Reasons behind the numbers of unemployment claims
A big group of people in all industries were laid off due to the inactive economy after the pandemic. As countries are mostly locked down, people do not travel around the globe, creating nearly zero demand for travel services. Hence, several world-renowned airline companies, including United Airlines, British Airways, and American Airlines, have all announced to have cut up more than 5,000 jobs. For instance, up to 20% of United Airline employees were on voluntary leave.
The retail industry and food industry are no better, the former having surpassed 2.1 million turnovers due to declining sales and the latter being limited to providing only delivery and takeaway services, eventually leading to 5.5 million job losses. American restaurant chain Famous Dave has sacked about 85% of its staff, which is approximately 2,700 workers. All these unemployed workers have filled in job loss claims. According to April statistics, there were up to 6.6 million filed claims alone in that month. With the number continuing to rise till today, it has reached up to 40.7 million. These massive job losses in the US means that people have lost their stream of income, leading them to reduce spending out of insecurity about their future. The US’s consumptions of goods and services and investments to companies will decrease, creating a shift of aggregate demand (AD2) to the left. The more AD2 shifts left, the more the gross domestic product (GDP) will drop. It is considered as a distinctive trait of the prelude to a great depression.
Possible Consequences
It is undesirable to see the US unemployment rate has nearly tripled from March to April, and despite a slight fall from April to now, it is still at a high value. As people lose jobs, their stream of income is cut. This causes them to save money, implying that they have a lower purchasing power on goods and services and hence a lower standard of living. In the long term, if individuals continue to be out of work, some of the skills from jobs might be lost and this can diminish the possibility of them finding a job in the future. Worse still, it may even further cause them to have mental problems and health problems. In most cases, for example, people tend to suffer from insomnia when becoming constantly panicky and anxious about having no job.
As for the US government, their financial burden will increase. Not only do they have to reduce the salary tax of citizens, but they also need to increase their spending to provide unemployment benefits especially for those who have filed job loss claims and are in a bad living condition. The US considers printing out more US dollars to save the economy will further increase their country’s debt-to-GDP ratio. According to Peter G. Peterson Foundation, the US’s debt-to-GDP ratio is 82% in 2020, which is a rise from 79% in 2019. Hence, this expansionary fiscal policy is still a constraint.
The decline in the consumption of goods and services has constructed a chain effect that brings workers in the goods and services industry either a salary cut or even zero income when they are laid off. The society eventually goes through a great recession with a diminishing gross domestic product (GDP). Also, crime rates are likely to rise because people don't have social stability.
As the US government is already aware of this serious issue, they have quickly taken action on resuming quantitative easing in solving the issue. By adopting the expansionary monetary policy, they have printed $31 aiming that this injection of money to the economy could ease the current situation. The money is used to buy bonds and funds and also to subsidise companies to retain their employee’s positions in avoiding more job losses.
The effect of using different policies remains doubtful.
As US central banks continuously print USD and buy more public bonds, the money supply will indeed increase its availability in the economy. According to the diagram below, when money supply shifts to the right (MS1 —> MS2), the interest rate also falls and this means the cost of borrowing will be lowered. This is an opportunity for people to borrow more money from banks but less interest in it. They will spend this money either on the consumption of goods and services or on investments. These inclinations of customer and investment spending lift the whole economy back to its normal state with an AD shift to the right (AD3).
However, statistics today proved it wrong. According to trading economics, unemployment kept rising nearly 10% from the start of 2020 till may. There were 2 main reasons why AD3 was not able to shift right till AD1. First of all, COVID-19 had threatened companies and led people to be unemployed. As individuals have no more stream of income, they would only use their savings on day-to-day necessities. At this point, central banks are not willing to lower their interest rate avoiding the public not saving money in their banks. It is shown that only the FED wants to lower interest rates but commercial banks did not reduce their interest rates. This is ineffective to the goal of boosting investments and consumption of goods and services in the economy. Secondly, COVID-19 had consistently blasted the number of people infected. Even if interest rates decreased, which means a lower cost of borrowing, consumers' future prospects are not optimistic and firms expect future profit to drop. These will discourage them from not borrowing and consuming or investing in anything. Thus, consumption and investment will not escalate. Hence, this expansionary monetary policy endorsement is ineffective in pushing up the aggregate demand back to its normal position as a means to resolve the upcoming recession in the US.