Returning Workers Could Trigger A Big Jump In the Jobless Rate In May
Analysts are expecting the civilian unemployment rate to jump to 19% in May, up from 14.7% in April. But an unexplained sharp drop in the labor force held down the reported jobless rate for April. If those workers return in May the jobless rate could jump well above consensus estimates.
The Bureau of Labor Statistics' (BLS) definition of someone unemployed is a person who had no work during the survey period and was available to work. The unemployment rate if based on the number of unemployed workers as a percent of the total labor force (i.e., the sum of employed and unemployed workers).
In April, record 6.4 million workers exited the workforce. It is not unusual to see people that lose their jobs also exit the workforce in the same month, especially when job opportunities are very poor as was the case in April with many businesses closed.
But what is puzzling is why did so many workers exit the labor force when Congress passed legislation that granted $600 extra unemployment compensation for those who were unemployed.
One possible explanation is that there was some initial confusion over the eligibility issue for supplemental unemployment compensation. It was not until mid-April that the Department of Labor offered official guidance to states clarifying that unemployment assistance included “individuals who do not qualify for regular unemployment compensation and are unable to continue working as a result of coronavirus, including self-employed workers, independent contractors, and gig workers”.
In other words, the government is now incentivizing workers to remain in the workforce as they would get $600 in unemployment compensation. Had the 6.4 million workers who exited the labor force stayed in the workforce in April the jobless rate would have been reported at 18.1%, well above the reported rate of 14.7%.
The combination of workers who exited the workforce in April returning and newly unemployed workers could result in the jobless rate in May rising above consensus estimates. It is worth noting that BLS stated in the April report that the number of responses to the household employment survey was 13 percentage points lower than the prior month, and large number of workers absent from work for "other reasons" were classified as "employed". That classification could change in May as people were out of work for an extended period.