Unemployment will rise. But it won’t tell the whole coronavirus story.

By Ernie Tedeschi

The coronavirus shock will lead to a dramatic spike in the unemployment rate. But even this surge could understate the true labor market damage from the virus. This is because:

1. the emergency unemployment insurance benefits passed as part of the CARES Act temporarily relaxed the eligibility requirement that workers be actively looking for work; this will cause at least some of the labor supply response to be along the nonparticipation margin rather than the unemployment margin; and,
2. some of the labor market response will be among workers who are still working but are involuntarily part-time. In the latter case, even looking at workers part-time for economic reasons may still prove insufficient, as households reducing hours due to coronavirus-related issues may cite a reason besides the economy for reduced hours, such as health or family care.

I introduce a broad labor market underutilization metric I call “NPOP” to better capture the future effects of the virus shock. NPOP incorporates any American not working full-time or voluntarily part-time.

Former Fed Chair Janet Yellen once said that if she had to pick only one indicator of the labor market, “the unemployment rate is probably as good a one as I could find.”

The unemployment rate — the share people with or looking for a job who are out of work — is indeed an economic metric par excellence. It mirrors much of the behavior we see other datasets; in economic jargon, it captures a lot of cyclical variation. And it does this while also being reasonably meaningful in its own right to non-economists.

No one doubts at this point that the unemployment rate will ultimately spike sharply thanks to the coronavirus. It may not start surging until the April data released next month, but some independent forecasts have it eventually exceeding the 26% peak reached during the Great Depression.

But even when it does rise, the unique circumstance of the coronavirus may prevent the unemployment rate from capturing the full breadth of the economic damage.

Unemployment misses people who drop out of the labor force, and workers who don’t have the hours they want.