The seven percent solution

Those of us of a certain age will recognize the title of this article as that of a mystery story in which Sherlock Holmes comes back from the dead to save the day. We are using it to introduce a discussion about the current and future path of the unemployment rate and why seven percent will be a number of particular importance.

The COVID-19 pandemic was largely responsible for the headline unemployment rate, called the U-3, going from 3.5 percent in February to 14.7 percent in April before falling back to 13.3 percent in May. The reason we say “headline” is because that is only one of several ways to estimate the percentage of the labor force that is unemployed.

Another measure that receives a great deal of attention is the U-6, which includes the U-3 as well as other measures of underutilization such as part-time employment. That statistic went from 7 percent in February to 22.8 percent in April before dropping back to 21.2 percent in May.

The decline in both measures had mostly to do with the beginnings of the reversal of the effects of the pandemic. We are going to see a lot more such effects in the reports that will be released over the next several months.

At some point, we should see the U-3 back at 7 percent.

This will mostly mean that we have reopened the economy and put many of the people who were sent home during the lockdown back to work. Beyond that, we will have to look into the details of the reports to see where we stand.

The first detail we will be looking for is the size of the job gains. When the U-3 stood at 3.5 percent in February, 158.7 million people had jobs. When the U-3 stood at 14.7 percent in April, 133.4 million people had jobs. The question will be: How many of the 25.3 million jobs that were lost between those two dates have been restored?

The second detail we will be looking for is which jobs were restored. For the first time in modern economic history, the job losses were concentrated in the service sector of the economy. Traditionally, manufacturing and construction are on the leading edge of the downturn. We know a lot about how recessions and subsequent recoveries work when they are based in the goods-producing side of the economy. The service sector recovery is going to be an education.

The final detail we will be looking for is where the jobs were restored. The reopening of the economy came in phases and was started at different times in different parts of the country. How successful and sustainable those efforts were will have to be evaluated as the news is received.

Which brings us to our final point. The Bureau of Labor Statistics (BLS) compiles the employment data using two separate surveys. The first, called the Establishment Survey, asks businesses how many people they had on the payroll. The second, called the Household Survey, asks individuals (each of whom is interviewed by an enumerator) about their employment status and their job characteristics. All of these procedures have been in place for decades and are followed scrupulously, so there is no reason to doubt the accuracy or the integrity of the results. And, as has been the case recently, when there are special circumstances such as difficulty in reporting, the BLS discloses those problems and the steps taken to address them.

Between now and the time we get to 7 percent, we really won’t be in position to evaluate the longer-term prospects for the economy. We strongly hope we get to 7 percent sooner rather than later, but we would not be surprised to see that process take the rest of the summer. Until we get to 7 percent, all we will be seeing is the rebound from the pandemic. That is no small achievement, but 7 percent is not 3.5 percent. And 3.5 percent is where we ultimately need to be.