Everywhere you look in the economy, there seems to be a shortage. The important things missing from shelves can be explained by factors like backed-up supply chains and a shipping crisis.
But another shortage that’s emerged – with increasing prominence as America’s recovery continues its long and winding path – is labor. Millions of workers are still out of work, even though businesses are reopening and want to hire.
One solution has to do with wages, and simply whether they’re enough to get people to do certain jobs after a pandemic. May’s jobs report showed wages on the rise for leisure and hospitality workers, but also showed workers quitting at the fastest rate documented in 20 years. While they saw significant pay jumps – by 7.2% from January to May – that only brought average hourly earnings up to $15.68.
“The wage growth that we’ve seen, say in leisure and hospitality, over the recent months, it’s so little more than just getting those wages in that industry back to where they would have been if COVID hadn’t happened,” Heidi Shierholz, the director of policy at the left-leaning Economic Policy Institute, told Insider. She said talk that such workers are getting more leverage may be “overstated,” and it probably won’t be sustained or permanent.
GOP governors in 25 states have decided that it’s too much leverage anyway, and that federal unemployment benefits in place for much of the pandemic have run their course. They’ve moved to end them months before their September expiration in President Joe Biden’s stimulus. It’s a decision that JPMorgan said is “tied to politics, not economics,” noting that many of these states didn’t have more job openings than jobless people.
Shierholz, a veteran of the Obama administration as chief economist at the Department of Labor, said broad reform is necessary in the labor market, and raising the minimum wage is a key aspect. That could both bring workers back and let higher wages stick, even after enhanced unemployment benefits taper off in September.
“That’s smart, and it’s good economics,” Shierholz said. She also said that things like passing the PRO Act – legislation that could both strengthen unions and offer greater protections to nonunionized workers – would aid recovery.
Shierholz previously told Insider that prematurely ending unemployment benefits could stifle the recovery, especially since workers receiving those benefits are putting that money back into the economy. She said that if the concern is higher benefits keeping workers from work, ending benefits may not be the best route.
“You could quote unquote ‘deal with that’ by cutting off unemployment insurance benefits, which has all these terrible implications” – like stifling recovery and leave millions without income – “or you could do something like raise the minimum wage,” she said.
Boosting wages to $15 may be helping with hiring and retention
Anecdotal evidence suggests that the businesses that did raise wages to $15 an hour succeeded in luring in new workers and boosting morale while cutting turnover. The Washington Post’s Eli Rosenberg spoke with several business owners who had done just that. Progressives have long wanted to raise the federal minimum wage to exactly that $15-per-hour number.
At the 5th Street Group – which owns several restaurants in Charlotte and Charleston – raising starting wages to $15 an hour, and enacting new tipping measures for staffers who aren’t normally tipped, helped the group go from being 50% to 60% staffed to nearly fully staffed in a matter of three weeks, according to the Post.
However, the likelihood of a $15 minimum wage being enacted anytime soon is low. Progressives led by Sen. Bernie Sanders pushed for its inclusion in President Joe Biden’s American Rescue Plan, but the measure ultimately didn’t survive under reconciliation rules. Eight Democrats voted against it, signaling even party-line support was not quite there. Talks on what, exactly, a minimum wage hike should be have also stalled recently.
The federal minimum wage is still $7.25. Although the above map shows that many states have opted to increase the minimum beyond that level, several remain at the federal rate.
Rhode Island recently passed a bill to raise the minimum wage to $15 by 2025, becoming the ninth state to pass a $15 minimum wage.
“Take a look at nationally – right now, states that are taking away the unemployment benefit of $300,” Gov. Dan McKee said in a press conference after signing the minimum wage bill into law. “Those states are at $7.25 cents an hour. So Rhode Island is a leader on this.”
But while raising the minimum wage might be key to an equitable recovery, according to Shierholz, it doesn’t look like the proposition is going anywhere anytime soon – even if it could help solve the labor shortage that’s holding back a full economic recovery.
Workers were tired before the pandemic. Now they’re reaching a breaking point.
“These guys are just dumbasses if they actually think that the UI is the problem and not the wage,” Matt Mies, an unemployed 28-year-old, told Insider.
He was referring to the dozens of Republican governors who have cited a so-called labor shortage, which they’ve blamed on the “disincentive” created by an expanded federal unemployment benefit from President Joe Biden’s stimulus package. The leaders, who govern nearly half of the 50 states, have moved to cancel the benefit early, stripping it from millions within weeks.
Economists had largely expected jobless Americans would rush back to work as vaccines rolled out and the country reopened, but that all changed on May 7, when the government’s monthly payrolls report showed much-weaker-than-expected job gains of 266,000 in April. That seemed to confirm the labor shortage was real.
Mies, who was a ground-crew worker in Hollywood before the pandemic, said most jobs like his had moved out of the area, but that’s not the problem. “I just think that UI has just at least fixed everyone’s brain enough to see how f—ed up the wages are,” he said.
He was one of several unemployed Americans Insider spoke with who said the “labor shortage” was an opportunity for America to rethink what work looks like. They said they weren’t looking to go back to the way things were, and millions more may agree with them – about 10 million Americans are unemployed, compared with right before the pandemic.
Some jobless Americans say it’s as simple as wanting higher pay after years of declining buying power. For others, expensive childcare and health issues are placing work lower on their list of priorities. Americans are also looking for better labor conditions after working from home sparked a societywide reassessment.
The president wants this rethink to happen. “Instead of workers competing with each other for jobs that are scarce, we want employers to compete with each other to attract workers,” President Joe Biden said in a speech Thursday. “That kind of competition in the market doesn’t just give workers more ability to earn a higher wage, it gives them the power and demand to be treated with dignity and respect in the workplace.”
But the opposite view is that work should and will go back to what it was in 2019, and the wages on offer aren’t up for negotiation.
“What has happened in our society, where a paycheck isn’t enough incentive to go to work?” Republican Sen. Ron Johnson of Wisconsin told Insider. “We supplanted that incentive with the incentive to stay home, and we need to end that incentive.”
Johnson also dismissed the idea that businesses needed to raise wages, saying, “Why would anybody need an additional incentive to go to work?
“The incentives have always been there: to take a paycheck, to have the dignity of earning your own success and providing for your family.”
Those incentives may no longer be attractive enough. Economic data suggested that while demand for workers was robust, Americans didn’t seek out work as experts had anticipated they would. Job openings soared to a record-high 8.1 million in March as more businesses looked to hire through reopening. The food-services and accommodation sectors – two of those hit hardest by the pandemic and related lockdowns – added the most openings. Yet the April jobs numbers showed little of that demand being serviced.
Work needs a rethink, but the country isn’t ready for it.
Pay was too low well before COVID-19 struck
For decades, the typical American’s wage growth was weak by historical standards. The situation was dire even before the global financial crisis and the slow subsequent recovery, which lagged expectations and left millions unemployed for years. Economic growth stagnated, and below-target inflation hinted the country was saddled with consistently weak demand.
Then the virus hit.
Low-wage workers were sent home by the pandemic, and if they were able to successfully navigate the unemployment system, they had a steady income, no inconsistent schedules, and life away from occasionally demanding customers. Thank the US government’s massive stimulus spending – roughly $5 trillion – for that big reset.
There is strong upward pressure for wage for the first time in decades. Federal Reserve Chair Jerome Powell said ahead of the April jobs report that wage growth would be a telling sign of a “really tight labor market.” And grow, wages did. Average hourly earnings rose $0.21 in April alone, roughly doubling the typical one-month increases from before the health crisis.
“Everybody should get a living wage,” Scott Heide, an unemployed 35-year-old in Florida, told Insider. He said people getting more money staying home than working was “outrageous,” but not for the reasons that labor-shortage critics cite. “I think if employers paid their employees a living wage, that would make a huge difference,” he said.
Heide was referring to what economists call the reservation wage, which tracks the wage levels at which Americans would take jobs. The reservation wage for workers without a college degree jumped 26% year over year in March, according to the Federal Reserve Bank of New York. That compares with average annual growth of about 2% over the past six years. The wage now comes out to $29.56 an hour, compared with an hourly rate of $23.45 just one year prior.
The data made it clear: Americans wanted better compensation for their work, and they were willing to wait for it.
It’s not just low wages dragging on the labor market’s recovery. UBS says childcare and COVID-19 fears from older people are more to blame for labor shortages than enhanced unemployment. Experts previously told Insider that it was a new phase of recovery, where the need for parents to have a safe place to drop off their children is becoming even more clear.
Karen Lucas, a 53-year-old single mother in Pennsylvania who is unemployed, said unemployment benefits were addressing childcare costs and that’s an important reason people have stayed out of the workforce.
“If my children were, let’s say, 5 years old – thankfully they’re 16, so they’re independent – I would not be able to work,” she said. Twelve years ago, she said, she paid over $1,600 a month for her children’s care.
When it comes to those parents opting to stay home, “I can’t fault them. I don’t think it’s a bad decision. If I were a parent with 5-year-olds, you better believe I would be doing that,” she said.
She said the situation showed the need for businesses to provide childcare or childcare incentives for their employees.
The unemployment benefit changed how some Americans view work
The only thing Mies misses about his old Hollywood job is the paycheck.
He’s still working as a technical director for a nonprofit theater organization that serves people with disabilities, which he said he’s always enjoyed more than his other work. During the pandemic, he was able to get a small paycheck from them – he hadn’t been paid before then – but was able to remain on unemployment. At its peak, he said he made about as much on unemployment-insurance benefits as he had before.
That made him realize he was working himself “to the bone,” he said, adding that he wanted to return to work, but not hard labor for long hours.
Even after the weekly federal supplement shrank to $300 from $600, the aid program was still competitive with low-paying jobs across the country. The combination of state UI and the federal boost surpassed the average wages of Montana, North Dakota, and Wyoming, Insider calculated, and in the rest of the US, unemployment benefits replaced an average of 76% of states’ average wages.
While UI might not deter Americans from work, it encouraged many to seek more rewarding jobs – or, at least, work in different fields. In February, 66% of unemployed Americans in a Pew Research Center survey said they had “seriously considered changing their occupation or field of work.”
Separately, Insider’s Mary Meisenzahl reported on retail workers leveraging the labor situation to leave their old jobs – and the drain that came with them – for better-paying positions. The drain was likely extreme. Research from the advocacy group One Fair Wage found that female tipped workers experienced more harassment and lower tips during the pandemic.
Wage hikes at large-scale employers, from Amazon to Chipotle, suggest businesses faced at least some pressure from the government benefit, and from a large first mover on raising wages, the tech giant Amazon.
Larger structural shifts and a September ‘fiscal cliff’
Other sectors, like academia, may see more of a structural shift on the other side of the pandemic. In the past year, higher education lost an unprecedented 650,000 jobs, Dan Bauman at The Chronicle of Higher Education reported, citing estimates from the Labor Department. That could represent a major sector emerging from the pandemic permanently disjointed – with a lot of collateral damage.
Jennifer, whose last name is known to Insider but withheld for privacy reasons, fears she is one example. She’s 42 and lives in southern Virginia. After finishing her Ph.D., and starting a new job in January 2020, she felt she was on her way up in the world. Then the pandemic hit, and her job was gone in March.
It took months to finally get the call she needed to receive her unemployment benefits. She said she had been surviving for six months off credit cards.
Throughout her time on unemployment, she said, “there’s been no highs, with quite a few lows.” About every three weeks, she panics about her situation, she said, “because I accidentally take a bird’s-eye view of my life and it’s terrifying.”
She said she was “frozen in time.” Every day, she wakes up, logs on to her computer, and searches for at least two jobs that she can apply to.
“I manage to wake up every single day saying it could be today, could be today. I could get that email. I could get that phone call. It could be today.”
Such validation needs to arrive in the next three months at the latest. Even in the 27 states that haven’t prematurely ended the federal UI benefit, the boost is set to lapse in September. That includes programs like Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation, which extended eligibility for benefits and the number of weeks people could receive them. When both of those vanish, their recipients will no longer have any UI.
Payment freezes, such as the federal eviction moratorium and a pause to student-loan payments, will also expire in the fall. This spate of deadlines has been referred to as a “fiscal cliff,” with millions of Americans on the brink of losing several forms of economic relief.
Jennifer’s experience shows that work may not be rethought for everyone who needs it. “The last thing I want is sympathy,” she said. “I’m just so angry. I need someone to validate that I’m a human being.”
The good news: The US labor market is well on its way to a full recovery.
The bad news: It’s going to take a while to get there.
After improving steadily through 2021, the disappointing April jobs report signaled the labor market’s rebound wouldn’t be as smooth as most hoped. With labor shortages and supply bottlenecks now dragging on the broader recovery, economists are updating their employment projections to account for numerous new hurdles.
Fitch Ratings economists joined the crowd on Wednesday. The team led by Brian Coulton sees a return to full employment arriving in the fourth quarter of 2022, about 15 months from today. The unemployment rate will fall to 4.3% from the April reading of 6.1%, and the employment-to-population ratio will return to a steady state, the team added.
Filling the hole in the labor market requires creating 7 million jobs, but a handful hurdles stand in the way of such an achievement, according to the team.
(1) The dangers of long-term unemployment
Bringing Americans back into the workforce is crucial to bringing about a full recovery, and those who’ve been out of it the longest present a significant challenge.
Almost 30% of unemployed Americans have been out of the labor force for more than a year, and that share is growing, Fitch said in a note to clients.
Bouts of unemployment lasting more than a year are far more likely to turn into permanent detachment from the workforce. Bringing the country to full employment will hinge on bringing the long-term unemployment rate from its latest reading of 1.8% closer to its pre-pandemic norm of 0.5%, the team said.
Some jobs will be permanently erased, and others will crop up elsewhere as the post-pandemic economy takes form. Those structural shifts in where labor is in demand will force some unemployed Americans to either move or change their skillsets entirely.
“Rapid changes in the sectoral demand for labor can lead to lasting increases in unemployment if workers made unemployed in shrinking industries are unable to move into other sectors,” the economists said.
(3) Some participation won’t return until well after reopening
The labor force participation rate took on new relevance during the pandemic as millions of Americans who lost their jobs didn’t look for new roles and dropped out of the workforce entirely.
The rate sank from 63.4% in January 2020 to a pandemic low of 60.2% in April of last year. Yet after $5 trillion in stimulus, vaccine distribution, and progress toward a full reopening, labor force participation stood at 61.7% last month.
“While we believe a large share of the fall will be reversed as the economy opens up there is also a likelihood that some people have permanently left the workforce,” Fitch said. Such a dynamic would persistently drag on the labor market until more Americans join the workforce.
(4) Many older workers are out for good
The participation rate for Americans aged 55 and older shows a particularly concerning trend.
The rate dove to 38.4% at the peak of the pandemic’s onset and sat even lower, at 38.3%, last month. That contrasts sharply from rates for other age groups, which have retraced at least half of their pandemic-era declines.
The trend is also unlikely to be linked to early retirement, Fitch said. The number of retirees rose by 1.24 million in 2020, according to social security data. That’s less than the 1.37 million jump seen the year prior.
If the trend continues throughout reopening, it “could signal permanent discouragement from the labor force among older workers,” the team said.
Federal unemployment benefits doled out for more than a year are on the verge of lapsing for millions of Americans, but the reason why isn’t new.
As soon as April’s disappointing jobs report was released, critics – largely in the Republican Party – began blaming the boosted support measure for disincentivizing Americans from seeking work.
This disincentive theory dates back decades, and largely comes from a Reagan-era book that argued government-support programs were the reason the US economy was falling behind.
In his 1984 book “Losing Ground,” political scientist Charles Murray posited that social welfare leaves society worse off, as it leads participants to rely on handouts instead of encouraging them to climb the socioeconomic ladder.
That thesis has informed Republicans’ economic policy for nearly half a century and is rearing its head once again as GOP governors prematurely terminate federal unemployment benefits for millions. But analysis of Murray’s book shows such policy rests on morally suspect arguments and possibly does the US more harm than good.
But while the circumstances of the coronavirus recession and the 2021 reopening of the American economy are unique, the argument that the social safety net provides a “disincentive” to work is an old idea.
The viewpoint originated in 1976 when, during his first presidential campaign, President Ronald Reagan highlighted “welfare queens” as a new kind of fraudster plaguing the country. Reagan claimed that by slashing spending on programs like food stamps and welfare, he could run the government more efficiently and put poorer Americans to work.
“Losing Ground” was published the same month Reagan was elected to a second term in a landslide 1984 victory. America clearly liked Reaganomics and wanted more. It didn’t take long for Murray’s book to power even stricter anti-welfare policies.
The political scientist was, indirectly, at the helm of a new economic-policy framework. The New York Times soon deemed Murray’s work a “budget-cutters’ bible” that was used as a “philosophical base” throughout government agencies. Reductions to housing assistance, education, and programs like the Jobs Corps reflected Murray’s push to eradicate welfare spending.
The uneven reopening of the American economy shows the book’s ideas are paraded just as loudly today.
Following this month’s jobs report for April, Gov. Kim Reynolds of Iowa said the payments were “discouraging people from returning to work,” while Gov. Mark Gordon of Wyoming said that “incentivizing people not to work is just plain un-American.” Gov. Brad Little of Idaho said cutting the benefit was “based on a fundamental conservative principle.”
And in 36 states, policymakers are bulking up work-search requirements for UI recipients. President Joe Biden even implicitly accepted some of Murray’s ideology in comments following the jobs report, saying Americans receiving unemployment benefits “must take the job” if offered one.
Yet Murray’s argument – and its decades-long influence – rest in part on shaky and ethically questionable foundations.
Murray used Black men as a proxy for all poor Americans
Some of Murray’s observations hold water. The number of Americans below the poverty line has gradually increased since the late 1960s, and, around the 1980s, poor Americans were starting to drop out of the workforce.
Other arguments from Murray are less compelling. Murray noted that, as spending on social services ramped up in the 1970s, poor Americans stopped working as a result of the support programs. This, he said, is why the federal safety net should be abolished.
Murray’s argument leans heavily on the “latent poverty” statistic – individuals who are only above the poverty line due to government benefits – but ignores one of its critical drivers, according to a 1984 article in the Yale Law and Policy Review.
Additionally, the political scientist focused only on Black men aged 16 to 24 to gauge poor Americans’ attachment to employment over time. Murray ignores labor force participation among Black women, and also fails to address the structural forces that hinder economic development for racial minorities.
Using young Black men as a proxy for all poor Americans likely skewed rates of labor-force dropouts for reasons not acknowledged in Murray’s book, author and Yale Law School graduate Edward Mattison said.
To be sure, neither Murray nor Mattison could have predicted the coronavirus crisis and its economic fallout. Both would likely be shocked to discover Congress allocated some $5 trillion to fiscal stimulus, much of it passed on a bipartisan basis, while the Federal Reserve embarked on an unprecedented level of monetary easing.
As a post-pandemic economy emerges, Democrats have proposed overhauling UI programs to match the new attitude toward stimulus, with a larger benefit and minimum 26-week payment period. Such proposals would mark a major shift in the government’s welfare policy and a huge step away from Reaganomics.
Republicans, meanwhile, seem to want to revert to the stripped-down UI programs seen in 2019. It’s a sign that Murray and Reagan’s ideas still hold significant sway, even with roughly 10 million Americans still jobless. The old debate is set to continue for some time still.
Job openings grew to record highs in the US in March amid continued vaccination and fresh stimulus.
The data shows businesses reopening along with the country, yet last Friday’s jobs report for April indicated employers have since had trouble filling those jobs.
Openings rose to 8.1 million from 7.5 million, according to Job Openings and Labor Turnover Survey, or JOLTS, data published Tuesday morning. The median estimate from economists surveyed by Bloomberg was for 7.5 million openings. The reading marks a third straight increase and places job openings at their highest level ever.
The food services, accommodations, and state and local government education sectors added the most openings throughout the month. The health care and social assistance sectors shed 218,000 jobs, marking the largest decline of the month.
Separations, which count layoffs and quits, dropped to 5.3 million from 5.4 million.
Quits climbed by 125,000 to 3.5 million. Layoffs and discharges sank by 243,000 to 1.5 million.
The country’s hiring rate rose to 4.2% from 4%, according to the report. That’s just above the pre-pandemic trend. Yet with roughly 10 million Americans unemployed, the pace signals the labor market recovery will take years if hiring doesn’t accelerate further.
Data published Friday suggests that such acceleration isn’t likely, at least not in April. The US added just 266,000 jobs last month, grossly missing the median estimate for 1 million payrolls. The reading also marked a sharp deceleration from the job growth seen in March. Unless the April figures prove to be noise or are revised higher, the report hints the labor market recovery hit major snags despite the broad easing of economic restrictions.
Some attributed the weak payroll growth to reports of labor shortages, but JOLTS data showed plenty of Americans searching for work. About 1.2 Americans competed for each job opening in March. That’s down from the February reading of 1.3 and the pre-pandemic level of about 0.8.
To be sure, a phenomenon known as reallocation friction can keep companies from hiring even in areas with an abundance of jobless Americans. Experts have warned that the post-pandemic economy will be drastically different from that seen in early 2020. The types of jobs available to workers could be very different, and jobless Americans might need time to decide which sector to work in if they have to make such a pivot.
The JOLTS report provides more detail around what was largely an encouraging month for the labor market. The country added 770,000 payrolls as Democrats’ $1.9 trillion stimulus supercharged spending. The unemployment rate fell to a pandemic-era low of 6%.
While the April jobs report showed the recovery stagnating last month, other indicators have shown more promising trends. Daily COVID-19 case counts fell to an 11-month low on Sunday and are swiftly trending lower as vaccination continues. Filings for unemployment benefits have similarly declined over the past four weeks and most recently slid below 500,000 for the first time since March 2020.
The US economy only added 266,000 nonfarm payrolls last month, the Bureau of Labor Statistics announced Friday. That’s way less than 1 million, the median estimate for payroll gains by economists surveyed by Bloomberg. While it was the fourth consecutive month of payroll increases, it was the smallest since September.
As a Morgan Stanley note from economist Robert Rosener’s team stated, “The expected ‘string’ of strong jobs reports has started to look more like a modest trail of crumbs.”
In the process, unemployment has risen again, albeit slightly from 6% to 6.1%, it was the opposite direction of the forecasted decline to 5.8%.
Job growth was strongest in the leisure and hospitality sector, adding some 331,000 payrolls. More than half of this increase was linked to hiring in food services and bars, offsetting declines in other sectors such as temporary help services.
The staggering numbers indicate that while the economy is still set to come roaring back to life this year, it won’t look anything like it did in 2019, and jobs may not come back at nearly the same rate as consumer spending ramps up.
Consumer spending recovering faster than jobs
The US economy is on the verge of a glow-up. Vaccines are increasingly finding their way into arms, big cities are reopening, and Americans are sitting on $2.6 trillion in excess savings, between three stimulus checks and a decline in discretionary spending.
They’re already swiping their cards on things like outdoor activities, transit, restaurants, clothes, and beauty as they prepare for what Insider reported is shaping up to be a “hot vaxx summer.” Economists expect this to continue, predicting that a lockdown lift will see the biggest boomtime in a generation.
But the return of consumers to the economy hasn’t yet been matched with blowout job growth, which is putting the predicted post-pandemic boom in a new light. The US is still down roughly 9.8 million jobs from its pre-pandemic peak. While relaxing restrictions is expected to help narrow this gap within the incoming months, April’s payrolls spark concern over how easy these gains will be.
The disruption to the experience economy is still taking its toll. Leisure and hospitality may have seen the most job gains in April, but employment in certain industries of this sector still hasn’t reached pre-pandemic levels.
Hallmarks of the 2019 economy that suddenly went on pause last year – the payrolls of motion picture and sound recording industries, travel arrangement and reservation services, performing arts and spectator sports, and accommodation – were all still at least 25% below where they were before the pandemic. Hollywood and travel may not look the way they once did on the jobs front – or not for years, meaning job gains will have to come from somewhere else.
Countries will need to “think well in advance” of what a post-pandemic economy will look like so as to add jobs where they’re going to be, Kristalina Georgieva, managing director of the International Monetary Fund, said in a Thursday video conference. Federal Reserve Chair Jerome Powell also noted that millions of Americans will struggle to find work as they acclimate to a permanently changed labor market.
“The real concern is that longer-term unemployment can allow people’s skills to atrophy, their connections to the labor market to dwindle, and they have a hard time getting back to work,” he said in the conference. “It’s important to remember we are not going back to the same economy, this will be a different economy.”
However, some experts remain optimistic. Jason furman, former top economist to former president Barack Obama, said on MSNBC Friday that he expects hiring to pick up during the summer. “I think we’re gonna see a hot summer in the labor market,” he said.
Lockdown lifts are just beginning and vaccinations are still rolling out. That is all to say: it’s still early on. But that we’re in the first stages of a recovery means that the 2019-vintage experience sector of the economy won’t snap back instantaneously, and that other industries are still grappling with the worker effects of not having properly estimated demand for goods during the pandemic.
April’s jobs report was a strong signal that recovery won’t be as simple as going back to the economic playbook from the before times. Instead of seeing an economy restored to what it once was, we might see an economy reshaped into something new.
After April’s shockingly disappointing jobs report, it looks more like “it’s not the economy, stupid, it’s the virus.”
March’s strong jobs data – along with widespread projections of a coming economic boom – had raised optimism among economists for a continued recovery in the labor force. It prompted Federal Reserve Chair Jerome Powell to deem March an “inflection point” for the reopening of the economy, and experts saw it kicking off a season of outsize payroll increases. But the drop in April makes clear the virus continues to bite.
Economists had expected payroll gains to reach 1 million, but the country added just 266,000 jobs last month. It was the smallest monthly increase since January and the biggest miss of payroll forecasts in more than two decades. The unemployment rate rose to 6.1%, female employment declined, and, although hard-hit sectors like leisure and hospitality saw healthy gains, most others posted either meager growth or shed jobs entirely.
The Bureau of Labor Statistics’ Friday release underscores just how much the labor market still has to recover, and that the climb won’t be as easy as most economists anticipated. Even if April stands out as a gloomy outlier, the average pace of payroll growth suggests it could take years to fully recoup the millions of jobs lost to the pandemic.
What went wrong?
The jobs report was such a shock that it’s hard to find a single explanation at first glance. It also highlights just how inadequate forecasting tools are for measuring this unique economic moment.
Economists typically use a combination of quantitative and qualitative data to estimate future growth. Indicators like weekly jobless claims and hours worked join anecdotal evidence and broad surveys to create forecasting models. Economists’ calculations, when tallied together and averaged, usually come close to guessing monthly payroll additions.
The April data serves as a wake-up call for the many forecasters who didn’t even come close to guessing correctly. Whether models overlooked details like COVID-19 fears or bullish biases tarnished forecasts, economists need to reconcile how they were so wrong.
The disappointment was likely fueled by several factors instead of one solvable hurdle. Despite President Joe Biden’s overdelivering on vaccinations, the country is far from placing the coronavirus pandemic behind it. Daily case counts still averaged about 50,000 at the end of last month, and highly contagious strains continue to spread across the US.
The coronavirus pandemic has also been notable for the “she-cession,” hurting female employment much more than men. The absence of affordable childcare and lack of in-person schooling around the country likely kept some Americans home instead of working, as born out by the April report, which showed women – who disproportionately take on childcare responsibilities – losing jobs through the month.
How big is the labor shortage?
Last month also saw several businesses across the manufacturing and service sectors reporting difficulties in finding workers. The jury is still out on how widespread worker shortages might be, as about 10 million Americans remain unemployed. On one hand, some economists suggest boosted unemployment benefits cut into the incentive to find work. Strong wage growth in the leisure and hospitality sector also signals businesses may need to lift compensation to attract workers.
“The benefits are due to expire in September but perhaps people think jobs will be just as easy to find then as they are now, so why take a job today?,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said. “If people continue to resist taking the jobs on offer at the pay on offer, then wages will have to rise more quickly.”
The Chamber of Commerce called on lawmakers to withdraw the federal benefit to unemployment insurance following the April report. The supplement results in 25% of recipients earning more from unemployment benefits than by working, Neil Bradley, executive vice president and chief policy officer at the Chamber of Commerce, said in a statement.
“We need a comprehensive approach to dealing with our workforce issues and the very real threat unfilled positions pose to our economic recovery from the pandemic,” he added.
The April data does not quite agree with the chamber’s argument, showing labor demand overshadowing anecdotes of a supply shortage. April job gains were strongest in lower-wage industries and in sectors with in-person jobs. The composition of last month’s job additions “doesn’t scream supply constraints as the problem,” Nick Bunker, an economist at Indeed, wrote on Twitter.
Separately, the number of Americans temporarily laid off ticked slightly higher in April. That also signals labor demand wasn’t as robust as businesses’ anecdotes suggested.
Looking to other labor-market data, the steady decline in weekly jobless claims now looks much less encouraging for the recovery. The April uptick in unemployment comes as filings for unemployment benefits fell throughout the month to numerous pandemic-era lows. The drops initially seemed to signal that more Americans were returning to work, but BLS’ report suggests the downtrend has more to do with Americans dropping out of assistance programs than finding employment.
It could take months for the government to lend a hand
Much of the last few months’ promising job gains were linked to massive stimulus packages. The CARES Act helped a sharp hiring rebound after initial COVID-19 lockdowns in March 2020. And Biden’s $1.9 trillion plan in March 2021 spurred stronger economic activity last month.
The president has since rolled out two new spending proposals, the larger of which would spend $2.3 trillion on job creation. The American Jobs Plan would create millions of jobs by funding traditional infrastructure projects, clean energy initiatives, and nationwide broadband, Biden said in a Thursday speech. Biden’s administration has at other times cited a Moody’s Analytics projection of 2.7 million new jobs from the American Jobs Plan.
The smaller package, named the American Families Plan, could support hiring in its own right by overhauling the care economy, as it seeks to provide paid family and medical leave and childcare support.
Yet such support is likely months away. Republicans have balked at both plans, lambasting their hefty price tags and the tax hikes proposed to offset them. Democrats seem to face a challenge passing the package on a party-line vote via reconciliation, as some moderates in their party have yet to throw their full support behind the follow-up packages as they exist.
To be sure, the April report represents just one month of hiring. May numbers could show a healthy rebound and revive the positive trend. The economy is not even fully reopened from virus-safety considerations yet, so rebounds are likely.
But with additional fiscal support far on the horizon and economists highlighting a number of obstacles hindering job growth, the resurgent spring recovery for jobs that many economists were predicting is gone.
The positive March jobs report showed a country on the brink of full reopening, with good news for the economy around the corner. But just reopening isn’t enough for a full recovery.
“There’s no guarantee that the people whose jobs have been permanently eliminated will be able to find work elsewhere,” Nancy Vanden Houten, lead economist at Oxford Economics, told Insider. “At the same time, there’s a risk that labor force participation won’t return to what it was prior to the pandemic. We might still experience shortages of workers.”
Filling the hole in the labor market will take more than reaching a 3.5% unemployment rate and recouping every lost payroll, she said. The country was adding roughly 200,000 jobs a month before the pandemic, meaning the labor market will have to get back to the February 2020 level – and then some – to reach maximum employment.
The US began that climb in earnest last month, adding 916,000 nonfarm payrolls, blowing the median estimate of a 660,000 gain out of the water. The unemployment rate fell to 6% from 6.2%, matching economist forecasts, still far above the 3.5% pre-pandemic rate.
Experts are bracing for several months of outsize job gains as consumers thaw the frozen economy. But to Vanden Houten’s point, pressures are now emerging on the supply side. While consumer demand shows signs of coming back, other signs point to an imbalance between job openings and Americans actively seeking work.
Jobless claims, however, have been volatile in recent months and give a clearer hint at deep scarring. Filings fell to a pandemic-era low of 658,000 in March but rose to 744,000 last week, signaling persistent challenges in hiring.
Supply strains and lagging cities present new challenges
Some of the world’s top economic policymakers are warning of long-term scarring of the labor force that reopening can’t address. Countries will need to “think well in advance” of what a post-pandemic economy will look like so as to add jobs where they’re going to be, Kristalina Georgieva, managing director of the International Monetary Fund, said in a Thursday video conference.
Federal Reserve Chair Jerome Powell echoed her remarks, noting that millions of Americans will struggle to find work as they acclimate to a permanently changed labor market.
“The real concern is that longer-term unemployment can allow people’s skills to atrophy, their connections to the labor market to dwindle, and they have a hard time getting back to work,” he said in the conference. “It’s important to remember we are not going back to the same economy, this will be a different economy.”
Even the businesses set to benefit most from reopening are running into snags. Staffing at full-service restaurants remains down 20%, or 1.1 million openings, from the year-ago level, according to data from the National Restaurant Association. Owners and managers interviewed by The New York Times attributed the persistent shortfall to a lack of available workers. Others said their former employees chose to stay out of the workforce and subsist on expanded unemployment benefits.
The country’s most densely populated areas are also experiencing slow recoveries, government data shows. Los Angeles and New York City held the highest February unemployment rates of the 51 major metropolitan areas: 9.9% and 9.8%, respectively. This kind of high unemployment in densely populated cities is bad news for the economic recovery, as the longer that the engines of the pre-2020 economy lie dormant, the further away lies a return to a kind of “normal,” unless a new normal rapidly takes its place.
The stimulus spending boost could be smaller than expected
The government acknowledged risks associated with weak spending and acted on them. The $1.9 trillion stimulus measure approved by President Joe Biden in March was the largest relief package to hit the US economy since the CARES Act was passed in the first months of the pandemic. Americans received support in the form of stimulus checks and bolstered unemployment benefits, two boosts set to supercharge spending and overall demand as the economy reopened.
Recent studies suggest that boost may not be be as potent as anticipated. Stimulus check recipients spent just under one-quarter of their latest relief payments, according to researchers at the Federal Reserve Bank of New York. That’s less than the share spent from the CARES Act checks or the $600 payments issued in January.
About 42% of the payments were saved, the highest percentage of all three stimulus checks. Though those savings can be unwound over time, they do little to aid the recovery in the near term. The remainder of the checks is expected to go toward paying down debts.
“As the economy reopens and fear and uncertainty recede, the high levels of saving should facilitate more spending in the future. However, a great deal of uncertainty and discussion exists about the pace of this spending increase and the extent of pent-up demand,” the team led by Oliver Armantier said.
Stimulus passed throughout 2020 already buttressed Americans’ savings, and there’s been little sign of that cash being put to use. Peoples’ savings grew by $1.6 trillion since last March, according to the New York Fed, but that sum is largely staying in bank accounts instead of moving throughout the economy.
Americans who held onto their jobs haven’t increased their spending activity even though their savings increased, the Fed researchers said in a Monday blog post. Limitations to how much people can dine out or go on vacation will also curb a surge in consumer spending.
“It is certainly possible that some of these savings will pay for extra travel and entertainment once the COVID-19 nightmare is behind us, but our conclusion is that the resulting boost to expenditures will be limited,” the team said.
Outlooks remain strong. Banks are forecasting the strongest economic growth in decades, and the March payrolls report bodes well for near-term job gains. The president’s $2.3 trillion infrastructure plan promises to create millions of new jobs if it can win ample bipartisan support.
But the path to a fully healed labor market remains riddled with downside risks. Trends in worker availability, consumer spending, and permanent scarring will determine whether the country can stage one of the fastest economic recoveries in history.
The March jobs report was a hugely positive surprise.
The Bureau of Labor Statistics said Friday that 916,000 nonfarm payrolls were added last month. That compares to the 660,000 expected by economists surveyed by Bloomberg and an upwardly revised gain of 468,000 jobs in February. The headline unemployment rate fell to 6%, matching the consensus forecast.
The data signals that the $1.9 trillion stimulus passed in March and gradual reopening drove a strong rebound for the labor market. Leisure and hospitality businesses – those hit hardest by the pandemic and related lockdowns – counted for one-third of the month’s additions. Construction firms added roughly 110,000 payrolls after hiring contracted during the prior month’s harsh storms.
By Insider’s calculations, that rate fell to 8.7% in March from 9.1%. That level suggests 14.3 million Americans are still jobless.
Separately, the Bureau of Labor Statistics’ broader read of nationwide unemployment remains at worrying highs. The U-6 rate – which includes Americans employed part-time for economic reasons and workers only marginally attached to the labor force – dipped to 10.7% from 11.1%.
“Today’s report confirms that labor market conditions are rapidly heating up but reaching broad-based and inclusive full employment will be a multi-year process,” Lydia Boussour, lead US economist at Oxford Economics, said in a note.
The White House is already teeing up its next booster for US job growth. President Joe Biden revealed a $2.3 trillion spending plan on Wednesday. The so-called American Jobs Plan includes funds for restoring roads and bridges, building affordable housing, and installing a nationwide broadband network, among other projects. The proposal should create millions of union jobs over the next eight years, according to the president.
“Now it’s time to rebuild,” Biden said during his announcement, adding: “Wall Street didn’t build this country. You, the great middle class, built this country, and unions built the middle class.”
The February jobs report shows the labor market in reopening rehearsal.
The US added 379,000 nonfarm payrolls last month, handily exceeding the median economist estimate of 200,000 additions. The unemployment rate fell to 6.2% from 6.3%, labor force participation held steady, and the number of Americans citing COVID-19 for not seeking employment fell by 500,000.
The drivers behind the gains are also encouraging.
While the drop in unemployment seen in January was largely tied to more Americans dropping out of the labor force, last month’s dip was tied to increased hiring across a broad set of sectors. The payroll increase would’ve “easily” topped 500,000 had adverse weather not contributed to construction jobs falling by 61,000, Morgan Stanley economists led by Robert Rosener said.
For all intents and purposes, the report came in more positive than expected. Investors overwhelmingly thought so, too. Treasurys declined sharply as traders bet on a faster-than-expected economic rebound, bringing the 10-year yield to its highest level since February 2020. The Dow Jones industrial average and S&P 500 gained, led by cyclical and value stocks.
Fanning February’s flames
A deeper dive into the data shows a recovery that’s found its footing. The leisure and hospitality industries – among those hit hardest by the pandemic and resulting restrictions – counted for 355,000 of the month’s payroll additions. Temporary job losses declined, suggesting businesses were able to reopen and rehire workers as COVID-19 case counts fell nationwide.
The overall gains are a “surprise” and can be boiled down to reopening “arriving earlier than expected,” Brian Coulton, chief economist at Fitch, said.
Warming weather, continued vaccination, and even lower daily case counts stand to supercharge job gains into the summer. Plenty on Wall Street agree. The data “suggest that the labor market recovery is accelerating in earnest,” Bank of America economists Joseph Song and Michelle Meyer said Friday.
Michael Feroli, chief US economist at JPMorgan, said investors can expect “even better numbers” as reopening provides an “incredibly powerful tailwind.”
“There is no ambiguity regarding where employment is headed, in our view, but just how long it takes to get there,” Rick Rieder, chief investment officer of global fixed income at BlackRock, said.
Not so fast
Still, the battle is far from won. A handful of datapoints signal the climb to maximum employment will be much steeper than the 6.2% U-3 rate implies.
That “real” rate improved to 9.1% through February, according to Insider analysis. While this is down significantly from the year-ago peak of nearly 24%, the pace of decline slowed significantly through the winter.
The U-6 unemployment rate – which tracks people marginally attached to the workforce and Americans employed part-time for economic reasons – showed no improvement at all and held at 11.1% last month.
These gloomier datapoints practically guarantee Powell will keep ultra-easy monetary conditions in place for the foreseeable future. The Fed chief cautioned on Thursday that it “will take some time” to achieve the central bank’s goal of maximum employment. The healthy decline in baseline unemployment is cause for some optimism, but a broad set of criteria need to be met to ensure the recovery is robust, he added.
“We want to see wages moving up. We’d want to see that the gains in employment are broad-based and that different demographic groups were experiencing it,” Powell said. “We have a high standard for identifying what maximum employment is.”
The still-elevated unemployment rate has also been cited by Democrats as a sign additional stimulus is still warranted. Senate Democrats kickstarted a lengthy amendment process on Friday with aims to pass a $1.9 trillion relief package over the weekend. The deal includes $1,400 direct payments, a $400 supplement to federal unemployment benefits, and funding for state and local governments.
While Republicans have argued the bill is a case of overspending, Democrats have pointed to lasting labor-market pain as justification for the hefty price tag. The bulk of February’s payroll gains can be traced to business reopenings, but an additional stimulus package could boost demand and drive new demand for workers.