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April 18, 2021

Euler Hermes Analysis: “Hidden unemployment” covers the real magnitude of the crisis on the employment market

  • 30 million workers going missing from official unemployment statistics
  • $14 billion of monthly consumption is lost
  • “Social spending” will be particularly affected

An unprecedented rise in the inactive population since February has seen more than 30 million workers going missing from official unemployment statistics across selected OECD and Emerging Market economies.

Because of this ”hidden unemployment”, the true monthly hit to household consumption could be underestimated by USD14bn. Only the tip of the iceberg: Up until now labor markets across many countries have proven much more resilient than economic activity – at least on the surface that is.  Based on the long-run relation between GDP growth and changes in the unemployment rate, the true Covid-19-related labor market impact in some countries should be much more dire than what headline indicators suggest.

According to our calculations, the number of unemployed that have gone missing from official statistics since February 2020 ranges from 2.4 million across France, Italy, Spain and Ireland and 5.5 million in the U.S. all the way to 13 million in Brazil. The sharp drop in the active population is without recent precedent. Beyond discouraged-worker effects, this sharp rise in inactivity can to a large extent be explained by special features associated with the Covid-19 recession, including severe restrictions on movement, the unavailability of government services as well as jobseekers kept from actively looking for work due to caring responsibilities for children amid widespread school closures. We recalculate unemployment rates by adding back changes in the inactive population since February both to the numerator (the unemployed) and to the denominator (the active population). We find that “hidden unemployment” across major developed economies would raise the unemployment rate by around 6pp in Ireland and Spain, 3pp in the U.S. and about 1pp in Italy, Canada and Portugal.

”In Romania, the official unemployment rate reached a maximum of 5.3% during July-August and, although it decreased slightly, it remained at over 5% in September. In reality, however, the actual number of unemployed could be higher, given the working-age population, but which does not meet the conditions of the “unemployed” category and is not included in the statistics. Closely related to this indicator, consumption, through the evolution of retail sales, remains at 9 months above the level of September 2019 but slows its growth rate to below 4% after reaching a post-crisis peak in July (INSEE, series adjusted according to the number of working days and seasonality).

However, the encouraging performance of retail trade (excluding cars and motorcycles) in the first 9 months of the year, up 1.7%, suggests a recovery after the drop in Q2. We expect that despite the spread of the pandemic, chosen constructions (and demand-related segments) to remain at a high level for the whole year, the proximity of the elections being able to maintain these areas and the current level of unemployment at a reasonable level.

Also, the expected budgetary adjustment measures are unlikely to occur this year. The timing and magnitude of the implementation will increasingly depend on the evolution of the pandemic risk that will dictate the pace of economic recovery.”, said Mihai Chipirliu, CFARisk Director Romania.

 The rise in Emerging Market unemployment rates largely understates the damage Covid-19 has done to the labor market: 13mn people have exited the labor force in Brazil since February, 5.2mn in South Africa, 1.8mn in Chile, 1.6mn in Colombia, and 1.2mn in Turkey. This leads to unemployment being underestimated by 10.4pp in Brazil, 16.7pp in South Africa, 15.8pp in Chile, 5.3pp in Colombia and 3.2pp in Turkey. “Hidden unemployment” tends to be a bigger issue in most Emerging Markets for two reasons: (i) weaker job protection and fewer ad hoc employment support during the crisis compared to developed economies and (ii) a greater tendency to shift to towards informal work, which does not appear in official statistics.

What does this mean for companies and consumers? Recovery prospects for the global consumer are likely to be overestimated. Indeed we estimate that for each additional month that the hidden unemployed remain out of the labor force, global private consumption incurs a “hidden” loss of USD14bn (0.3% of monthly GDP) due to foregone “social spending” and spending on sectors that typically suffer during a downturn. The longer the newly inactive population remains out of the labor force, the stronger the “hidden” hit to consumption sectors that are particularly sensitive to a Covid-19 recession.

Although we expect the gradual recovery of the economy to bring some of the inactive population back to the labor market, which will lead to higher official unemployment rates, it is possible that at the same time new periods of lock-down will mark a new increase in “hidden unemployment” in some sectors.

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