The lesson here is that even coming out of a recession, when employment should surge, policy matters — and bad policy can easily hobble an economic recovery.
The May jobs report released last week showed a labor market consistently falling short of even diminished expectations. The economy added a net total of 559,000 jobs in May, which doesn’t sound so bad until you consider that it’s nearly 100,000 fewer jobs than economists had predicted. And it’s worse in the context of current trends.
The April jobs report showed a meager 278,000 new jobs, about 700,000 fewer than the 1 million jobs economists expected as the pandemic eased and businesses revived. Even economists’ tempered expectations for May proved too optimistic. Meanwhile, what had been an encouraging March report was revised down by almost 150,000 jobs, to 770,000.
This anemic performance is worrying, especially considering that total employment remains 7.6 million jobs below pre-pandemic levels. It’s not as though businesses aren’t trying to hire. Those 9.3 million job openings ought to be enough to fuel a record-shattering recovery. The problem is that workers aren’t filling those positions, despite widespread availability of vaccines and a significant relaxing of lockdown restrictions in most states.
One of the main reasons for this, of course, is that the government is still providing generous emergency unemployment benefits well after the emergency has ended. It was one thing to provide supplemental benefits when millions of unemployed Americans literally had no hope of finding work due to government lockdowns, but that is no longer the case.
The government is subsidizing an extended sabbatical for a significant portion of the workforce, adding $300 weekly on top of regular unemployment benefits. People are responding by staying home. University of Chicago economist Peter Ganong told the Wall Street Journal in April that, with the supplement, he estimates “42% of workers are making more than their pre-unemployment wage.” It’s a rational economic decision.
The artificial labor shortage is particularly acute in the restaurant industry. I recently spoke with the manager of a restaurant in my neighborhood who told me that before the pandemic struck, he had a staff of more than 30. Now, he said, the restaurant has only 12 employees, despite his best efforts to fill the remaining positions. He echoed a refrain heard across the business community: “Nobody wants to work.”
Despite record-high job openings, the retail sector lost 30,200 jobs in April and an additional 5,800 in May. It’s no coincidence that the Democrats’ supplemental unemployment benefits took effect in March. Liberal economists claiming otherwise must have missed all those “Help Wanted” signs going up this spring.
Some on the left have argued that this simply means business owners — restaurateurs in particular — should increase wages to lure workers off the sidelines. Such an increase could conceivably make marginal sense if there had been a fundamental change in the economics, such as a sustained surge in demand or a permanent reduction in the supply of labor. But businesses are dealing with an inherently temporary situation: a flood of government largesse.
Restaurateurs who respond now with permanent wage increases — instead of closing their doors because that would finish them off — would merely raise the price of eating out, exacerbating current inflationary trends. And it would create a new market equilibrium characterized by lower demand due to higher prices, ultimately driving even more restaurants out of business.
Even President Biden seems to recognize the economic reality: On Friday, after the disappointing jobs report, he said it “makes sense” for the pandemic unemployment bonus to “expire in 90 days,” as scheduled. For struggling small businesses that survived and are attempting to emerge from the pandemic, 90 days is an eternity. The longer this artificial labor market imbalance persists, the more small businesses will fail. That’s certainly one way to whittle down those 9.3 million job openings.
No wonder at least 25 states — all with Republican governors — have announced they will end this unemployment bonus starting as soon as this month, helping Americans get back to work and businesses to hire. That will reduce the unemployment rate and increase labor participation; look for sunnier job reports in the coming months. But that will be despite the Biden administration’s policies, not because of them.