At a passing glance, it appears that on both sides of the Atlantic the labour market is, if not exactly thriving, doing far better than we might have expected. In the US, the headline jobless rate has swiftly fallen back from 15 per cent to 8.4 per cent. Meanwhile in the eurozone the picture looks even brighter: the unemployment figure has barely moved up at all — the latest reading, out Thursday, was 8.1 per cent. That’s actually below its historical average. Does that mean all is well? No, it certainly does not.
As Leo Hindery, Jr, a member of the Council on Foreign Relations, put it recently in this piece for us, looking at headline rates makes for a misleading reading of what’s actually happening on the ground. The reason being that many of those who initially lost their jobs in the US have now fallen out of the headline measure due to the Bureau of Labour Statistics labelling them either re-employed in part-time jobs or ineligible for work. That’s because circumstances related to the crisis have meant they’re no longer searching for a job. This newfound ineligibility could also have affected unemployed workers who were looking for a job before the crisis struck but no longer can. Via Hindery, Jr:
Amid the pandemic, workers have been forced from full-time jobs into part-time positions out of necessity; others have not searched for a job in the past month because of availability, skill or personal reasons; some have put their job-searches on hold within the past four weeks despite wanting to work; and others have put their job-search on hold altogether over the past 12 months. BLS excludes all of these millions from its tally.
One way of uncovering a more accurate reading of what’s happened to the labour market is to look at the gap between the headline rate, dubbed U3 in wonk-speak, and U6 — a measure that includes those who would like to work but are no longer actively seeking a job, as well as underemployed part-time workers. Hindery, Jr, believes that by looking at this measure, the unemployment rate is 16.8 per cent, or 28.2m in terms of the number of workers. Double the rate that grabs the headlines, then.
The gap between the U3 and U6 rates has been widening for decades as part-time work and more precarious forms of employment have become more prevalent due to globalisation, “innovation”, and de-unionisation. However, the gap tends to widen further in times of crisis — such as after the global financial crisis in 2008.
But what about the eurozone? As in the US, the headline rate is based on a narrow definition: those included under this reading have to be available to start work within two weeks and actively seeking work. In recent years, European policymakers have studied U6 closely. Central bankers, for instance, have viewed the substantial gap between it and the headline figure as one explanation for why the pace of wage growth has been sluggish despite the (on the face of it) rosy picture painted by the unemployment rate. Via a 2017 article in the FT:
A new measure of “slack” in the labour market from ECB economists indicates that between 15 per cent and 18 per cent of the eurozone workforce are without jobs or would like to work longer hours, almost double the official unemployment rate. In weaker labour markets, such as those in France and Italy, underemployment is still rising as workers become disenchanted and give up on finding a job.
Finding an accurate measure of U6 right now is difficult. The data is usually collected from door-to-door surveys, which clearly are not advisable during a global pandemic.
But we’d guess that it has gone up less here than across the Atlantic. The reason being that, unlike in the US, the policy response in Europe has focused on schemes that help keep workers in their current jobs — as opposed to doling out benefits directly to individuals. These schemes, the most renowned of which is Germany’s Kurzarbeit programme, cover a substantial portion of the income lost from employees working fewer hours — or, in some cases, not at all. While the fate of America’s poor hangs in the balance, all of the currency zone’s major economies have pledged to keep their workplace schemes in place until 2021. But though this will help support demand and provide workers with some much needed security, it also means that there is a dearth of information in the contained in the unemployment numbers — including U6.
The European Central Bank has attempted to rectify this by putting together its own measure of slack, which includes short-time workers with zero hours. The results are shocking, showing the percentage of workers without work right now is almost as high as a third in France:
Another enlightening, albeit depressing, means to assess the damage is to look at what’s happened to hours worked. Quarter on quarter, these have plunged:
Whether in Europe or the US, then, the picture painted by the headline jobless rates is more a mirage than an accurate representation of just how much slack there is in labour markets right now.