The unemployment rate doesn't reflect how bad the U.S. job market really is, as millions who have dropped out of the workforce have gone uncounted, according to Federal Reserve Chairman Jerome Powell.
While the published unemployment rate has dropped to less than half of its pandemic peak of 14.8% in April 2020—6.3% as of January—the numbers are misleadingly low, Powell said in a speech via webcast for the Economic Club of New York on Wednesday. The true figure is probably close to 10%, he said—in part because the pandemic has led to the largest 12-month decline in labor force participation since at least 1948.
"Unemployment rates during COVID have dramatically understated the deterioration in the labor market," Powell said in remarks released by the Federal Reserve. "Fear of the virus and the disappearance of employment opportunities in the sectors most affected by it, such as restaurants, hotels, and entertainment venues, have led many to withdraw from the workforce."
Before the onset of the pandemic last year, the unemployment rate stood at 3.5%, the lowest in half a century. But global shutdowns meant to stem the spread of COVID-19 crushed the economy, and even now a tenuous job market is undermining the economic recovery. Despite the lack of meaningful job growth, investors are pushing stock markets to records and consumers are growing more optimistic about future spending, betting that between vaccines and the potential for new stimulus checks, a true recovery is in sight.
In January, nearly 5 million people said the pandemic prevented them from looking for work. What’s more, many unemployed individuals have been misclassified as employed since the pandemic began. Taken together, the real unemployment rate is close to that 10%, Powell said.
"Unfortunately, even those grim statistics understate the decline in labor market conditions for the most economically vulnerable Americans," Powell said. Many more low-income workers have lost their jobs than higher-wage employees, and while employment for the latter has improved in recent months, it hasn't changed much for the former.
The unemployment rates for Black and Hispanic people have risen significantly more than for Whites since February 2020, further widening economic disparities.
Recovery will depend upon controlling the spread of the virus, including continuing vaccinations, he said.