The Job Market Is Tighter Than You Think -- Capital Account
April 21 2021 - 8:29AM
Dow Jones News
By Greg Ip
One set of numbers shows a labor market in dire straits. Total
employment, despite March's jump, is still down 8.4 million from
its pre-pandemic peak, on a par with the worst point of the 2007-09
recession and its aftermath.
While the unemployment rate at 6% is lower than in 2009, it is
above 9% when people not counted as unemployed because they dropped
out of the labor force or were misclassified are added back,
according to the Federal Reserve. In short, the labor market seems
awash in slack, with job seekers swamping demand for workers.
Weirdly, that isn't what a different set of numbers suggests. It
shows a labor market starting to look, well, tight.
Consider wages. In a truly bad labor market, desperate workers
would accept much lower pay, dragging down earnings growth. That
hasn't happened.
The Labor Department's widely followed average earnings data are
distorted by the disproportionate drop in low-wage work, so you
need to consult measures that filter out these compositional
effects. One, median wage growth as tracked by the Federal Reserve
Bank of Atlanta, was 3.4% in February, barely changed from before
the pandemic. Another, the Labor Department's employment cost
index, shows earnings up 2.8% in the fourth quarter of 2020,
compared with 3% a year earlier. In 2010, both measures of wage
growth fell below 2%.
Another sign of a tightening labor market: employers having
trouble staffing up. In October 2009, businesses contacted for the
Fed's beige book, an anecdotal survey of economic conditions,
overwhelmingly described the labor market as weak and wage
pressures as subdued. By contrast, this month's beige book reported
shortages of drivers; entry-level, low-wage and skilled workers;
child-care and information-technology staff; specialty trades; and
nurses. "A homebuilder related that a landscaper had hired 20
laborers in early February and none showed up for work," the latest
beige book said. "One restaurant had begun offering $1,000 if
workers stayed for at least 90 days."
One shouldn't put too much weight on anecdotes, but these are
corroborated by data. Some 7.4 million jobs were open in February,
above the pre-pandemic level. By contrast, job vacancies plummeted
by half in 2007-09. A mismatch might be at work: sectors and
regions unscathed by the pandemic want to hire, but the available
workers are in the wrong place or have the wrong skills.
Nonetheless, job vacancy rates are above pre-pandemic levels in
most sectors, even leisure and hospitality.
So why does one set of numbers suggest the labor market is slack
while another suggest it is tight? The discrepancy goes back to how
this recession was fundamentally different from the previous one.
The 2008-2009 financial crisis wiped out wealth and dried up
credit. That sapped demand for goods and services as consumers
stopped spending, and for workers as employers stopped hiring. By
contrast, the pandemic clobbered both demand for workers as
businesses closed, and the supply as workers withdrew to look after
their children or their health.
As businesses reopen and stimulus checks juice sales, the demand
for workers is now recovering, but the supply of workers, not so
much. Adjusted for population growth, the labor force -- people
working or looking for work -- is roughly five million smaller than
before the pandemic.
Only a small share of those labor market dropouts want a job.
Covid-19 is keeping most of the others out of the job market. A
Census Bureau survey in late March found that 2.6 million people
weren't working because they were sick or caring for someone who
was, and 4.2 million were afraid of catching or spreading the
virus. (The two groups might overlap.) Indeed, fear might be the
single most important difference between this recession and its
predecessors. Millions are also caring for children, but it wasn't
clear how many were because of Covid-19 closures.
Stimulus checks and unemployment insurance, which has been
extended to gig workers and made more generous, might also have
kept potential job seekers on the sidelines. Several studies found
that the aid didn't depress employment last year because there were
no jobs to be had. That may be changing as demand for workers ramps
up.
All in all, while unemployment is indeed elevated, the job
market isn't as "loose" as the 8.4 million shortfall suggests. This
partly undercuts the rationale for the aggressive fiscal and
monetary stimulus injected into the economy: to fuel spending that
soaks up all of those out-of-work people. Many simply aren't
available to be hired.
That is likely to change. As vaccination spreads, the
virus-related obstacles to working should recede and economists
expect the labor force to rebound. That is a Goldilocks scenario:
historically high levels of employment and the sort of robust wage
growth workers, especially the lowest-paid, were enjoying
pre-pandemic.
But what if workers are slow to return? As stimulus-stoked
demand for labor meets stubbornly reduced supply, the result should
be even faster wage gains for those who do work, and one more
reason to worry about inflation.
Write to Greg Ip at greg.ip@wsj.com
(END) Dow Jones Newswires
April 21, 2021 08:14 ET (12:14 GMT)
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