I read an interesting report this morning, which resonated with some other work I had…
The US Bureau of Economic Analysis published the latest US National Accounts data last week (July 28, 2022) – Gross Domestic Product, Second Quarter 2022 (Advance Estimate) – which showed that the US economy is now in technical recession – two consecutive quarters of negative GDP growth. After recording a contraction of 1.6 per cent in the March quarter in real GDP, the advance estimates for the June quarter show a further contraction of 0.9 per cent. Many commentators are, however, denying the recession narrative because they are pointing to the low unemployment rate (of 3.6 per cent). It is true, that the GDP figures are often revised and when the final, second-quarter estimates are available, they might record positive growth. But there is a puzzle emerging. We have long held the view (based on Okun’s Law – see below), that when GDP growth declines, the unemployment rate rises. This is a long-held stylised fact that has until Covid stood the test of time. But Covid has changed things and at present the US (and other nations) are experiencing a major slowdown in the growth of their working age population as a result of quite alarming rises in long-term disability as a result of the enduring impacts of Covid infections (and repeated infections). That has meant that unemployment rates are lower than they otherwise would have been as a result of worker shortages. On the one hand that is good for the employed. But, on the other hand, it is disastrous for workers who are now disabled. So the meagre fact that unemployment is low does not negate the conclusion that the US economy is now in recession, which has been deliberately created first by a massive fiscal contraction, and then, by the irresponsible conduct of the Federal Reserve Bank.
The White House was quick to deny any recession.
In this CNBC report (July 29, 2022) – White House goes on offense to argue that the US is note in a receission – which followed the BEA data release, the near moribund American administration claimed that low unemployment was the reason the US economy could not be in recession.
The President was quoted as saying:
Let me just give you what the facts are in terms of the state of the economy … Number one, we have a record job market, and record unemployment of 3.6%, and businesses are investing in America at record rates … that doesn’t sound like a recession to me.
The National Review article (July 31, 2022) – Paul Krugman Claims U.S. Not in a Recession: ‘What Does It Matter?’ – reported that Paul Krugman was running the White House line that “Jobs are abundant” and so the economy cannot be in recession.
The most extraordinary intervention came from the Treasury Secretary Janet Yellen (July 28, 2022) – Transcript of Secretary of the Treasury Janet L. Yellen’s Press Conference – which helps you understand that both arms of macroeconomic policy are working together to create the recession they deny is underway.
She said in the Q&A section of her Press Conference that followed the BEA National Accounts release that:
I see the last several quarters as exhibiting a significant slowdown in the pace of spending in the economy, and when you look at the details, in terms of spending components, we’re in a period where there’s very significant fiscal drag. Government spending made a negative contribution to GDP. We saw a negative contribution this quarter …
So there can be no doubt that macroeconomic policy in the US is creating this recession.
But it is not a normal situation, which is why the commentators are pointing to the low unemployment rate as some sort of saving grace, which for those in employment it is?
Janet Yellen alluded to this in an answer during her Press Conference:
… this is a very unusual situation where we have a slowdown, the labor market remains very tight. You know, we could see some mild easing of pressures in the labor market and yet continue to feel we’ve got a good strong labor market that’s operating in full employment.
She did not, however, elaborate on that anomaly.
Usually, when GDP is slowing this rapidly, the labour market deteriorates.
This was the basis of the work of American economist Arthur Okun in the 1960s.
I last wrote about his work in this blog post – Okun’s Law survives 50 years – trouble for the neo-liberals (January 22, 2013).
Covid has altered my considerations though.
Okun’s Law is a rule of thumb that allows us to quickly estimate how much unemployment will change for each percentage change in real GDP growth.
A rule of thumb in economics is not a rigid exact relationship. There are no such relationships in social sciences. It is rather a recognition that labour market and product market aggregates are intrinsically linked by construction and behaviour and over time allow us to make guesses about the future of one variable based on the evolution (hypothesised) of other variables.
Okun’s rule of thumb was used to predict what would happen to unemployment rates when real GDP growth fell.
His rule of thumb (the Okun Coefficient) said that for every 2.5 to 3.0 percentage point increase in real GNP, the unemployment rate will drop by 1 per cent.
So based on that approximate rule, we should have expected the US unemployment to have risen by about 1 point since January 2022 – which would take it to around 5 per cent in June 2022 rather than the official estimate of 3.6 per cent.
The reason the ‘Law’ has not predicted well in this case is that other factors are at work as a result of Covid which have altered the relationships between macroeconomic variables that we have consistently observed over many recessions.
One of those factors has been the slowdown in the growth of the working age population (WAP) since the pandemic really took hold in the US.
The US Bureau of Labor Statistics labour force data shows that the average monthly growth in the WAP between January 2005 and December 2020 was 0.081 per cent.
Since the pandemic (January 2020 to June 2022), that average rate of growth has been 0.05 per cent.
In the last two months the average growth has been -0.01 per cent.
The following graph shows the evolution of the working age population since January 2020 (blue line). The orange line is the extrapolated trend working age population based on the pre-pandemic growth rate and estimates where the working age population would be had the pandemic not slowed the growth.
The gap as at June 2022 between the actual WAP and the trend estimated WAP is 1,660 thousand workers.
If you then adjust the labour force estimates based on current employment and participation rates, the labour force would be 1,032 thousand larger than it was estimated to be by the BLS in June 2022.
That would mean the unemployment rate would be 4.2 per cent instead of the official estimate of 3.6 per cent.
Significantly, while the official estimate has the unemployment rate constant at 3.6 per cent since March 2022, the adjusted estimate, that takes into account the slowdown in the WAP, has risen.
What might be driving the WAP slowdown?
There was an interesting and rather pointed article in Australia’s The Saturday Paper at the weekend (July 30, 2022) – Hope, denial and Covid-19 – by leading Australia epidemiologist Raina MacIntyre.
It bears on this topic.
I won’t review the whole article because that would take me off topic but her warnings about the way we are ‘checking out’ about Covid and letting it run wild are profound.
She notes, among other things:
The virus doesn’t care that we are fed up with dealing with its fallout. It is here to stay – not a cold, as we were promised, and not even the flu, but a rapidly mutating virus that affects various organs, including the brain, and can cause debilitating long-term illness …
Masks have been shown to work, especially high-quality ones such as the P2 or N95 respirators, but without a mandate only about 30 per cent of people will wear one. With a mandate, as we saw in Australia, that number rises to more than 70 per cent, and this would make a massive difference to transmission.
Masks remain a dirty word and disinformation keeps pouring into our feeds without correction.
For heaven’s sake, it’s just a mask. Get over it, mandate it, save more lives, prevent more illness and protect businesses.
But of relevance to this post was her comparison between the way the West is behaving and the much vilified Chinese approach at present.
As soon as it was allowed, your boss likely insisted everyone come to the office – just like in the 1990s, when they insisted you keep using the fax machine instead of emails – even though productivity was unchanged or even improved with remote working. And then, when everyone obeyed and came back to the office while Covid raged on, productivity took a hit when mass infections occurred at work. These effects will be even worse when long Covid impacts the workforce. The blinkered approach by many countries in ignoring the chronic burden of disease and only focusing on acute infection is a mistake. It is not a choice between unmitigated transmission and zero Covid. Any measures that are used to reduce the spread of the disease will reduce the potentially crippling effects on society and the economy of long-term disability and chronic illness …
Like it or not, we face a future that will never again look like 2019. The sooner we accept that and adapt, the better off we will be. Looking ahead a decade or two, Covid may be the defining event that tipped the balance of power globally between the US and China.
If China keeps the virus under better control, its population will be fitter and healthier into the future, while the US, Europe and much of the rest of the world, including Australia, will be groaning under an unprecedented burden of chronic disease and disability that will have major long-term economic impacts. This is not a call for lockdowns, just for better control using layered strategies that do not impinge on freedoms.
This is relevant because an NPR Report (July 31, 2022) – Millions of Americans have long COVID. Many of them are no longer working – reported on survey data from the Census Bureau, the Federal Reserve Bank of Minneapolis and the Lancet, that helps to explain why American firms are facing “staffing problems, with jobs going unfilled month after month.”
A society needs workers to work to produce things.
Sick workers do not work.
The estimate is that “millions of people may be sidelines from their jobs due to long COVID” and Brookings Institution, based on that survey data, conservatively estimated:
4 million full-time equivalent workers out of work because of long COVID … That’s 2.4% of the U.S. working population.
The other problem is that employers are placing massive pressure on sick workers to return to the workplace before they have recovered from Covid, which exposes the worker to further sickness.
And, government is yet to formalise appropriate disability policies because of the unknowns.
The problem with coming up with accommodations for long COVID is that there are so many unknowns. The duration and severity of symptoms varies wildly from person to person … with long COVID, it’s difficult to measure whether an employee is in fact on a path back …
This isn’t a sprain or strain where somebody turns an ankle and we know in x amount of months, they’re going to be at this point …
With long COVID, symptoms come and go, and new symptoms may arise.
The British Office of National Statistics released their latest data on Covid last week (July 29, 2022) – Coronavirus (COVID-19) latest insights: Infections – which showed that:
An estimated 2.0 million people in private households (3.0% of the population) were experiencing self-reported long COVID as of 4 June 2022. Of those, around three-quarters (74%) reported experiencing long COVID symptoms at least 12 weeks
That is twice the number from a year ago (approximately).
This ONS report (July 7, 2022) – Prevalence of ongoing symptoms following coronavirus (COVID-19) infection in the UK: 7 July 2022 – provides more details.
A research article published in Applied Economic Letters (July 6, 2022) – The impact of Long COVID on the UK workforce – by English academics Darja Reuschke and Donald Houston found that:
Since the beginning of the pandemic, economic inactivity due to long-term sickness has risen by 120,900 among the working-age population, fuelling the UK’s current labour shortage. An estimated 80,000 people have left employment due to Long COVID.
These are the sort of numbers that Raina MacIntyre was referring to as being the basis of a “major long-term” and “unprecedented burden of chronic disease and disability” that our policy makers have ignored as a result of short-term political aspirations.
Our politicians are failing us in this regard.
Coupled with relative denial of climate change (that is, saying you care but only taking half-hearted policy responses to appease the voters), this growing labour market problem will undermine future prosperity like nothing else we have experienced.
Commentators who bombard Twitter with self-referencing claims that Covid is only a threat to the ‘vulnerable’ and that we have restricted so-called ‘freedoms’ without reason need to explain what these labour market trends are about and tell us why they are undermining our long-term futures as a society.
A healthy society cannot have millions of people of working age permanently on disability support because Covid has rendered them unable to work.
Especially as many advanced nations are already facing rising age dependency ratios, which means that the next generation of workers need to be more productive than ever (even if we adjust production and consumption patterns to deal with the climate imperative).
Wear a mask at least!
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.