Why Were the Unemployment Numbers So Messed Up?

There was quite a Friday surprise from the Bureau of Labor Statistics, which said the unemployment rate dropped from 14.7% in April to 13.3% in May.

But economists have called that figure into question for a variety of reasons — not the least of which was a "misclassification error" by the BLS itself.

"There is good reason to be skeptical of [the Trump] administration's latest report," said Robert J. Shapiro, chair of the consultancy Sonecon and a fellow at Georgetown University, in a blog post Friday for Washington Monthly.

The BLS said 20.9 million Americans were unemployed in May. It attributed the drop from April to employers generating 2.5 million jobs in May as some states gave the green light for limited economic activity.

"But it's not that simple," Shapiro explained.

Behind the Numbers

The jobless rate is determined by the results of a week-long survey of businesses and households; the latest poll took place during the week that ended May 16.

That same week, BLS also reported that nearly 30 million Americans collected unemployment benefits.

"That's a gap of 8,980,415 people, enough to raise the May jobless rate 5.7 percentage points to 19.0% and much closer to economists' expectations," Shapiro explained.

What Happened?

The BLS counted anyone whose employers said they were being paid "even if they were not actually at their jobs," Shapiro points out.

In addition, the BLS considers furloughed workers to be "unemployed on temporary layoff," he adds; however, if the BLS expects these individuals to return to their prior jobs, it does not include them in the tally of unemployed workers.

A recent University of Chicago study, though, estimates that 42% of workers furloughed due to the pandemic will not get their jobs back, Shapiro points out. Plus, just 30% of those laid off are expected to get new jobs later in 2019.

"With 30 million people receiving unemployment benefits, that analysis is more consistent with unemployment at 19.0% today than 13.3%," explained the former Under Secretary of Commerce.

Continuing Jobless Claims

According to JPMorgan Chief Global Strategist David Kelly, "the measured unemployment rate still likely sharply underestimates the true unemployment rate (as it did in April)."

The underestimation is tied to the fact that "the rolls of the unemployed exclude millions who are ready, willing and able to work but are not currently looking for a job because of the pandemic — or who are being incorrectly classified as being employed but not at work when they are, in reality, unemployed," Kelly added in a report Monday.

The change in continued unemployment claims "should have been a better measure of net employment changes, since they exclude claims filed but denied and net out those hired or rehired from the rolls of the unemployed," he said.

The continuing claims for unemployment benefits grew by 2.8 million between the April and May survey weeks, he adds, to 14.2 million people.

'Misclassification' by BLS

BLS, which is part of the Labor Department, acknowledged Friday that counting furloughed workers as unemployed would have increased the official jobless rate to 16.3%, an improvement from 19.7% in April.

Its note explained that if this "misclassification error" had not been made, the "overall unemployment rate would have been about 3 percentage points higher than reported."

There also was "a large number of workers who were classified as employed but absent from work," according to the BLS.

"As was the case in March and April, household survey interviewers were instructed to classify employed persons absent from work due to coronavirus-related business closures as unemployed on temporary layoff," it explained.

The group added, though, that "it is apparent that not all such workers were so classified. BLS and the Census Bureau are investigating why this misclassification error continues to occur and are taking additional steps to address the issue."

Why the Discrepancy?

According to Shapiro, the 9 million-person "discrepancy" should be seen in the broader context of how BLS classifies those in the labor force.

"If you are out of work but didn't look for a job over the previous four weeks, or couldn't work for family reasons such as caring for children who are no longer in school, BLS says you are out of the labor force," he explained. "If you're not in the labor force, you're not unemployed."

In May 2019, BLS said 96.2 million Americans weren't in the official labor force. As of May 2020, that figure stands at 102.1 million, which is a change of 5.9 million.

This "could explain nearly two-thirds of the 9 million-person gap between those receiving unemployment benefits and those counted as unemployed," the economist explained.

— Check out CBO: U.S. Economy Won't Recover Pandemic Losses Until 2030 on ThinkAdvisor.