The ‘V’ continues: The labor market is rushing to a full recovery

Most news media reports suggest the recovery in the labor market is stalling out. The Oct. 17 report on initial unemployment claims puts paid to the falsity of the suggestion. The historic V-pattern of the recession and recovery suggests we are on a fast track to full recovery before the end of the year.

The report shows that continuing claims for unemployment compensation were 8 million as of Oct. 10 on a not-seasonally-adjusted (NSA) basis. Seasonal adjustment, which aims to remove regular seasonal variability from data, is incapable of dealing with a one-time event, such as the broad state shutdowns that led to unprecedented changes in unemployment that were large multiples of normal or regular within-year weekly or monthly movements. 

The V-shape of the government-mandated recession recovery is seen by the number of people receiving unemployment benefits in state insurance programs. The shutdowns began in early March, when continuing claims were running at a relatively steady 2.1 million people (up to the week ending March 14) and then surged to a peak of 22.8 million eight weeks later (May 9). Since then, it has fallen for 22 weeks, reaching 8 million in the week ending Oct. 10. 

This pronounced V-shape, with a corresponding pattern in the nation’s income and output, has resulted in the shortest recession in history and a dramatic and short recovery. Cumulative filings of initial weekly claims for compensation rose by 59.5 million persons over the period, but only 8 million people remained on the unemployment rolls by Oct. 10. The remaining 51.5 million returned to work, were not initially eligible for unemployment compensation, or had exhausted their benefits. 

Over this period, few people exhausted benefit eligibility without returning to work or dropping out of the labor force, because unemployment benefit eligibility had been extended in most states to 39 weeks. Someone who lost a job in mid-March has benefit eligibility to mid-December because most states provided 13-week extensions for benefits. There is some double-counting because some workers lost jobs and returned to work on multiple occasions. The result was that by Oct. 10, continuing claims were only 5.9 million larger than they had been just prior to the government shutdowns.

The pattern of decline has not been constant. The Labor Department information shows the shifting size of weekly declines for six periods that were shaped by 1) an initial large rebound with furloughed workers quickly returning to work; 2) the influence of temporarily unusually large unemployment compensation slowing the pace of return until close to the end of the temporarily large benefits on July 31; and 3) strong demand for workers and the return of relatively low unemployment benefits. 

The period ending Aug. 1 marked the expected end of the temporary federal compensation of $600 per week. Pressure just before and just after that date would be expected to boost job search and withdrawal from the unemployment rolls. A few weeks later, President Trump restored a $300 weekly benefit retroactively to the first full week in August, but funds for those benefits were exhausted by mid-September.   

Weekly reduction in unemployment is now over a million persons per week. At the current pace of decline, continuing claims will reach 2 million people — the pre-COVID shutdown level — in about five weeks, just before Thanksgiving. This shows the strength of the recovery and that a continuing claims level consistent with high employment is within sight. Some might argue that the rapid pace of decline over the past four weeks reflects the end of eligibility for benefits. However, most states have extended eligibility through mid-December. 

The recovery apparently is proceeding faster than even exceptional other indicators might suggest.

John A. Tatom is a fellow at the Institute for Applied Economics, Global Health and the Study of Business Enterprise, Johns Hopkins University, and a former research official at the Federal Reserve Bank of St. Louis.