The June Job Report (07/02/2020)

7/2/20 8:44 AM

Total nonfarm employment in America jumped by 4.8 million payrolls in June, according to data out this morning from the Bureau of Labor Statistics. That was much better than the 3.0 million gain analysts anticipated and the largest increase on record. As for joblessness, the official unemployment rate (U-3) slid from May’s 13.3 percent reading to 11.1 percent last month. Methodology quirks mean this figure could be underestimating the true rate of joblessness in America, but even alternative measures still confirm that unemployment has already fallen considerably from the Q2 peak. Seeing the labor market recovery continue to gain momentum in June should not be surprising because more parts of the economy were reopened than in May.


However, it is also far too early to declare “victory” since over 19.2 million Americans are still collecting unemployment insurance, including 1.4 million new benefits recipients added just last week. The latter stat is particularly worrying because these layoffs are occurring roughly two months into the reopening. The recent coronavirus resurgence that has caused several states to consider slowing or even reversing their economic reopenings is likely responsible for some of these latest separations, but many more of the job losses could be a longer-lasting side-effect of the economic fallout from the initial lockdown still working its way through the system. In fact, data from Challenger, Gray, and Christmas out yesterday showed that most of the job cuts that occurred in June were due not directly to COVID-19 but instead market conditions, cost-cutting, and a downturn in customer demand. Such persisting weak spots in the labor market are worth highlighting since today’s payrolls data will be the last big monthly job report released before the August recess in Congress, and lawmakers must therefore be careful not to read too heavily into the encouraging headline figures.


Moreover, a key issue that will be discussed in Washington this month when negotiating the next fiscal package is what to do with the generous $600 unemployment insurance (UI) boost that is currently set to expire at the end of July. With many out of work Americans now making more on unemployment than they did while employed (see below) there is a clear job search disincentive that will need to be eliminated. The arbitrary July 31st deadline, though, is too early with millions of Americans still out of work and likely to remain so for some time due in part to continued social distancing practices that limit rehirings, e.g. building occupancy restrictions, and perhaps more importantly a sluggish rebound in customer demand. Indeed, just because the lockdowns have been lifted many consumers are reluctant to go back out and spend like they did prior to the pandemic. Lingering concerns about the virus of course play a role but so too does income uncertainty, and suddenly slashing the benefits for the millions of UI recipients by 66 percent is only going to further damage consumer demand, and in turn likely lengthen the time it takes for the economy to recover.


Fortunately more lawmakers have become aware of the deflationary shock that could result from an abrupt removal of the emergency benefits, and now the main question is what the current relief measure will be replaced with. The simplest option is to extend the UI bonus until the unemployment rate falls back into the single-digits or some other economic objective is achieved. Alternative proposals include gradually shrinking the $600 benefit while at the same time adopting a “back-to-work” bonus that pays an individual a lump sum upon returning to work. Additional job search incentives could come from temporarily eliminating the payroll tax, which would not only help employed Americans but also cash-strapped small businesses trying to make payroll. Such a measure is not unprecedented and has even been utilized as recently as 2011 when Congress cut the Social Security payroll tax by two percentage points.



Sources: Econoday, U.S. DoL, CG&C, WF, GS, DB, ADP, FRBSL

Post author: Charles Couch