Fed Report Says Coronavirus Shock Has Hit Low-Wage Workers Hardest
The Federal Reserve said severe disruptions in the U.S. labor market related to the coronavirus pandemic were hitting workers with lower earnings, including minorities, especially hard.
Employment had fallen nearly 35% from February to mid-May for workers who were previously earning wages in the bottom fourth of wage earners, the central bank said Friday in its semiannual report to Congress. Higher-wage earners, by contrast, had seen employment fall by 5% to 15%.
Because lower-wage earners are disproportionately African-American and Hispanic, unemployment has risen more sharply for those groups.
“The path ahead is extraordinarily uncertain,” the report said. “The pace of recovery will ultimately depend on the evolution of the Covid-19 outbreak in the United States and abroad and the measures undertaken to contain it,” the Fed said, referring to the disease caused by the virus.
Fed Chairman Jerome Powell said Wednesday, after the Fed’s policy meeting this week, that the central bank was preparing additional ways to support the economy after slashing interest rates to zero and purchasing trillions of dollars of government debt to improve financial market functioning. Officials this week projected they would hold rates near zero through 2022.
Mr. Powell is scheduled to deliver the report and testify on Capitol Hill next Tuesday and Wednesday.
The report said if economic activity remained weak due to virus-related disruptions, including because consumers aren’t confident to resume previous spending patterns even as states and counties lift stay-at-home orders, more businesses could fail or resume operations at a diminished scale, leading more temporary layoffs to become permanent.
The report cited data from Homebase, a provider of software that helps small businesses hire, schedule and manage hourly workers, which showed between 30% and 40% of business establishments have gone inactive between Feb. 15 and May 30 in sectors deeply affected by social distancing. Separate figures from Womply, a software and business-services provider, reveal spending at small restaurants had fallen 80% from a year earlier in early April and was still down 50% in early June.
“Taken together, these data suggest considerable risk of failure for a large number of small businesses,” the report said.
Even though overall unemployment declined in May, the number of unemployed workers who had been permanently laid off rose by roughly 300,000 from April.
“As lower-paid workers are disproportionately employed by small businesses — which typically have fewer financial resources than larger firms — they may be at heightened risk of seeing their former employers shut down and hence experiencing the scarring effects of permanent separations,” the report said.
The Fed report said other data suggest employers, after adding 2.5 million workers in May, had continued to increase employment since a Labor Department’s midmonth survey. “Payroll employment will likely move up again in June, albeit from what remains a very low level,” the report said.
The report said many workers had left the labor force altogether due to the pandemic, because of difficulty holding jobs or finding work during periods of mandated business closures, which means the official unemployment rate may not fully capture the extent of labor-market disruptions.
“The distinction between being unemployed and out of the labor force likely has become especially blurred,” the report said.
The Labor Department reported last week the unemployment rate fell to 13.3% in May from 14.7% in April, but that possible misclassification issues meant the unemployment rate may have been closer to 16.4% in May and 19.5% in April. The share of Americans with a job fell to 51.3% in April from 61.1% in February. It stood at 52.8% last month.
The Fed said the fallout from the pandemic risked putting strains on banks and other financial institutions, which entered the crisis in a strong capital position thanks to overhauls imposed following the 2008 financial crisis.
The report said vulnerabilities from non-depository financial institutions have amplified some of the economic strains from the pandemic. “Accordingly, financial-sector vulnerabilities are expected to be significant in the near term,” it said. “The strains on household and business balance sheets from the economic and financial shocks since March will likely create persistent fragilities.”
Source: Dow Jones