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America's Policy-Driven Labor Shortage

If you look at the unemployment numbers, America is still stuck in a recession. Yet if you look at the number of job openings, we’re in the greatest economic boom in modern history. So what’s happening to the U.S. labor market?

The Bureau of Labor Statistics reported a record 9.3 million job openings at the end of April, up from 8.1 million job openings a month earlier. Both counts were the highest on record dating back to when the series began in December 2000. A rapidly growing count of job openings combined with a stubbornly elevated unemployment rate indicates to a growing labor market shortage. It also reveals a new version of the “redistribution recession,” where a combination of state and federal policies are incentivizing workers to remain unemployed or out of the workforce altogether, resulting in unfilled job openings, slower growth in output and a prolonged recovery.

Economists like to use the Beveridge Curve to show the relationship between the unemployment rate and job openings rate. The unemployment rate is the number unemployed divided by the labor force, while the job openings rate is the number of jobs open as a portion of total employment plus job openings. At 6.0%, the U.S. job openings rate is at the highest level recorded since the data series began.

By looking at the Beveridge Curve you can see that recessions are marked by sudden increases in unemployment and drops in job openings, with slow reversals in both numbers during recovery. The purple line below shows the Beveridge Curve for the economic cycle that began after the Great Recession, which shows along, slow climb out of the high-unemployment, low-job opening nadir of July2009. The pandemic recession caused a sudden explosion in unemployment in March2020 along with a surprisingly slight decline in job openings. After some initial recovery late last year, the unemployment rate has been stuck at an elevated level since January 2021, even as the number of job openings has climbed to unprecedented levels. The unemployment rate remains equivalent to what we saw in the worst period of the post-2001 recession, but the explosion in job openings is unlike anything seen, either in booms or recessions.

The Beveridge Curve might in fact understate the labor market problem because the U.S. labor force participation rate has stalled in its recovery since last summer. Labor force participation remains nearly two percentage points below pre-pandemic levels, meaning that the high unemployment rate is showing an incomplete picture of joblessness. There are 9.3 million officially unemployed workers who are in the labor force, and the labor force is 3.5 million smaller than it was just more than a year ago.

Fear of the novel coronavirus along with government shutdown orders caused the spike in joblessness during the early months of the pandemic. Yet state and federal policies have incentivized unemployment throughout the pandemic, starting with the CARES Act’s $600 weekly federal unemployment benefit through July 31, 2020, which was a bonus in addition to state unemployment benefits. The Congressional Budget Office estimated that roughly five out of six unemployment recipients received benefits that exceeded what they could expect to earn from work. The federal unemployment bonus has since been reduced to $300 per week, running through September 6, 2021, still significantly raising the opportunity cost for lower-wage workers to return to work. The pandemic recession has been marked by the disproportionate loss of such lower-wage and entry-level jobs in sectors like retail and leisure and hospitality.

One of the more common explanations for the U.S. labor shortage is a lack of child care options combined with remote learning for K-12 schools. The idea is that when young children learn at home instead of in school, parents are forced to choose between watching their kids and returning to work. Set aside for a moment that this problem, to the extent that it exists, has been caused by ongoing and unnecessarily restrictive school policies. Nonetheless, the evidence does not support this claim as the cause of the labor market shortage.

America’s labor force participation rate has remained in a depressed range since July of2020 – a month when K-12 schools were out for summer break. Even as school shave increasingly reopened for in-person learning since last July, and the number of job openings has increased from 6.7 to 9.3 million, Americans have not been pulled back into the labor force to anywhere near pre-pandemic levels. So while school closures might have been a primary factor keeping workers on the sidelines during the early months of the pandemic, it doesn’t explain why workers have remained on the sidelines even as schools have reopened, wage shave risen, and a net 2.6 million more jobs have opened.

Furthermore, research from economist Jason Furman, the Chair of President Obama’s Council of Economic Advisors, finds that “any childcare issues that have pushed mothers out of the workforce accounts for a negligible share of the overall reduction” in employment. In fact, while women with young children have left the labor force at a slightly higher rate than similarly situated women without young children, men with young children experienced relatively less employment loss than similarly-situated men without young children.  Furman’s conclusion “implies there would have been even more jobs loss if parents of young children experienced the same employment decline as similar people without a young child, on account of fathers with young children experiencing relatively less employment loss than other men.” The real problem is the excessive benefits to not-working.

Despite the fact that vaccine availability has been ubiquitous for months and economic restrictions have increasingly been lifted, the April and May U.S. jobs reports still came in a combined 900,000jobs short of economists’ expectations. Furthermore, the National Federation of Independent Businesses found that a record 48% of small businesses were unable to fill job openings in May despite hiring bonuses and pay raises.

Twenty-five states have reacted to local labor shortages by ending their participation in extended federal unemployment benefits. And states are also increasingly returning to in-person schooling. Yet the policy-driven labor shortage and damage to the U.S. economic recovery is ongoing. With widespread vaccine availability and a record number of job openings, the federal government should unwind programs that incentivize unemployment and states should return their economies and labor markets to a state of pre-pandemic normality.