MNI POLICY: US at Risk of Rising Permanent Unemployment-SF Fed

Most U.S. layoffs this year have been temporary instead of more damaging permanent reductions, though that good news is at risk if the pandemic continues to hit the economy, San Francisco Fed researchers wrote in a paper published Monday.

"Temporary layoffs do not appear to be turning into permanent layoffs at an unusually high rate thus far," according to the paper by Erin Wolcott, Mitchell Ochse, Marianna Kudlyak and Noah Kouchekinia.

Temporary layoffs accounted for essentially all of the rise in unemployment in April to a record of 14.7%, the researchers found. The jobless rate has since tumbled to 6.9% in October, closing down the gap with the half-century low of 3.5% recorded last year.

Since April there has been a rise in the share of people who are unemployed for reasons that are more closely linked to long-run employment, one reason for caution about the strong progress so far, the report said.

FEAR OF SCARRING

Fed officials have voiced concern about labor market "scarring" that will frustrate its goal of restoring full employment over time, as people jobless for too long will lose skills and be much more difficult to re-hire.

"Unemployment due to other reasons has increased, especially due to permanent job loss, slowing the decline in the overall unemployment rate and raising a question about what this pattern means for the future," the authors wrote in the paper.

The odds of a temporary layoff turning into a permanent one was less than 5% outside of recessions, but hit 15% in the 2007-09 recession. There are "reasons to be cautious" about the rate of permanent layoffs if the current downturn becomes a more prolonged recession, the paper showed.

"The risk remains: if the current health and economic crisis becomes prolonged, a growing share of unemployment will consist of people in persistent categories of joblessness, thereby slowing the recovery."