Business revenues in New England and across the country plummeted with the onset of the COVID-19 pandemic, as entire sectors shut down or limited their operations to slow the spread of the disease, and consumers changed their behavior. The lost revenues have led to layoffs and pay cuts, especially for employees classified as nonessential. These job losses and wage reductions have also produced what New England Public Policy Center Senior Economist Osborne Jackson refers to as indirect effects on the labor market: reduced product demand from those workers who have lost their jobs or had their wages cut, which further reduces sales revenues and potentially leads to additional earnings losses.

In a new report for the Boston Fed’s Research department, Jackson examines the regional labor market effects of an economic shock. The analysis focuses on his predictions for layoffs and unemployment in New England and the rest of the country in the second quarter of 2020, when the COVID-19 pandemic took hold. Jackson’s projections are quite comparable to the official Bureau of Labor Statistics estimates. That is, the BLS numbers, once they are adjusted for likely measurement error, fall within Jackson’s range of predictions for best-case and moderate-case scenarios.

In forming his predictions, Jackson uses pre-pandemic employment data by occupation to identify the subpopulation most vulnerable to the economic shock from the coronavirus: nonessential workers who can’t do their jobs from home. In addition, he employs a conceptual framework that relates changes in a business’s revenue to changes in its labor costs, as well as changes in its profit and capital costs.

“This approach, which builds on the work of other recent analysis, should be helpful in estimating the regional labor market impact of future economic shocks,” Jackson writes in his report, “An Approach to Predicting Regional Labor Market Effects of Economic Shocks: The COVID-19 Pandemic in New England.”

Jackson’s moderate-case predictions of unemployment for the second quarter of 2020 are about 23 percent in the United States and 18 percent in New England. His best-case predictions are roughly 14 percent in the nation and 11 percent in the region. The BLS estimates for the U.S. unemployment rate are 19.5 percent for April 2020 and 16.4 percent for May 2020, after they have been adjusted for likely errors from some workers being misclassified as employed instead of unemployed. The adjusted U.S. numbers from the BLS, which acknowledges such errors, fall squarely between Jackson’s moderate-case and best-case projections. “Departments of labor in at least two New England states have similarly indicated that ‘baseline’ official estimates of state-level unemployment likely underestimate true unemployment,” Jackson writes.

Layoffs lead to more layoffs

Jackson’s predictions take into account the aforementioned direct and indirect effects of the COVID-19 pandemic on the labor market. His analysis also incorporates wage reductions, which a business may impose instead of laying off some workers. Indeed, the inclusion of pay cuts reduces the estimates of the unemployment rates for the country and the region by roughly 1 to 2 percentage points. In addition, Jackson looks at the offsetting effects of the $2.2 trillion federal Coronavirus Aid, Relief, and Economic Security Act on the pandemic’s labor market impact.

The predicted numbers rise when Jackson incorporates indirect effects of COVID-19 on the labor market. These indirect effects reflect the reduced product demand from workers with diminished earnings, leading to reduced sales revenues for businesses, which could affect the employment status of nonessential workers who are able to work from home. When the indirect effects are incorporated, along with wage cuts, Jackson’s predicted unemployment rate for the United States for the second quarter of 2020 jumps 3.5 percentage points, for an increase of 15.2 percent. For New England, the predicted unemployment rate rises 2.4 percentage points, or 13.3 percent.

How much job loss has the CARES Act prevented?

Jackson incorporates the effects of the CARES Act into his analysis as an increase in revenue generated from the goods and services produced and offered by directly affected workers. This rise in revenue would result from an increase in the demand for those goods and services from consumers and businesses due to the additional income they receive from the economic stimulus package. The additional revenue could reduce the number of layoffs and the size of wage reductions.When the impact of the CARES Act as well as indirect effects are included in Jackson’s analysis, the unemployment estimates for both the United States and New England are similar to the respective projections that don’t include the indirect effects or the CARES Act response. “This equivalence suggests that the size of the CARES Act policy response might approximately offset the labor market impact of indirect effects,” Jackson writes.

Read Jackson’s full report.

Osborne Jackson is a senior economist with the New England Public Policy Center in the Federal Reserve Bank of Boston's Research department. Full bio here.