We continue our journey into the economic alternate universe. A huge drop in employment, but. . . more money washing around the state?
That appears to be the case, based on a simple analysis of the state employment figures for April, that were released on May 20. The jobs data, based on a large survey of employers that covers their employment levels during the week of April 12, shows a drop of over 550,000 jobs from the February survey, or 16 percent of total state employment.
But with the generous supplemental unemployment insurance (UI) benefits provided by the federal government, and with those benefits applying to self-employed, gig and part time employees, the total of benefits seems to more than offset the total wages that are now not being paid to those who have lost their jobs. And that does not count the $7 billion or so injected into the state through one-time federal payments.
Let’s look at job losses first. Figure 1 shows the drop in employment by large sectors between the week of February 9, the high point for employment in the state, and the week of April 12. (The employer survey covers the week that includes the 12th day of the month.)
For this period, still somewhat earlier in the crisis, job losses are concentrated heavily in construction, arts, entertainment and hospitality. Later in April and into May, other industries would show more losses, and these will appear in the May report. Because so many of these job losses were concentrated in lower paid industries, with low average weekly earnings, the 16 percent job loss results in a total estimated loss of wages to the state economy of about 12 percent.
Figure 2 shows how these lost wages are being backfilled through unemployment insurance payments.
Here, alongside the average weekly wage paid in these industries (in the third quarter of 2019) we see an estimated weekly unemployment insurance benefit payment. These estimates are based on the average weekly wages for the sector, assuming that the employee worked consistently during the year (the average weekly wage figure accounts for part time work). It also includes the $600 weekly supplemental payment provided by the federal government, but does not include the one-time federal payment.
Figure 3 shows the relationship between benefits and hourly pay rates for full time employees. Full time workers making under $30 per hour will typically get more in UI benefits than they were earning previously.
By the rough estimates in Figure 2, if everyone who lost a job between Mid-February and Mid-April received their full UI benefit, the total benefits paid in the state would be larger than the lost wages. If this is true, we are in the very strange position of having massive unemployment generate a positive near-term economic impact.
The actual size of the total benefit payout will be affected by a number of factors. Some people will not claim benefits, although the Employment Security Department indicates it paid out 504,000 claims in the week following the employment survey, so it appears that most eligible claimants are getting their benefit. Self-employed workers, who are not counted in the employment survey, are now eligible for benefits, and those benefit payments will push the total higher.
What is clear is that, in the near term, the state is not experiencing a large drop in aggregate household income. This will change. First workers will return to jobs, but many will have fewer hours and lower pay. Second, the later waves of UI claims come from sectors with higher pay, and as seen in Figure 3, these claimants will not all get more in benefits than they were earning on the job.
This phenomenon reinforces one of the strange features of this economic downturn: it is based on a shortage of supply rather than a shortage of demand. In most recessions, some disruption takes away the purchasing power of large numbers of consumers, and this drop in demand trickles through the economy. In the current situation, however, purchasing power has been supported, but households have fewer places to spend their money.
Latest figures on UI filings
New applications for unemployment benefits were up during the week that ended May 16, as seen in Figure 4.
This increase takes place amid a large wave of fraudulent claims, so we cannot know how many of them are the result of actual job losses and will generate legitimate payments. There remains a large discrepancy between the number of claims being filed and the number of benefits being paid out. Figure 4 shows that during the week of May 9, over 100,000 new claims were filed, but that during the following week, when those claimants could have received a benefit, only 27,000 new benefits were paid (the normal one-week waiting period has been waived). The cumulative number of claims continues to be over twice the number of payments.
As the economy gradually reopens, the new job losses in sectors like healthcare, will be offset to some degree by the return of workers in construction, some manufacturing and some recreation activities. We can, however, expect the May jobs report, which will be released on June 17, to show little improvement. And because the trend has been toward increased job losses in somewhat higher paying sectors, the enhanced UI benefits will be less likely to offset lost wages. National data, released at the end of the month, will give us some clues about the degree to which spending is recovering and how much reduced spending is ending up in savings.
Questions going forward are:
- What happens to the money that is being paid to households that cannot be spent as the household would prefer?
- What happens to the “experience economy” that had been gaining a larger share of economic activity?
- Will inexpensive capital, combined with a large available labor pool, result in new entrepreneurial activities that are consistent with social distancing rules?