Measuring The Damage

True Unemployment Effects on US States Masked by Workforce Exits

Challenging their ability to manage through the crisis

Excerpts from Fitch Ratings detail the seriousness of the high and uncertain unemployment landscape. Access full report here.

Fitch Ratings-New York-24 September 2020: In addition to large swings in headline unemployment figures this year, material labor force exits are complicating the picture for US states. Certain states have seen an outsized proportion of their populations drop out of the labor force since the onset of the coronavirus pandemic, clouding an already high and uncertain unemployment landscape, says Fitch Ratings.

Focusing on the official unemployment rate alone may understate the pressure on states’ economic and budget situations. While those not in the labor force are a small part of the employment picture for most states, they likely compound the negative fiscal effects of job losses. Those who have exited the labor force are typically not generating taxable income or purchasing as many taxable goods and services, and are also more likely to require publicly-funded social services such as Medicaid.

While the pandemic has caused a substantial shock to state revenue collections to date, Fitch anticipates that most states will eventually return to their long-term economic growth trajectories. A return to economic contraction consistent with our downside scenario, likely reflected in lagging labor force growth or even fresh declines, could challenge states’ ability to manage through the crisis.

Employment Recovery Is A Key Factor

There has been an unprecedented decline in the labor force count this year, and to gauge the full effect of the pandemic-driven recession, employment recovery cannot be measured by just the official unemployment rate. Employment recovery is a key factor driving overall economic and tax revenue recovery for states. The pace of the recovery for each state depends in part on how quickly exited workers are able to return to the labor force.

States with a larger percentage of those who dropped out of the labor force may suffer greater volatility in their unemployment rate levels as individuals seek employment after a period of not actively seeking work...

States with a larger percentage of those who dropped out of the labor force may suffer greater volatility in their unemployment rate levels as individuals seek employment after a period of not actively seeking work. If those who exited the labor force were to be considered unemployed, the unemployment rate in some states would be significantly higher than what the official unemployment rate indicates. For this reason, as well as the economic drag represented by those not in the labor force, Fitch is monitoring state-level unemployment inclusive of labor force exits – what we call the Fitch-adjusted unemployment rate.

Eight states have a Fitch-adjusted unemployment rate higher than the highest August official unemployment rate of 13.2% in Nevada: Massachusetts, New Mexico, Nevada, Hawaii, Rhode Island, California, Pennsylvania and Iowa. The chart below orders the states by the difference between the headline unemployment rate in August and the corresponding Fitch-adjusted unemployment rate. The calculation of the Fitch-adjusted unemployment rate assumes that those out of the labor force are back in the labor force but unemployed.

Labor Force Decline

Massachusetts’ official unemployment rate improved to 11.3% in August from 16.3% in July but the labor force decline increased to 8% in August from 4% in July. As a result, the Fitch-adjusted unemployment rate only declined to 18.0% in August from 19.7% in July, well above the Fitch-adjusted US rate of 10.4%.

Five states including Delaware, Texas, South Carolina, Tennessee and Alabama saw labor force gains from July to August. This may indicate a strengthening job market as some residents started looking for work after a period away from the workforce. This may have led to increases in those residents being reclassified as unemployed if they were not immediately successful. The expiration of the Federal Pandemic Unemployment Compensation program on July 31, which provided an additional $600 per week in unemployment aid, may have caused more people to re-enter the labor force.

Fitch assessed monthly unemployment and labor force data from the Bureau of Labor Statistics (BLS) Current Population Survey (CPS) program. BLS notes the ongoing pandemic affected the agency’s data collection process and led to some modifications in its reporting model. Given labor market volatility, Fitch considers the CPS data to be a useful indicator of economic trends, but not as definitive as pre-pandemic data.