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The best way to solve a labor shortage is with labor
In July we added a 1/2 million jobs on net, wages rose briskly and the unemployment rate fell to its 50-year low. That's a sign of progress.
Jobs Day was a good day.
Workers getting a new paycheck and many getting a bigger one are things to celebrate on a human level. On the economic level, they are, too.
The sizable payroll gains as an encouraging sign that labor shortages are easing. During the recovery, ‘missing’ workers are right up there with broken supply chains as holding the recovery back and pushing up prices. And high wage growth last month? How else are you going to bring workers back when they’d held out until now? Plus, there are clear indications that the growth in spending by consumers and businesses is cooling off, though the level remains high. The hiring in July is supply catching up.
Some had a different reaction. Jason Furman is a good example. He sees the labor market as “uncomfortably hot,” and the fast wage growth “worries” him. Others like Olivier Blanchard are worried too. The jobs report elevates already big concerns that inflation will stay high, and we’ll need a deep recession to break it.
The two main assumptions behind the Bad Day view are 1) inflation is demand-driven, and 2) the Fed is the thing that can bring inflation down. If you believe those two things, then Jobs Day, which gave workers more money to spend, was bad because the Fed will need to raise interest rates even more to reign in their spending. That will occur mainly through big job losses, that is, a severe recession. In their view, less demand is the way to bring inflation. Good now, is worse down the road.
In contrast, if you believe, as I do, 1) a big portion of inflation is supply driven and 2) other factors are working to bring inflation down, then it was a Good Day. We are likely chipping away at the labor shortage. Plus, a strong labor market gives us time to work through other issues like supply chains, production bottlenecks like refineries, and demand shifting back to services. Good now, is better down the road.
We should take both views seriously. Reality will likely end up somewhere in between. How close it is to one side will make a huge difference next year.
Labor shortages are getting better but are still here
As with supply chains, we see signs of the labor market improving, but it’s not enough. Inflation occurs when demand outpaces supply. Last year when the vaccines rolled out, and the world opened up, we saw customers come back fast, much faster than workers who had been laid off or had left the workforce.
Labor supply is catching up, but it has not caught up. As of June, the latest available data, there were 1.8 job openings for every unemployed worker, that’s down from the high in March but twice the rate before Covid. The rate of job openings to employment remains elevated across all major industries, including those that had severe disruptions due to Covid, and has improved since early this year.
Encouragingly, Jobs Day for July showed broad-based gains and notable progress in sectors searching intensely for workers. (Note, payrolls are jobs and not necessarily new workers. It could be a worker taking another job or moving from self-employment.) We won’t know until the July JOLTS survey shows how much of the job gains reflected supply coming back or demand rising even faster. Given the slowing consumer spending and real income growth in the GDP report, it seems likely that much of it is supply.
Pandemics harm people; workers are people
Covid is the root cause of the economic mess today. We cannot have a productive conversation about current economic conditions or policy solutions without acknowledging that fact. That is especially true about the labor market.
Reduced health is not the only consequence of long COVID. People with the condition work and earn less than they would have otherwise. One survey found that 44% of people with long COVID were out of the labor force and 51% worked fewer hours.5 In the economy as a whole, more than 1 million people may be out of the workforce at any given time because of long COVID.6
This reduction in labor supply is a direct earning loss. If 1 million people are out of the labor force because of long COVID, the lost income would be more than $50 billion annually. People out of the workforce because of long COVID disproportionately worked in service jobs, including health care, social care, and retail.7 The widely noted shortage of workers in these sectors is driving up both wages and prices. Part of the recent surge in inflation in the US may thus be related to long COVID.
The effects of long-Covid, in particular, on the labor market are likely substantial. Gopi Shah Goda and Evan Soltas estimate that it could account for about 0.2 to 0.3 percentage point or about one-fifth of the shortfall in the labor force participation rate relative to pre-Covid. Aaron Soujourner finds that health-related absences that have risen sharply during the pandemic are reducing hours worked. Missing hours on top of missing workers have made it harder for businesses to meet demand.
Moreover, the United States stands out among other advanced economies in excess deaths attributable to Covid. Our inadequate public health response and politicization of the vaccines came at a cost, including labor shortages and high inflation. The health risks are not over. And nearly 4 million Americans were not working last month due to being sick with Covid or caring for someone with Covid.
We should not be surprised at the labor shortage caused by Covid. As the Spanish Flu in 1917-18 showed, pandemics disrupt the supply of workers. Labor shortages, then as now, put upward pressure on wages. The shortage passes, and wage growth largely normalizes, though it can take time.
Fed Chair Powell has referred to the labor market as “tight to an unhealthy degree.” Powell is on to something, but only if he meant it literally.
Better jobs are the best way to get workers back
Health problems due to Covid aren’t the only reason more people are on the sidelines, despite many job openings. Effective ways to bring workers back include higher pay, more benefits, predictable hours, workplace safety, and basic respect.
Covid has also shown us the actual costs of the cheap consumer goods we had enjoyed for years, costs that workers bore. Firms are learning that they cannot count on an endless supply of cheap, disempowered labor. Want to get workers back? You have to deliver. Again, this is basic economics.
One of many examples of firms struggling to hire is meat packing plants, which Joe Weisenthal points to. They have created terrible working conditions for years and outright dangerous ones that killed workers during Covid.
Meat packers are by no means the only example. The unionization of an Amazon warehouse started with outrage over the dangerous working conditions in the pandemic. Many frontline, often low-wage, workers who worked throughout were not protected. And again, many of these employers did not treat their workers well before either. Seeing workers get raises and being able to quit and move to better jobs is a good thing. Yes, inflation must come down but not by breaking workers.
My argument here is basic economics, not vain hope or politics. I recognize how deeply Covid harmed workers and disrupted our economy. The pandemic caused shortages of goods and workers, leading to inflation. More workers, not fewer customers, is the best solution. Higher wages can get us more workers, and Fed interest rate hikes get us fewer customers.
Jobs Day was a good day. We need more good days.
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