Unemployment will be higher in the US than in other advanced economies through 2021, Goldman says

• The US labor market will stage a slower recovery than most other advanced economies until at least 2021, Goldman Sachs said Tuesday.
• The bank forecasts the nation’s unemployment rate sinking to 12% by the end of the year before hitting 8% at the end of 2021. The UK, Japan, Germany, and Australia are set to keep their rates below 8% throughout next year, Goldman said.
• The US’s lack of stricter job-preservation policies will likely turn many temporary layoffs permanent as employee-employer relationships deteriorate, according to the bank.
• An extension of the CARES Act’s unemployment insurance support could incentivize low-wage workers to stay out of the labor market well into the economic recovery, Goldman added.
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Lasting fallout in the US labor market will keep the unemployment rate higher than in peer countries for more than a year, Goldman Sachs economists said in a Tuesday note.

The bank expects the US unemployment rate to reach 12% by the end of the year before sliding to 8% alongside Canada by the end of 2021. The UK, Japan, Germany, and Australia will enjoy a far less pronounced labor-market hit, Goldman said, and end next year with their rates well below 8%.

The US sits in a joblessness crisis partially stoked by policy side effects, according to the bank. While European economies turned to job-preservation policies through the initial coronavirus outbreak, the US turned away from such strategies and expanded unemployment benefits. Millions of Americans have since lost their jobs, and if companies can’t rehire workers temporarily laid off, those seeking jobs will likely overwhelm the market.

“This could be an advantage if the post-virus economy looks very different from the pre-virus economy and large-scale job reallocation is therefore needed. But it will be a disadvantage if structural changes are more limited,” Jan Hatzius, chief economist at Goldman, wrote with senior economist Daan Struyven.

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The US’s recent unemployment insurance expansion also stands to keep the rate from near-term recovery. The CARES Act component “has been instrumental in stabilizing US household income so far,” Goldman said, but it’s also given low-paid workers less incentive to take back their previous jobs. If the benefit expansion is extended beyond its July 31 deadline, the incentive for such workers to return to the labor market will fade.

Goldman’s diagnosis arrives as the second quarter is poised to show another spike in the unemployment rate. April’s jobs report pushed the metric to 14.7% and revealed 20.5 million nonfarm payrolls lost. While weekly jobless claims have declined through May, economists expect unemployment to peak in the current quarter at roughly 25%.

Goldman holds a similar forecast and sees the rate remaining well above 20% through the third quarter.

Even if the US labor market will face a slower-than-expected rebound, the firm doesn’t view the unemployment crisis as impeding the country’s economic recovery. The country’s focus on propping up household income will stabilize disposable income and aid consumer spending through the summer, the team wrote.

Goldman also forecasts a partial extension to employment benefits, with only half of the $600 per week expansion staying in effect past the July 31 deadline. The policy shift “will limit both the incentive effects and the income hit without fully resolving either issue,” the bank said.