The Unemployment Paradox
The jobs report for August reported a wide gap between expected new jobs and the real numbers. The consensus forecast projected 733,000 new jobs, while the Labor Department reported only 235,000. However, this report doesn’t tell the whole story behind the current labor market. In fact, employers are desperate for workers, and are offering increased pay and benefits, but workers are still hesitant about returning to the workforce.
Figure 1. Labor Force Participation Rate, 1975‐2021. Graph from St. Louis Federal Reserve (September 8, 2021)
COVID displaced and shifted millions of jobs, but even as we recover from the pandemic, job participation rate remains at a 50-year low. Covid’s Delta variant doesn’t make things easier as the economy’s reopening has slowed. The economic opening that dominated the last few months has clearly slowed as people are traveling and eating out less. Liberation summer has been a disappointment (1)!
However, the issue isn’t a lack of job openings. The National Federation of Independent Business conducted a survey in August 2021 of 10,000 small-business owners. They found that 49% of owners could not fill job openings in the month. In fact, the number of unfilled job openings has remained far above the 48-year historical average of 22% (2).
Figure 2. Percentage of small business with at least 1 unfilled opening, Jan 2010 – August 2021. Graph from NFIB, NFIB Small Business Jobs Report (August 2021)
Furthermore, wages are on the rise as well. Average hourly earnings rose 17 cents in the month, or a 6.9% annual rate (3). Jobs are available, with seemingly great benefits, but aren’t being filled. So what explains this paradox?
The federal government boosted unemployment benefits during the pandemic, most recently by $300 a week, for as long as 18 months. The added incentive to stay at home and away from work, is set to soon expire nationwide. As extended benefits end, workers should naturally be drawn back into the labor force to replace the lost income.
Many states have already ended the financial enhancement months ago, but have not seen the growth in payrolls as expected. In fact, states that ended enhanced benefits have seen a lower increase in nonfarm payrolls from April to July than states that maintained benefits.
Nonetheless, economist caution against concluding from this data that unemployment benefits are not correlated with labor market participation. With such intense federal stimulus over the last 18 months, including direct payments and other benefits, they say it may be too early to detect such effects. In addition, the added variable of the Delta variant’s impact on the economy should not be ignored.
Economists at Goldman Sachs analyzed this data over the last few months and have released the following conclusions:
“We find no evidence of a boost to labor force participation – in fact, the estimated effect is negative, but statistically insignificant. This suggests that many workers are staying out for non-financial reasons such as concern about Covid and may be slow to return to the labor force even after UI benefits end” (4).
“The state-level July payrolls figures do not show a statistically meaningful difference in job growth between states that ended UI benefits early and states that didn’t. But the more detailed individual-level data from the household survey of the employment report show clear evidence that benefit expiration increased the rate at which unemployed works became employed” (5).
“Our estimated effect is economically and statistically significant. It implies that if benefits had expired nationwide, July job growth would have been 400k higher at over 1.3mn. In fact, this might be a conservative estimate of the monthly job boost from benefit expiration because most states didn’t end benefits until later in the month” (6).
Of course, other factors play a role in the record low labor-force participation rate. Family responsibilities, closures, relocation, retirement, and fear of COVID-19 all play role in keeping workers home.
As the economy reopened this past spring and summer, a burst of demand was created for low-wage workers at restaurants, sporting events, transportation centers, and other leisure and hospitality businesses. The businesses that operate within this segment of the economy provide jobs that would pay workers less than what they would collect through the enhanced federal unemployment benefits. Jobs in the hospitality sector grew 6.52% from April to July in states that kept unemployment benefits and 4.76% in states that ended them. More likely than not, this report reflects states with boosted benefits, such as California and Massachusetts, reopening more slowly than those that have already ended benefits. As a result, they are likely to see a greater growth now as compared to states where businesses were less restricted during the pandemic.
Figure 3. Change in non-farm payrolls April to July 2021. Graph from the WSJ Journal, States That Cut Unemployment Benefits Saw Limited Impact on Job Growth (WSJ, September 1, 2021)
The nationwide expiration of the enhanced benefits in September will offer a much larger case study with more definitive data. Throughout September, over 11 million workers will lose federal unemployment benefits. In the 25 states that have already ended benefits, about 3.5 million lost those benefits. Therefore, it seems more likely the data will soon point towards a positive correlation between boosted unemployment benefits and low labor force participation rate.
1, 3) The WSJ, September 3, 2021
2) NFIB Jobs Report, August 2021
4, 5, 6) Goldman Sachs Investment Research, August 21, 2021 7) The WSJ, September 1, 2021