The Unemployment Gap
Dear Rich Lifer,
In economics, market clearing is the process by which the supply of something that is traded is equal to the demand so that there is no leftover supply.
In other words, it should be close to impossible for an unfulfilled demand of something to exist while there is an ongoing surplus of that same thing.
However, it looks like we are witnessing the impossible right now when it comes to the jobs market: there are a plethora of open job positions, but millions are unemployed.
According to the most recent Job Openings and Labor Turnover report from July 7, there were over 9.2 million job openings in May. Meanwhile, the Bureau of Labor Statistics reported that the unemployment rate for June was 5.9% or 9.5 million people.
The good news is nonfarm payrolls are 15.6 million about April 2020 lows; the bad news is we are still 6.8 million below pre-pandemic levels.
Today we explore theories that experts have about this discrepancy and explain why some are worried that labor supply issues were bubbling under the surface long before the pandemic…
Why the Disconnect?
Employers, economists, and policymakers have been trying to determine why unemployment numbers are so high while so many job positions are open.
There are multiple explanations and here are a few:
- Remote learning and lack of childcare have forced millions of parents (mostly mothers) out of the workforce.
- Fear of Covid-19 since the majority of the population has still not been fully vaccinated
- Increased unemployment benefits, which have made staying home a better economic decision for many underpaid workers
- A general reassessment of the work-life balance with employees unwilling to take jobs without flexibility
Many are hopeful that the fall will bring solutions to many of these problems.
As children go back to school, many adults will be able to return to the workforce. As more people (hopefully) get vaccinated, the threat of Covid-19 will continue to subside.
A large number of experts have placed an enormous amount of expectation for employment to increase on enhanced unemployment benefits running out in September.
25 states have already ended their enhanced unemployment benefits but has this move actually pushed the unemployed back into the workforce? Let’s explore…
Is Withdrawal From Unemployment Programs Actually Helping?
Early data shows that ending enhanced unemployment benefits is reducing the number of people on unemployment but isn’t resulting in the spike of employment that many were hoping to see.
In states that cut the additional payments in June, the share of adults receiving unemployment benefits fell by 2.2 percentage points.
However, Census Bureau data shows that in the same time period, employment actually declined by 1.4 percentage points.
Susan Houseman, research director at the W.E. Upjohn Institute for Employment Research, reviewed the research and deduced, “There’s not early evidence [federal benefits] were a big constraint [on jobs].”
Analysis from the job site Indeed also found that job-search activity was muted in states that ended the federal benefits programs early.
We may have to wait longer to see how things play out, as Houseman noted, “You could argue, maybe it will take people longer to find jobs than a couple weeks.”
But we have to ask, what happens if September comes and goes, and the labor shortage persists? For investors, this could have negative consequences because there will be an increased risk of a continual, targeted monetary policy response from the Fed.
How worried should investors be that this could happen…
The Other Factors Fueling the Labor Shortage
There have been other factors contributing to the current dilemma with the labor market, and they cannot be ignored if long-term solutions are to be found.
An Aging Workforce
Right before the pandemic hit, unemployment was at a 50-year low — 3.5% — which alerted employers to the beginning of a potential labor shortage.
Ed Yardeni, president of Yardeni Research, attributes this to an aging workforce. At the start of the 2007-09 recession, the birth rate began to decline. This was expected to be temporary but has actually persisted with the current birth rate at about 1.6 births per woman.
The impact of a slowing population on the labor market wasn’t being felt before the pandemic because many members of the “baby boomer” generation were working past retirement. According to data from the Pew Research Center in 2019, the majority of U.S. adults born between 1946 and 1964 were still working.
Now, due to the pandemic, many are retiring earlier, with 15% of those over age 62 were retired a year after the coronavirus took hold in the U.S., according to Geoffrey Sanzenbacher, an economics professor at Boston College.
And as companies go back to the office, it is expected that many older workers will choose retirement over a job without the flexibility that has been found with remote work.
The Inflation-Wage Dilemma
Inflation might also be to blame for the lack of workers willing to take low-wage jobs. With inflation rising, companies are passing the costs on to consumers through higher prices; consumers then demand higher wages to afford rising costs.
In fact, according to the National Low Income Housing Coalition, a worker would need to work 89 hours a week to afford a modest one-bedroom rental in Pennsylvania due to a $7.25 minimum wage and rising costs.
The Fed has attempted to calm inflation fears and boost consumer confidence by indicating that the current inflation rate is transitory.
But according to the University of Michigan’s consumer sentiment index, inflation expectations are at 4.8% and 2.9% over the next one year and five years, respectively.
This may be why the reservation wage, the minimum paycheck that someone would accept for a new position, is increasing. The latest data shows this number has increased 11% from November 2019 to $71,403.
While inflation has caused workers to demand higher wages, it has forced companies to actually lay off staff, with companies like General Mills announcing it will cut 1,000 employees.
During the pandemic, there was also a rush to increase automation, which had to be adopted when workers were laid off. Now, the spike in automation is putting nearly half of the seven million jobs yet to be recovered from the pandemic at risk, according to Lydia Boussour, economist at Oxford Economics.
And while automation increases productivity, it does not create new jobs or return lost ones.
All this to say, all the blame being placed on unemployment benefits or disruptions to childcare only go so far if the underlying issues are being ignored.
The fall will bring increased understanding about what policies will be able to heal the labor market. Until then, we will continue to research the structure issues at the core of this ongoing problem.
To a Richer Life,
The Rich Life Roadmap Team