Why There Are Plenty of Jobs and Still Unemployment

Markets, we’re taught in basic economics classes, are supposed to clear; so it should be impossible for huge unmet demand to exist simultaneously with a surfeit of supply. That’s clearly the case with wheat or widgets, but it should also hold for humans seeking to hire workers or people looking for jobs. The supply and demand curves ought to cross somewhere on the graph.

That they haven’t is indeed a conundrum. As has been widely reported, there were more than 9.2 million unfilled positions at the end of May, according to the most recent Jolts, or Job Openings and Labor Turnover, report, while there were 9.5 million unemployed in June, the Bureau of Labor Statistics reports. In other words, there were nearly as many job openings as jobless individuals. And while nonfarm payrolls are 15.6 million above their low in April 2020, they’re still 6.8 million below their prepandemic February 2020 level.

Many explanations are offered, including a lack of affordable child care keeping parents out of the job market; fear of Covid-19 for those considering working in public-facing positions; and the effects of generous unemployment benefits in some states, including an extra $300 federal payment, which makes it more lucrative not to work, especially after taking into account the costs of commuting and other job-related expenses.

Finally, the pandemic apparently has spurred widespread reassessment of work-life balance, especially among those with a cash cushion accumulated while they were stuck at home and weren’t spending money for work or for pleasure.

All of these factors are difficult, if not impossible, to quantify. And we’re in the midst of a real-time experiment of manipulating some of them.

The extra jobless payments have been ended in about half the states and will expire in the rest in early September. Reluctance to return to the workplace ought to have been diminished by vaccines. And assuming a return to in-school learning this fall, child-care concerns should ease.

One number that labor economists use to gauge willingness to work is the reservation wage, the minimum paycheck that someone would accept for a new position. The New York Fed tracks this in its Survey of Consumer Expectations, and breaks it down among demographic groups.

In its latest survey, in March, it found that the mean annual reservation wage was $71,403, a surprisingly high amount needed to lure someone to a new job. That represented a hefty 15.66% increase from the figure a year earlier, in the early days of the pandemic, when the jobless rate was coming off a generational low of 3.5%.

Perhaps even more revealing: The percentage increase was greater among workers under 45, at 17.30%, versus 14.15% for those over 45. For individuals without a college degree, it was 26.05%, versus 5.97% for those with one; 18.37% for women, compared with 11.05% for men; and 16.44% for the less-well-paid ($60,000 or less), versus 2.85% for those making more.

Those results make perfect sense to Philippa Dunne of TLR on the Economy because many of these cohorts were “essential workers” during the worst of the pandemic, and women mainly have to deal with the problems of child care.

But these results go against history. During a period of relatively high unemployment, the reservation wage has tended to drift lower, according to a working paper by economists Andreas I. Mueller and Alan Krueger. Normally, the longer you’re out of work, the less picky you get about pay and other employment factors. That’s one of the things that makes the year-over-year jump in the reservation wage so puzzling.

Secondly, as noted, the reservation wage rose most among the less-well-paid, younger workers, women, and those without college degrees. And the gap based on education levels shrank, with non-college graduates’ reservation wage rising to 71% of that of college grads, up from 60% a year earlier, according to A. Gary Shilling’s Insight monthly letter. Why?

One widely proffered hypothesis is that generous government benefits reduce the urgency to work. A 2009 study of the impact of tax credits in the United Kingdom found that they did raise reservation wages. But the preliminary evidence in the U.S. is less clear, according to a paper published July 21 by Arindrajit Dube, a professor of economics at the University of Massachusetts, Amherst. Dube found that in states that cut off the extra $300 in federal jobless benefits, there was no increase in employment during the following two to three weeks. The evidence is still early and more data are needed, he adds.

One reason supply and demand curves for labor don’t meet might be that many businesses and workers remain far apart on pay. The Atlanta Fed’s Wage Growth Tracker showed overall gains of 3.2% in June, down from 3.8% a year earlier, and well short of the 5.4% rise in consumer prices over the past 12 months.

“Maximum employment” is the Federal Open Market Committee’s key goal. Its other policy mandate is to have inflation run “moderately above 2%,” a mission that seems to have been accomplished.

The New York Fed’s next survey will reflect July data, which may show whether the reservation wage remains high and whether many job openings remain unfilled. If that is the case, it would imply that the employment part of the dual mandate hasn’t been met. That presumably would deter the Fed from beginning to normalize monetary policy.

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Write to Randall W. Forsyth at randall.forsyth@barrons.com

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