As states across the country impose restrictions on business operations and confine consumers to their homes in order to fight the spread of the novel coronavirus (COVID-19), many firms have been (and will be) forced to make difficult decisions regarding their ability to retain workers. In some cases, employees are fully laid off, while in others they have their hours and/or pay cut involuntarily. This has an impact not just on the specific workers who lose their job or full-time status but the broader economy as well, with consumer demand falling and companies scaling back their activities to match a diminished workforce. For the accounts receivable management (ARM) industry, collectors must be cognizant of consumers’ uncertain situations and balance their financial health with repayment.
Rising unemployment and underemployment are typical in an economic downturn – for example, the headline employment rate increased from 4.4% in May 2007 to 10% in October 2009, the height of the Great Recession. The difference in our current situation is the sheer scale of job losses over a relatively short period, suggesting that this recession could run deeper than those that came before without swift and decisive governmental intervention. According to the most recent data released by the Bureau of Labor Statistics (BLS), the unemployment rate rose from 3.5% percent in February to 4.4% in March. This change of nearly a percentage point – around 1.4 million newly unemployed persons – constitutes the largest monthly percent increase since January 1975. Meanwhile, the number of people employed part-time for economic reasons – who’d prefer a full-time job but either had their hours cut or couldn’t find one – increased by 34.5%, the single largest monthly increase since BLS began tracking the metric in 1955.
These figures don’t quite capture the severity of the pandemic’s impact on the labor market in March, however. This is because the survey upon the which they are based covers the week of 8th to the 14th, which is before many states began to issue business closure orders. In order to gain a greater understanding of job losses in the latter half of March, Kaulkin Ginsberg examined weekly initial unemployment benefit filings as reported by the Department of Labor (DOL), which can be used as a proxy for layoffs and other job separations. The graph below captures this data since the DOL first began collecting it in 1967, illustrating the unprecedented nature of the latest filing numbers.
The week of March 21, 3.3 million people filed an initial claim, a nearly 11-fold increase from the previous week’s total of 282 thousand. Over 6.6 million initial claims were filed the week of March 28, leading to a two-week cumulative total of almost 10 million. The week of April 4, another 6.6 million people filed for unemployment benefits for the first time, bringing the three-week cumulative total to 16.5 million – roughly 10% of the total labor force. For context, the largest number of claims filed in a single week before March 21 was 695,000 in 1985. These data indicate that workers are losing their jobs at a much quicker rate than in past recessions, which could heavily strain state unemployment programs struggling to process large amounts of applicants at once.
Two of the biggest questions arising from this situation are: how high will unemployment go, and for how long will the labor market remain weak? The answer to the first question is murky. First, what little data we have right now is lagged, for the most part – as mentioned earlier, BLS’s unemployment data reflects the labor market as it was on March 14. Assuming everyone who filed for unemployment benefits in the past three weeks remain unemployed, the actual unemployment rate at the beginning of April should be around 14.5%. This figure is much higher than the peak during the Great Recession. Going forward, Goldman Sachs forecasts a peak of 15% unemployment later in the year, while the St. Louis Federal Reserve cautions that, in the absolute worst case, unemployment could top out an unprecedented 31.2%. Of course, these projections are in constant flux as economic data updates and public health conditions shift.
The answer to the second question is difficult to predict as well. This recession is unique in that, unlike previous recessions, it was primarily caused by a public health crisis rather than underlying economic conditions or a financial crisis. It is possible, then, that once the public health crisis is resolved firms may simply resume full operations and hire back those they laid off. However, there are complicating factors.
For one, some businesses simply won’t survive the quarantine period, even if they qualify for government aid. Secondly, most firms will likely restart operations gradually, meaning some former employees could have to wait months before even getting a sniff at their old job. Finally, consumers may be less willing to spend their money even after stay-at-home orders are lifted, preferring instead to pay off accumulated expenses or save money for the next crisis. This lack of demand could induce some businesses to avoid restoring their workforce to pre-COVID-19 levels.
The bottom line is that unemployment levels in the U.S. will be heightened for the foreseeable future. Furthermore, many consumers who remain employed will likely experience anxiety about their own jobs, and whether they’ll be laid off tomorrow or the day after that. For ARM companies, it will be critical to accommodate consumers’ circumstances, help them develop a payment plan that works best for their financial health, and point them towards available resources (such as those listed on the Consumer Financial Protection Bureau’s website). As the intermediary between consumers and their creditors, collectors are well-positioned to support the financial wellbeing of those who are most vulnerable. As such, the ARM industry should see this situation as an opportunity to both help people and repudiate its negative reputation in the public eye.