Show Transcript
The U.S. labour market has managed to rebound after big losses. Anthony Okolie speaks with Sri Thanabalasingam, Senior Economist, TD Bank Group, about the role of support programs and whether the job turnaround is sustainable.
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- Sri, when you look at the US May non-farm payroll numbers and the US weekly initial jobless claims numbers, they both seem to be telling a different story. What's your take?
- That's a good question, Anthony. So what we found were the weekly jobless claims numbers would have told us that employment would have continued to decline in May. And that's not what we saw with the Bureau of Labor Statistics data. We saw that the job market added 2.5 million jobs in May.
And the reason could be three-fold. One, a lot of people that were ineligible for unemployment insurance applied. And that's because of the generous benefits that was provided by the CARES Act, specifically the expansion of the unemployment insurance of $600 per week. So that's significant. A lot of people could have applied for it who weren't eligible.
And then we also saw covered claims not change so much as well. And this is because, or what could be a reason is that many people who were rehired did not apply for insurance in the first place. So we didn't really see a change there. So that could have been a possible reason, as well.
And finally, on the BLS side, a lot of household survey interviewers misclassified many of the respondents as being employed when they were unemployed due to a COVID-19 reason. So if you included those people as unemployed, you would have had the unemployment rate sitting at 16.3% instead of the reported 13.3% for May.
- And I want to touch on the CARES Act, because you also say in your report that the CARES Act income and support programs helped boost jobs in May. Can you explain how?
- Sure. So as I was saying, the CARES Act provided generous unemployment benefits. So you have the extra $600 per week for all who had lost their jobs due to the coronavirus. But then you also had these one-time checks that many households were receiving. So individuals that were making less than $75,000 were getting $1,200 in terms of one-time checks. And if you had a child, you would get another $500 on top per each child.
And what this was doing for many households was giving them more income than they would have received if they had kept their jobs. And so with their incomes continuing to stay afloat, when states started reopening their economies, they were able to go out and spend more. And with that increase in consumer demand, businesses needed to hire more workers.
- And I want to talk about one of those programs under the CARES Act, specifically the US Paycheck Protection Program, or PPP. Explain what is PPP, and why do you say that the impact of this program has been mixed?
- Sure so the PPP program was a program that was meant to keep businesses and employees tied together through the pandemic period, so that businesses would keep their workers on their payrolls. And it was designed to cover payroll costs for two months. And these would be in terms of loans, but they would be forgivable loans. As long as businesses spent 75% of those loans on payrolls and 25% on other operating expenses and they spent that money within eight weeks of receiving them, those loans would be completely forgivable.
Since then, the Senate has passed legislation to make it more flexible for businesses to comply with the forgivable criteria. So now they have to only spend 60% on payrolls. And they have up to 24 weeks to spend the rest of the money.
And why the evidence has been mixed, though, is there have been some studies that have taken more high frequency or higher frequency data to show that there hasn't been really a discernible impact on employment for firms of all sizes. But there are issues in that data where it may not cover the entire labor market.
So if you look at a more sectoral level or a more aggregate level, what we find is that for sectors that have had more payroll coverage through PPP, they hired more workers. So this is suggesting that PPP is having some impact. But because we're getting mixed results, that's why the jury might still be out whether the PPP is supporting the labor market so far.
- And do you see PPP supporting the labor market in the short term?
- In the short term, it definitely would seem like the PPP will be supporting the labor market. As I had mentioned, for businesses to qualify for loan forgiveness, they will need to spend that money and bring staffing back to full capacity, or else they would not be eligible for loan forgiveness. So definitely, the incentive is there for them to rehire their employees.
So in the short term at least, we will see some increase in employment due to PPP. But the pace of rehiring could take some time, because now they have up to 24 weeks to spend that money instead of the original eight weeks.
- What are the risks to the labor market if PPP is allowed to expire?
- The risk could be pretty significant. As these loans phase out or they finish off for many of these businesses, they do not necessarily have to keep hold of their workers. They can lay off these workers again if their revenues do not improve adequately. So economic conditions is a key factor here. And what we know right now, small business revenue is about 20% lower than where it was in January.
So it may take some time for revenues to recover. But by that time, these small businesses may have run out of those PPP loans to keep their payrolls at full capacity. And at that period, we might start to see some increased layoffs again.
So this is concerning, and Congress is taking this into account in their deliberations. And we're expecting to see some more support for small businesses in the coming months.
- Sri, thank you very much for your insights.
- Thank you, Anthony.
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- That's a good question, Anthony. So what we found were the weekly jobless claims numbers would have told us that employment would have continued to decline in May. And that's not what we saw with the Bureau of Labor Statistics data. We saw that the job market added 2.5 million jobs in May.
And the reason could be three-fold. One, a lot of people that were ineligible for unemployment insurance applied. And that's because of the generous benefits that was provided by the CARES Act, specifically the expansion of the unemployment insurance of $600 per week. So that's significant. A lot of people could have applied for it who weren't eligible.
And then we also saw covered claims not change so much as well. And this is because, or what could be a reason is that many people who were rehired did not apply for insurance in the first place. So we didn't really see a change there. So that could have been a possible reason, as well.
And finally, on the BLS side, a lot of household survey interviewers misclassified many of the respondents as being employed when they were unemployed due to a COVID-19 reason. So if you included those people as unemployed, you would have had the unemployment rate sitting at 16.3% instead of the reported 13.3% for May.
- And I want to touch on the CARES Act, because you also say in your report that the CARES Act income and support programs helped boost jobs in May. Can you explain how?
- Sure. So as I was saying, the CARES Act provided generous unemployment benefits. So you have the extra $600 per week for all who had lost their jobs due to the coronavirus. But then you also had these one-time checks that many households were receiving. So individuals that were making less than $75,000 were getting $1,200 in terms of one-time checks. And if you had a child, you would get another $500 on top per each child.
And what this was doing for many households was giving them more income than they would have received if they had kept their jobs. And so with their incomes continuing to stay afloat, when states started reopening their economies, they were able to go out and spend more. And with that increase in consumer demand, businesses needed to hire more workers.
- And I want to talk about one of those programs under the CARES Act, specifically the US Paycheck Protection Program, or PPP. Explain what is PPP, and why do you say that the impact of this program has been mixed?
- Sure so the PPP program was a program that was meant to keep businesses and employees tied together through the pandemic period, so that businesses would keep their workers on their payrolls. And it was designed to cover payroll costs for two months. And these would be in terms of loans, but they would be forgivable loans. As long as businesses spent 75% of those loans on payrolls and 25% on other operating expenses and they spent that money within eight weeks of receiving them, those loans would be completely forgivable.
Since then, the Senate has passed legislation to make it more flexible for businesses to comply with the forgivable criteria. So now they have to only spend 60% on payrolls. And they have up to 24 weeks to spend the rest of the money.
And why the evidence has been mixed, though, is there have been some studies that have taken more high frequency or higher frequency data to show that there hasn't been really a discernible impact on employment for firms of all sizes. But there are issues in that data where it may not cover the entire labor market.
So if you look at a more sectoral level or a more aggregate level, what we find is that for sectors that have had more payroll coverage through PPP, they hired more workers. So this is suggesting that PPP is having some impact. But because we're getting mixed results, that's why the jury might still be out whether the PPP is supporting the labor market so far.
- And do you see PPP supporting the labor market in the short term?
- In the short term, it definitely would seem like the PPP will be supporting the labor market. As I had mentioned, for businesses to qualify for loan forgiveness, they will need to spend that money and bring staffing back to full capacity, or else they would not be eligible for loan forgiveness. So definitely, the incentive is there for them to rehire their employees.
So in the short term at least, we will see some increase in employment due to PPP. But the pace of rehiring could take some time, because now they have up to 24 weeks to spend that money instead of the original eight weeks.
- What are the risks to the labor market if PPP is allowed to expire?
- The risk could be pretty significant. As these loans phase out or they finish off for many of these businesses, they do not necessarily have to keep hold of their workers. They can lay off these workers again if their revenues do not improve adequately. So economic conditions is a key factor here. And what we know right now, small business revenue is about 20% lower than where it was in January.
So it may take some time for revenues to recover. But by that time, these small businesses may have run out of those PPP loans to keep their payrolls at full capacity. And at that period, we might start to see some increased layoffs again.
So this is concerning, and Congress is taking this into account in their deliberations. And we're expecting to see some more support for small businesses in the coming months.
- Sri, thank you very much for your insights.
- Thank you, Anthony.
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