Labor Market Shortages

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Job openings are everywhere. One cannot drive down a street without seeing “Help Wanted” signs in front of most businesses. Anyone who goes to a bar, restaurant or other commercial establishment is likely to encounter slow, short-staffed service.

These labor shortages are a unique feature of the COVID-19 recession. During a typical recession, the situation is the opposite – there is a surplus of workers, with more people looking for jobs than there are jobs available, resulting in unemployment. Thus, the labor market during the COVID-19 recession and recovery is unique.

In fact, there are currently 9.3 million job openings across the United States, a record high number. If all these job openings were filled, total employment in the economy would exceed its pre-COVID high. However, there currently are seven million fewer jobs in the economy than prior to COVID, with only 58% of the U.S. population currently employed. The “employment-to-population ratio,” is currently at its lowest level since the early 1980s. Thus, there is a record number of job openings, but a 40-year low in the percentage of the population that is employed. What explains this?

A likely explanation is the enhanced unemployment benefit. Pre-COVID, the average weekly unemployment benefit was approximately $400. The first COVID relief bill, signed into law in March 2020, added an additional $600 per week to this benefit, more than doubling it. This means that an unemployed worker collected $4,000 per month in unemployment benefits during this time. Currently, an additional $300 is added to the weekly unemployment benefit, which still represents a 75% increase compared to the average benefit before COVID.

Offering this enhanced benefit during the worst part of COVID might have made sense, given the severity and suddenness of the onset of the pandemic, and the layoffs that ensued. The average weekly wage in the U.S. is approximately $1,000. Thus, the $600 enhancement brought the average unemployment benefit up to the average weekly wage so that the typical unemployed worker was made whole during this time.

Given how antiquated the unemployment insurance software is, it was impossible to tune this enhancement more finely, compared to just giving everyone an additional $600/week. Thus, some workers made more on unemployment than they would working. A person working 40 hours a week works 160 hours a month; thus, collecting $4,000/month in enhanced benefits is equivalent to making $25/hr. A worker, obviously, would turn down any job that paid less than this! The current $300/week enhancement is equivalent to making $17.50/hr. Any employer offering less than that is going to have a hard time attracting workers, which likely explains the labor market shortages. Employers could raise wages to offset this, but many are not able to do so after being shuttered for 16 months.

The enhanced unemployment benefits are scheduled to expire in September. If they are not extended, I expect an increase in the employment-to-population ratio and a reduction in the labor shortages.

 

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