R52 National Institute Economic Review No. 252 May 2020

US AND UK LABOUR MARKETS BEFORE AND DURING THE COVID-19 CRASH

David N.F. Bell* and David G. Blanchflower**

We examine labour market performance in the US and the UK prior to the onset of the Covid-19 crash. We then track the changes that have occurred in the months and days from the beginning of March 2020 using what we call the of Walking About (EWA) that shows a collapse twenty times faster and much deeper than the Great Recession. We examine insurance claims by state by day in the US as well as weekly national data. We track the distributional impact of the shock and show that already it is hitting the most vulnerable groups who are least able to work from home the hardest – the young, the least educated and minorities. We have no official labour market data for the UK past January but see evidence that job placements have fallen sharply. We report findings from an online poll fielded from 11–16 April 2020 showing that a third of workers in Canada and the US report that they have lost at least half of their income due to the Covid-19 crisis, compared with a quarter in the UK and 45 per cent in China. We estimate that the unemployment rate in the US is around 20 per cent in April. It is hard to know what it is in the UK given the paucity of data, but it has gone up a lot. Keywords: employment, unemployment, underemployment, Covid-19. JEL codes: J31; J60; J61

“Florida’s Department of Employment Opportunity executive director Ken Lawson said Monday April 6th that 520,000 applications for unemployment benefits have been filed in the past three weeks, more than the 326,653 applications for all of 2019.”1

We originally intended this paper to contribute to the unemployment rate and historic falls in the employment debate around whether the UK and US labour markets rate and the underemployment rate. Initially there were close to full employment at the end of 2019. Our was little evidence of changes in wage growth or self- work on this topic was near completion in February employment. The hardest hit groups are already those 2020 when the world economy was overwhelmed by at the margins of the labour market, the young, the least Covid-19 events. Given the magnitude of the shock, we educated, the foreign born and minorities. Unfortunately, altered strategy to update readers on the momentous UK data from the ONS is less timely and unable to signal shifts in labour markets following the Covid-19 outbreak. high frequency changes in the UK labour market. Hence Between early March and mid-April, a global recession it is more difficult for us to present a contemporary view has taken hold. This is most evident in the US, partly due of UK trends. to its severity, but also due to its ability to produce timely, accurate labour market statistics. The quote above from In the UK and the US, prior to the Covid-19 outbreak, the state of Florida makes it clear that existing systems unemployment rates were close to post-war lows. have been overwhelmed by the unprecedented scale and During the Great Recession increases in unemployment speed of the labour market collapse. were less dramatic than many expected. In the UK, for example, the annual unemployment rate averaged 11.2 It is our judgement that the two labour markets were per cent between 1982 and 1987, while from 2008 to not close to full employment at the start of 2020. As 2013 it averaged only 7.5 per cent.2 In the US, annual the Covid-19 shock hit, the first evidence of how the averages have not been in double figures since 1955, US labour market was taking the strain was a dramatic though they reached 9.3 per cent and 9.6 per cent in rise in unemployment insurance claims, a rise in the 2009 and 2010, respectively.3

* , IZA and CPC. E-mail: [email protected]. **, University of Stirling, GLO, Bloomberg and NBER. E-mail: David.G.Blanchflower@dartmouth-edu. We thank Jagjit Chadha, Philippa Dunne, Kevin Rinz and Alex Salmond for helpful discussions and comments. Bell and Blanchflower US and UK labour markets before and during the covid-19 crash R53

1. Full employment? Even before the dramatic impact of the Covid-19 In both labour markets unemployment rates have epidemic, many Americans were suffering economic, been in decline since 2014, falling below 4 per cent physical and psychological hardship – see for example in December 2018 in the UK and in May 2018 in the Arnade (2019), Kristof and WuDunn (2020), Quinones US. Yet only towards the end of this period was there (2015), Vance (2017) and Deaton and Case (2020) who any marked uptick in wage growth. Between 2010 and documents the rise of hopelessness and deaths of despair 2018, wage growth varied within the range 2–2.5 per – from drug poisonings, suicide and heavy drinking – cent in both countries. Why was the wage response so especially among prime age less educated whites in the weak as unemployment fell? It seems to be that there US. Blanchflower and Oswald (2019) show that one in was more ‘slack’ in the labour market than implied three Americans in a recent international survey report by the unemployment rate (Blanchflower, 2019 and had, over the previous four weeks, been in pain ‘often’ Bell and Blanchflower, 2020). If labour markets are at or ‘very often’. This compares with an average of 20 the NAIRU, one would expect a marked rise in wage per cent in other countries.4 Much of this seems to be growth as firms do not have a pool of labour – Marx’s labour market driven (Blanchflower, 2019). This was not reserve army of the unemployed – to draw from. To hire a good starting place for the biggest and fastest postwar they would have to bid them away from other firms at economic shock. higher wages. Rising wage growth is thus the central indicator of a tightening labour market. Previously, at We start by presenting evidence on a series of labour unemployment rates of under 4 per cent, wage growth market variables across the two countries including would have been higher; hence the puzzle. unemployment and underemployment rates, participation and employment rates, as well as the share of employment At full employment those who want fewer hours (the accounted for by part-timers. We then discuss trends in overemployed) and those who want more hours (the multiple jobholding and in self-employment. underemployed) should be able to realise their wishes, since firms will have to accommodate workers’ wishes If the UK or US economies were close to full employment in order to retain them. A similar argument applies to by the start of 2020, we would have expected to see the overemployed. Full employment should give workers evidence of fundamental changes as workers move onto flexibility to optimise their hours of work. Having their labour supply curves. Our expectation was that developed this argument in previous Reviews (Bell and we would find some such evidence of change in these Blanchflower, 2018a; 2018b; 2014, 2013, 2011 and channels of labour market adjustment between 2016 Blanchflower, 2013) we now search for evidence for and 2019. The absence of marked changes suggests significant change as labour markets apparently approach that neither labour market was anywhere close to full full employment. We find little or no verification for such employment. As the virus hit, there was already existing changes in either the US or the UK. slack in the two labour markets, especially in the number of additional hours workers desired to work. We now If the economy is at full employment, workers who are summarise this evidence. hours constrained in their main employment should be able to move readily and easily to new jobs with an 2. Background US and UK labour markets hours-mix that better meets their preferences. Or they 2000–20 may move to self-employment so that they can control their working time, subject to demand. Another We begin by discussing similarities and differences possible way to add to their working time would be between the US and UK labour markets: to take another job, through either employment or self-employment. Both the underemployed and the Similarities overemployed are unhappy (Bell and Blanchflower, a) Strong labour market recovery in the decade 2019, Mousteri et al., 2020), so presumably being able following the Great Recession, so unemployment and to adjust actual hours to desired hours would make underemployment rates fell. them happier, which gives them an incentive to adjust b) At the end of 2019, unemployment rates were below their hours. These mechanisms affect wage outcomes pre-recession levels while underemployment rates were without necessarily affecting unemployment, so they not. shift the NAIRU, weakening the predictive power c) Wage growth in both labour markets has been weak. of previous estimates of its relationship to wage d) There has been little change in second job holding rates. inflation. e) Average weekly hours have been broadly flat. R54 National Institute Economic Review No. 252 May 2020 f) The proportion of workers in part-time jobs has which only uses data on involuntary part-timers who are declined in recent years. usually part-time (see Dunn, 2018). However, from the g) Labour force participation and employment rates in UK as well as data from other European countries based both countries had risen as the unemployment rate fell. on the European Labour Force Surveys, it is clear that it h) In neither country has there been any dramatic is not just involuntary part-timers who want more hours, change in wage growth since the start of the recovery, but so too do voluntary part-timers and even some full- suggesting that neither are at the NAIRU, even though timers (Bell and Blanchflower, 2019). unemployment rates fell below 5 per cent. We also have data on underemployment from the Gallup Differences US Daily Tracker Poll (GUSDT), on 2,767,068 individuals a) Employment rates and labour force participation rates across the years 2009–17, with around 350,000 a year in the UK are well above pre-recession levels but this but with 270,000 in 2017 and only 17,000 in 2009. is not the case in the USA. Information on labour force status is available over b) Self-employment rates in the UK rose after 2007-08 these years, split into six categories – employee FT; self- but fell in the USA. employed FT: PT does not want full-time; PT wants full- time; unemployed and out of the labour force (OLF). We now trace these developments in detail, while also Part-time is defined as less than 30 hours and part-time including the Covid-19 induced changes to the US labour wants full-time is based on responses to the question market which were already evident in the second half of “Do you want a job with 30+ hours?”. This is essentially March 2020. As mentioned earlier, it is not possible to the same question used in the UK and European Labour replicate this for the UK, due to lack of timely data. Force Surveys – part-time wants full-time – as reported in Bell and Blanchflower (2020). The BLS U7 measure Unemployment and Underemployment has more than halved since 2009, whereas the Gallup Figure 1a-d shows the pick-up and subsequent decline in measure has slowed less and picked up again in 2017. the unemployment and underemployment rates (U7). In figure 1a for the UK we define the underemployment rate Figure 2 plots data from the Gallup US Daily Tracker Poll as the number of part-time workers who say they want full- from 2007–18. It shows the BLS measured U7 and U3 as time jobs, expressed as a per cent of employment and in well as an unemployment rate derived from the data file figure 1b for the US we define it as the number of part-time that tracks closely the official US unemployment rate. for economic reasons as a share of employment (Bell and What is clearly different is the Gallup underemployment Blanchflower, 2019) that we call ‘U7’. In both countries, in measure which is a) much higher and b) has a very contrast to the unemployment rate, the underemployment different time path (table 1). The likelihood is that a large rate was still above pre-recession levels in 2019. share of part-timers who classify themselves as choosing a job for non-economic reasons would still take a job In the UK, the Great Recession started in April 2008 when of 30 hours and over if they had the option. If such a the unemployment rate was 5.2 per cent, and in the US job was offered, many of these workers could likely the recession started in December 2007, when the rate take it up in the following week. These Gallup numbers was 5 per cent. The UK unemployment rate did not fall seem a better measure of underemployment to us than below 5 per cent until October 2016 and in the US until the BLS numbers and suggest a much higher level of August 2014. Previously, unemployment rates below 5 underemployment in the US since the Great Recession. per cent were associated with wage growth of 4 per cent and higher in both countries. We report the re-calculated Bell-Blanchflower underemployment index (seasonally Table 1. Underemployment measures: Gallup and BLS adjusted) for the UK up to 2019Q4 in figures 1c and 1d. In figure 1c we plot the number of (higher) desired hours of Gallup U7 BLS U7 the underemployed along with the desired (fewer) hours 2009 9.9 6.4 of the overemployed. In the latest data they are once again 2010 10.2 6.4 close together. In figure 1d we translate these data into an 2011 10.5 6.1 2012 10.3 5.7 underemployment rate, which then is very close to the 2013 10.3 5.5 unemployment rate. Note that the unemployment rate was 2014 9.8 4.9 well above the underemployment rate before the Great 2015 9.1 4.3 Recession. For the US, our underemployment index is not 2016 8.6 3.9 available, and we have to proxy it using U7, a statistic 2017 8.8 3.4 Bell and Blanchflower US and UK labour markets before and during the covid-19 crash R55

Figure 1a. UK monthly uemployment and U7 Figure 1b. US monthly unemployment and underemployment rates, 1992–2019 underemployment rates

11.5 5.5 11.0 7.0 6.5 10.5 5.0 10.0 6.0 9.5 4.5 9.0 5.5 8.5 4.0 8.0 5.0 7.5 3.5 7.0 4.5 6.5 3.0 6.0 4.0 3.5 5.5 2.5 rateUnemployment % 5.0 Underemployment rate % rate Underemployment Unemployment rateUnemployment % 3.0 Underemployment rate % rate Underemployment 4.5 2.0 4.0 2.5 3.5 1.5 3.0 2.0 1992 1997 2002 2007 2012 2017 1992 1997 2002 2007 2012 2017

Unemployment rate (LHS) U7 (RHS) Unemployment rate U3 (LHS) U7 (RHS)

Figure 1c. Under and over hours, UK, 2001–19 (millions Figure 1d. Bell-Blanchflower underemployment index UK of hours) 2001Q3–2019Q4 (seasonally adjusted)

46 10.5 44 10.0 42 9.5 40 9.0 8.5 38 8.0 36 7.5 34 7.0 32 6.5 30 6.0 28 5.5 26 5.0 4.5 24 4.0 22 3.5 20 3.0 Unemployment/underemployment rate

More hours Fewer hours Unemployment Rate Underemployment Rate

Employment rates According to the NBER Business Cycle Dating Committee Figure 3 plots employment to population (EPOP) ratios the US entered recession in December 2007. Of note in for the UK and the USA. Prior to the Great Recession the the is that overall, seasonally adjusted US EPOP rate was above that in the UK but is now below EPOP has never returned to its pre-recession levels – it it. In both countries EPOPs fell after the onset of recession was 62.7 in December 2007 versus 61.1 in February and a subsequent recovery. The 2019 UK EPOP was well 2020 and 60.0 in March 2020. That was also true of above its pre-recession level, while it was lower in the US. whites that their EPOP remains well below starting The UK EPOP was below its US counterpart until around levels – 63.5 in December 2007 and 60.2 in March 2020 2011 and is now above it. On these measures the US was respectively. In contrast EPOP of African Americans is clearly not at full employment in 2019. now the same as at the start of recession – 57.8 in both R56 National Institute Economic Review No. 252 May 2020

Figure 2. Gallup Daily Tracker unemployment and under- Figure 3. Labour force participation rates, US and UK employment rates, USA, 2007–20 1992–2020

12.0 66.0 65.0 10.0 64.0 63.0 8.0 62.0 6.0 61.0 60.0 4.0 59.0

Participation rates 58.0 2.0 57.0 56.0 0.0 55.0

U7 Gallup U7 Gallup U3 U3 UK US

Table 2. Employment to population rates by state

2000 2008 2019 2000 2008 2019 Alabama 60 57 56 Montana 65 64 61 Alaska 69 66 60 Nebraska 72 71 68 Arizona 63 60 59 Nevada 67 64 61 Arkansas 60 60 56 71 68 67 California 67 64 62 New Jersey 64 63 61 Colorado 70 69 67 New Mexico 60 60 55 Connecticut 66 65 64 New York 60 60 58 Delaware 67 63 60 North Carolina 65 61 59 DC 64 65 67 North Dakota 69 72 68 Florida 61 60 58 Ohio 64 63 60 Georgia 67 64 60 Oklahoma 62 61 59 Hawaii 64 63 59 Oregon 65 62 59 Idaho 66 63 63 Pennsylvania 62 62 60 Illinois 67 64 62 Rhode Island 64 63 62 Indiana 66 62 62 South Carolina 63 58 57 Iowa 69 69 69 South Dakota 71 71 67 Kansas 68 68 65 Tennessee 63 59 60 Kentucky 61 58 57 Texas 65 63 62 Louisiana 59 59 56 Utah 70 68 67 Maine 66 62 61 Vermont 68 67 65 Maryland 68 66 66 Virginia 66 67 64 Massachusetts 66 63 66 Washington 65 65 62 Michigan 66 58 59 West Virginia 54 54 52 Minnesota 73 68 68 Wisconsin 70 67 65 Mississippi 60 56 53 Wyoming 69 63 63 Missouri 67 62 62 USA (January) 65 63 61 Source: BLS https://www.bls.gov/lau/rdscnp16.htm. Bell and Blanchflower US and UK labour markets before and during the covid-19 crash R57

December 2007 and March 2020. Prime age men in the Figure 4a. UK monthly average weekly earnings pay US appear to have been especially hard hit in terms of growth, 2001–19 declining EPOPS. Prime-age female LFPRs ages 45–54 have higher EPOPS compared to pre-recession levels up £530 10 from 73.0 in December 2007 to 73.7 in March 2020 £520 8 from 76.1 to 76.2 although men aged 45–54 have seen £510 6 a fall from 85.9 to 84.8. Similarly, females aged 35–44 £500 4 £490 have seen a rise from 73.1 to 73.6 while men aged 35–44 2 have seen a fall from 88.7 to 87.9. £480 0

Real pay £470 The rise in EPOP in both countries suggests labour £460 -2 market recovery, albeit at a slower rate in the US. As £450 -4 Nominal pay growth the economy recovered people were drawn into the £440 -6 labour force. This additional slack was not reflected in £430 -8 increased unemployment rates, suggesting a discouraged worker effect. When conditions improve, those who are out of the labour force (OLF) rejoin the job market. The AWE at 2015 constant prices (LHS) question going forward will be what happens to those who lose their jobs in the crisis; what proportion will Single month growth (RHS) move to unemployment and what proportion will drop out of the labour force? Figure 4b. US weekly wages private sector production and Table 2 plots EPOP rates by US state for the years 2000, non-supervisory workers by month, 1965–2020 2008 and 2019. In every state except Massachusetts, the 2019 rate was below the rate in 2000. The 2019 $350 11 rate was below the 2008 rate in 44 states; constant in $340 10 three (Indiana, Maryland and Wyoming) and above it $330 9 in Tennessee (+0.9pp), Michigan (+0.9pp), DC (+2.4pp) $320 8 and Massachusetts (+2.9pp). Aggregate US employment $310 7 6 $300 grew, but the population grew faster. 5 $290 4 Wage growth $280 3 Figure 4a and figure 4b respectively present evidence on $270 2 nominal and real weekly pay growth in the UK and the $260 1 USA. We focus on weekly earnings to allow for variations $250 0 in hours worked. When times are good, overtime can boost earnings. At the start of 2019, pay growth began to accelerate. Among US private sector production and Average weekly earnings in constant 1982- non-supervisory workers (PNSW), which make up four- 1984 prices fifths of the private sector workforce, wage growth hit Weekly wage growth 4.0 per cent in January. That was the high point. Wage growth has declined ever since, falling to 2.5 per cent in March 2020. Ave