Jobless rates are now climbing down the mountain in the U.S. and Canada, but descending, they say, is the riskiest part of the trip. And a big crevice is the large number of permanent layoffs, which risks slowing the decline in joblessness, curbing consumer spending, and straining household finances. Permanent job losses will also increase the economy’s vulnerability to future shocks, such as another wave of the coronavirus, while placing added stress on fiscal finances.
Although U.S. businesses have rehired half (52%) of the 22 million workers let go during the shutdowns, employment is still down 7.0% from February, worse than at the nadir of the Great Recession. Nearly 13 million people are still without work, almost double the pre-pandemic level. The majority of job losses are in food services, accommodation and entertainment, where many businesses are still closed (Chart 1). But no sector has been spared, with manufacturing, construction and business services also registering large job losses.
The easy phase of the recovery—the recalling of millions of workers on temporary layoff—is behind us. The next phase will be tougher, as tens of thousands of businesses have closed (according to Yelp) and many others face muted demand and continued restrictions. Consequently, permanent layoffs have risen by 2.5 million since February (Chart 2). (A permanent layoff is one that is deemed not temporary by the laid-off worker, with no expectation of recall.) Although the total (3.8 million) is less than the record-high set in the Great Recession (6.8 million), the recent run-up has been faster. It took all of 2008 for permanent layoffs to rise as much as in the past seven months. Permanent job losses spiked by more than half a million in June, and, after steadying in July, surged again in August, as rising virus cases depressed demand and delayed reopening plans for some businesses, resulting in a second round of layoffs. Though slowing in September, permanent unemployment could spike again amid recent layoff announcements in the airline and other industries and with infections rising in some colder parts of the country as activity shifts indoors.
Most workers facing permanent layoff won't stay unemployed forever, but many will remain jobless for extended periods. The number of persons out of a job for more than six months has risen by 1.3 million since February. Meantime, support for millions of UI claimants could end without another fiscal relief bill, including the $300 weekly federal top-up payment, and, after December 31, the 13-weeks of extended payments under a special emergency program.
While the U.S. jobless rate fell quickly from a post-war peak of 14.7% in April to 7.9% in September, the decline was greased by a stalling participation rate (Chart 3). Permanent layoffs account for 30% of total unemployment, well above February’s 22% though less than 2009’s 45% peak. Unless this group can quickly find a job (or stop looking for one), the decline in the jobless rate will slow, leaving it above pre-pandemic levels. Adding the 2.4 million increase in permanent unemployment to the 5.8 million total unemployed in February would suggest a "structural" jobless rate of 5.2% versus 3.5% before the virus. That’s at least a percentage point above the Fed’s view of the rate that can be sustained in the long run, all but ensuring many years of near-zero policy rates.
North of the border, Canada’s labour market has progressed faster than the U.S.’s, as the nation avoided a summer resurgence in the virus. By September, Canada had regained three-quarters (76%) of the initial 3.0 million job losses, paring the damage to -3.7% or about half the U.S. hit. However, reclaiming the remaining 720,000 lost jobs will be a tougher grind given new restrictions to contain a recent flare-up in infections. Unemployment, though falling to 1.8 million in September from a record-high 2.6 million in May, remains 1.1 million above pre-virus levels.
Canada's rapid jobs recovery reflects the large number of layoffs that were temporary, with the increase since February peaking at 1.1 million in April (seasonally adjusted) compared with just 85,900 in the Great Recession (Chart 4). But permanent layoffs were also substantial, with the increase since February cresting at 781,900 in August (seasonally adjusted), almost twice the run-up (407,100) in the last recession. While this is a proportionately larger rise than in the U.S., it has shrank to 435,300 in September, as most of the job gains last month came from the ranks of workers on permanent layoff. But this recent progress is now at risk, as rising COVID-19 infections have led to new restrictions and will likely reduce demand for consumable services in several major cities, including Toronto, Montreal, and Ottawa.
As the pandemic stretches into its eighth month, the rising duration of joblessness is concerning (Chart 5). The number of unemployed out of work for 27 weeks or more rose to 297,100 in September from 178,100 in February, and looks to surpass the level of the last recession.
In September, permanent layoffs accounted for 26% of the total unemployed (not seasonally adjusted) in Canada. While that's in line with 2019’s average, the situation could worsen given the upturn in virus cases. If the increase in permanent unemployment held steady, then "structural" unemployment in Canada could rise to almost 1.6 million, or a 7.7% rate versus 5.6% in February. This would further tie the Bank of Canada’s hands in keeping rates lower for longer.
The Bottom Line: To the extent that large numbers of permanent layoffs reflect business failures, ongoing restrictions on economic activity, and weaker demand, a repeat of the “jobless recovery” of the last recession is a distinct possibility. Added pressure could stem from the increased use of automation as the consumable services sector tries to cope with the pandemic. Many unemployed workers in hard-hit industries will need to learn new skills and find jobs elsewhere. The most vulnerable workers are at risk of leaving the workforce for extended periods, damaging the economy’s short- and long-run prospects. Governments may need to target support programs to help these workers adjust to the new environment.