The U.S. labor market is showing signs of optimism that might best be described as hedging its bets—confident that the vaccination program will eventually allow for the reemergence of the normal workplace, but recognizing that it may not take just a snap of the fingers to get there.
The surge in job openings—which hit a two-year high—and the elevated level of voluntary separations both imply growing confidence among firms and households that the recovery of the economy and labor market is underway. We expect to see a strong run of hiring over the remainder of the year.
Last Friday’s job numbers for March were undeniably good for a change, with 916,000 more employees on nonfarm payrolls, including 53,000 more manufacturing jobs that are essential for a sustainable recovery. And today’s Job Openings and Labor Turnover Survey (JOLTS) for February from the Bureau of Labor Statistics hints at labor market improvements to come but does not reflect what were outright gains in March.
Job openings reported in the survey increased to 7.4 million in February after bottoming out at 4.6 million in April 2020. Increases in job openings and hiring were noted in health care and in the leisure and hospitality sectors as local economies begin to reopen. The increase in job openings is important because, if sustained, the unfilled staff requirements indicate increased demand for labor that could signal the end of the recession.
Voluntary and involuntary job separations suggest recovery
The JOLTS report also suggests that after months of decline, more and more of the workforce appears willing to take chances that were out of consideration just a few months ago. After dipping to a seasonally adjusted 2.2 million in May, the number of workers who were willing to test the market and quit their job increased to 3.4 million in the post-holiday months of January and February. (Note again that March’s quits have not yet been released and we expect to see more increases based on payroll increases already reported.)
Based on the availability of new jobs in March and the increase in vaccinations, we expect more employees to test the job market in the months ahead. Anecdotally, we also expect labor shortages in low-paying service-sector employment as workers have the ability to move to higher paying jobs in the online retail industry and what looks to be a manufacturing revival.
Further hints of a tightening labor market come from the decline in layoffs reported in the JOLTS figures. The number of discharged employees was 1.8 million in February, just slightly lower than its five-year pre-pandemic average. That suggests a return to normality or the unwillingness of employers to let go of staff because of impending higher demand or a workforce that has been stripped down to the bare essentials.
Preventing long-term damage to the labor force
As we assess the necessity and size of the Biden administration’s infrastructure proposal (the American Jobs Plan) and the pandemic relief package (the American Rescue Plan) already passed by Congress, it’s helpful to review the enormity of the immediate crisis and the potential for long-term damage to the labor force if nothing were done or if the pandemic were to lead to a third or fourth wave.
Let’s start with the number of newly filed claims for unemployment benefits, which until March 2020 were averaging about 200,000 per week. This year, that average has stubbornly remained above 700,000 per week.
This has been a chronic problem during the pandemic, even when local economies began to reopen during 2020. When adjusting for the growth of the population—in order to make historical comparisons—at its worst in March of 2020, the number of newly unemployed people each week reached as high as 2.3% of working-age population (which is literally off the chart in the figure below). A year later, initial unemployment claims each week remain at 0.28% of the working-age population, which is as high as during the most severe of recessions—the 1970s stagflation era, the world-wide double-dip recessions of the 1980s, and last decade’s Great Recession.
Some of the persistence of unemployment insurance claims can be attributed to the on-again, off-again shutdowns during the pandemic. According to an analysis of unemployment in California, “‘Additional claims’ (the re-opening of a claim after a claimant has returned to work) continue to make up the majority (75%) of initial claims.”
Nevertheless, that analysis from the California Policy Lab finds that since the start of the crisis, “over 45% of workers in the labor force in February 2020 claimed UI benefits” and that “9.2 million unique California claimants have filed for some type of UI benefits” in the last year. And the demographic analysis of the newly unemployed clearly shows the difficulty of overcoming the labor market issues facing the economy, no matter how soon the pandemic comes to an end: the preponderance of claimants are younger, less educated, and from underserved communities.
Abnormal duration of unemployment
Next, let’s look at the duration of unemployment compared to previous business cycles. The average number of weeks that people remain unemployed continues to increase, reaching 29.7 weeks in March. Other than during the aftermath of the Great Recession, this is the longest duration of unemployment in the post-war era.
Prior to the Great Recession, it took only 13 weeks on average for furloughed workers to attain new employment. But since then, the duration of unemployment has never dropped below 20 weeks, even as the unemployment rate dropped to 3.5%.
There were arguments throughout 2020 that additional unemployment benefits were so large that they dissuaded people from returning to work. But that would only have been the case for the very bottom tier of income levels.
And how would increased benefits during the 2020-21 pandemic explain unemployment duration remaining at recession levels (dropping from 40 to 20 weeks) during last decade’s recovery when there were no supplemental benefits?
Inarguably, the 2008-09 Great Recession brought about structural changes in the economy that have prevented workers from quickly getting back to work. For instance, manufacturing was hollowed out during this period. That all but eliminated employment alternatives for at least one subset of workers and for the downstream services that supported manufacturing. Add to that the limited mobility of low-income households and that’s the prescription for longer delays in finding suitable employment.
There is also the argument that the lengthy period of unemployment—particularly during periods of technological change—leads to rapid deterioration of skills, diminished productivity, and less likelihood of returning to the labor force. Why hire someone who was already been let go—and might be damaged goods—when you can hire a younger person for less money?
After the Great Recession, there were warnings of a scarring of the workforce. Does the 20+ weeks of unemployment duration before the pandemic suggest this has come to fruition?
Addressing the problem
So there’s work to be done. Continuing to ignore the limited labor mobility of low-income workers will not solve anything.
On the public policy side, the development of the global economy demands that society owes everyone not only a public school education, but the training in order to remain competitive within the global supply chain.
The Biden plan is requesting funding for modernizing public schools and community colleges and for training existing employees, the unemployed and the underserved for jobs in a transitioning economy. That’s a step in the right direction that should increase productivity, competitiveness, worker wages and company profits.
On the private sector side, it’s not clear if corporations who accept their roles as socially responsible participants and who provide additional education for all their employees will be rewarded with higher profits. But one look at the change in companies that now populate the stock indices should provide a starting point for discussion.
