and a total labor force of 4.46 million people, resulting in a 2.6 percent unemployment rate that month. If every one of the approximately 12,000 people who filed an initial claim in the last two weeks of February and the first two weeks of March (since the unemployment rate is based on a survey conducted the second week of the month) was counted, the number of unemployed in the commonwealth would rise to just under 130,000 Virginians. Assuming that every one of those newly unemployed had been employed (thus the labor force was unchanged), we would have a slight increase in the unemployment rate, to 2.9 percent for March.

The following three weeks (weeks ending March 21, March 28, and April 4) added over 360,000 initial claims. If the week ending April 11 had 90 percent of the number of claims during the week ending April 4, there would be 150,000 more unemployed in Virginia from the middle of March to the middle of April. If every single one of those claims became an unemployed worker in the April household survey, Virginia would have an astounding 14.3 percent unemployment rate in April (data will be released in May.)

However, if our estimate of the unemployment rate is based on every unemployment claim translating to an unemployed person, we would probably overestimate the unemployment rate. The chart below shows the number of initial claims in Virginia for a given month and the change in the number of unemployed Virginians from month to month. For every month, the number of initial claims far exceeds the (net) new people counted as unemployed in the state. Why might this be? For one thing, there is a certain amount of churn in the labor market. There are always people filing for unemployment benefits even in periods when the unemployment rate is declining; some people will get another job before the next iteration of the household survey. Some claims will likely be denied, normally because an individual does not meet the federal or state eligibility requirements. In the difficult labor market from August 2008 to April 2009, for example, the increase in the number of unemployed was somewhere between 20 and 40 percent of the increase in initial claims. Currently, many states are encouraging workers to apply for unemployment because of the expansion in the unemployment insurance program—better to apply and be denied than not apply. Finally, the unemployment rate itself could understate the number of people who have lost their jobs during this pandemic: If people lose their jobs but cannot search for another one (a real possibility in this environment), a person could move from employed to out of the labor force altogether, which would hold down the unemployment rate.

On the other hand, the number of initial claims could understate the number who tried to file—there are many reports of state filing systems being overwhelmed by the increase in the number of people trying to file.

One thing is certain: Neither the March nor the April (nor, probably, the May or the June) jobs reports will be good in Virginia. Even if only 30 percent of those who filed for unemployment for the first time join the ranks of the unemployed, we will have an unemployment rate of well over 6 percent in April, and this is under the assumption that initial claims are 10 percent lower in the week that ended April 11 than they were the week that ended April 4. Even this conservative estimate results in a doubling of the state's unemployment rate in a mere two months.

The Virginia economy is in a virtually unprecedented situation. Given the expansion in claims eligibility, the difficulty of looking for work, and the pressures that all firms are under, it is not hard to imagine that more than 30 percent of those claims become a part of the unemployment rate. Assuming that half of the initial claims are added into unemployment, Virginia would have an unemployment rate of 8.5 percent in April.

What About the Structure of the Virginia Economy?

The social distancing measures have struck some industries far worse than others. With the rise in unemployment, the stock market declines, and the broad uncertainty, consumer demand will certainly decline over the next few months, impacting an increasingly broad array of industries and firms. Does the industry structure in Virginia give us any reason to think that Virginia might be harder hit than the U.S. as a whole?

The Bureau of Labor Statistics' Quarterly Census of Employment and Wages enables a more detailed look into industries within states. Using 2018 data, the last full year available, Virginia had more than 400,000 people working in food services, accommodation, arts, entertainment, or recreation—a little under 13 percent of employment. Almost all of these workers will be affected in some way by social distancing measures. There were an additional 320,000 workers in non-food retail who are also likely to be affected. In total, these industries account for about 23 percent of the over 3 million people who work in Virginia. In the U.S, those industries account for 23.2 percent of employment. (For other states in our District, see here.) In other words, there is nothing in the distribution of employment in Virginia to indicate that the economic impact of social distancing measures will be notably different from that in the U.S. And, in fact, the higher concentration of Virginia employment in professional and business Services and government might help the state weather the downturn. Nonetheless, the impact will be sizeable.

Conclusion

The economic fallout from the spread of COVID-19 and the accompanying social distancing measures has been swift and severe. Even assuming that the sharp rise in unemployment claims will not fully translate into unemployment in the state as measured by the household survey, there will be an increase in the March unemployment rate and the increase in the unemployment rate in April will be sharp. Thus far, the impact has been primarily in those industries or occupations directly affected by social distancing—not just hotels and restaurants, but also businesses such as dental offices or hairdressers. As we continue through this crisis, the impact on consumer demand will increasingly affect more firms across more industries. In other words, the longer this goes on, the stronger and more persistent the effect on the Virginia economy will be.


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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.

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