Is the Labor Market Back?

Last month I asked if travel was back. Air travel has recovered a lot from the depths of the pandemic, but it was still only about 80-85% of pre-pandemic levels.

Labor markets also plummeted during the worst of the pandemic, and have slowly (and sometimes quickly) clawing their way back. But are we back to pre-pandemic levels?

The national unemployment rate is now under 4%, a level which is rarely reached even in the best of times. But there is considerable variation across states.

The latest BLS release of state unemployment data shows that some states are at their historic lows, with one state standing out: Nebraska currently has the lowest unemployment rate a state has ever recorded at 1.7% in December 2021 (the data go back to 1976). Utah is also just below 2% in December — at 1.9% it’s the 2nd lowest in history (after Nebraska, of course).

Of course, all is not well everywhere. California and Nevada have the highest unemployment rates, at around 6.5%. This is well above their pre-pandemic levels of about 4%, and also well above what you would expect during normal times, other than during and immediately following at recession.

So is the labor market back in Nebraska, Utah, and other similar states? Not so fast.

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In States that Ended the Extra $300/Week Unemployment Benefits, People Returned to Work at Over Twice the Rate than in the Other States

Anecdote # 1. In June we stayed a couple nights in a motel in western Massachusetts. The proprietor was outside watering flowers and trimming shrubs. I asked about business. He told me, “Well, we are starting to get customers back, though we are still hurting. But my bigger problem is that I cannot find a single person who wants to come back and work. Between federal and state unemployment benefits, they are making $850 a week, which is over $21 per hour. Anybody can claim those benefits, you don’t even have to prove that you were laid off. I cannot match that money, much less beat it.  My wife and I are doing all the work. I don’t know how we will manage long term.”

I murmured something sympathetic, and opined hopefully that if these benefits run out in September, folks might come back to work. This area has been economically depressed for decades, and normally people would jump at any kind of job. He shook his head and said that the state benefits would continue, and that his key workers have told him that they have saved so much money from unemployment and stimulus funds (and perhaps being allowed to skip rent or mortgage payments due to federal “forbearance” laws) that they may never come back to work.

Anecdote #2. In July my wife and I went into a hardware store in northern Virginia to buy some stuff. The employees were helpful and efficient. My wife complimented them, and said something like it must be nice working in an environment where everyone seemed to have a good attitude. The clerk’s response was yes, but they were having to work more overtime than they really wanted. And why was that? Because  the other workers won’t come in, because they were making about as much money staying home on unemployment – – so why should they bother working?

Those are a few personal data points on the effects extending the big unemployment benefits. I have read numerous other anecdotes from small businessmen and women that they cannot operate as fully as they would like because they cannot get help. And really, anybody with eyeballs can see the Help Wanted signs everywhere today.

Deeper thinkers than I will have to tease out all the ramifications of this situation. In GDP growth terms, it seems clear that incentivizing people to not work is a bad thing. On the one hand, we could say, “Just pay the workers more and they will come”. That is fine, if a business can raise the prices it charges for its products to cover the added labor costs, but that can only go so far. What is more likely is that businesses will figure out ways to get by permanently with fewer workers. This may lead to higher nominal productivity per worker, but also more structural unemployment.

Without further ado, here are some data which may illuminate the extent to which extended unemployment benefits have kept people from working. The nation has been running a real time experiment over the past several months. 27 states (“red” states, as you would have guessed) stopped the extra $300/week benefits in June, while 23 states and DC retained them.

Wolf Richter has compiled some numbers on unemployment insurance (UI) claims by state, reported weekly by the Department of Labor. A data point of “continued claims” reflects the number of people that have claimed UI for at least one week. A drop in continued claims would indicate that they have started working again. He lumped the states into two groups, “Enders” who terminated the extra unemployment benefits, and “Keepers” who retained them. Here are the results through the end of August:

These results seem to speak for themselves. Far more people went back to work in the “Ender” states (32% vs. 14%).  Here are the same results, reported as four-week rolling averages for smoothing, though that introduces a time lag:

Richter quotes the Wall Street Journal to the effect that:

Economists at Goldman Sachs analyzed the behavior of workers in the July jobs report after adjusting for age, gender, marital status, education, household income, industry and occupation of a respondent’s current or prior job. They said they found “clear evidence that benefit expiration increased the rate at which unemployed workers became employed.”

Goldman Sachs estimated that if all states had ended benefits, July payroll growth would have been 400,000 stronger. Economists at the firm projected the nationwide benefit cutoff this month will account for 1.5 million job gains through the end of the year.

Richter notes that after the federal cutoff, some states will continue to offer the $300/week funded with leftover stimulus money, but he expects overall more people to report for work this fall. I think that is likely, but I am concerned that conditioning a lot of people to not work for 1.5 years may have given us a long-lasting step downward in the percentage of adults who are willing to work. Some other post, some other time, maybe I will explore how we saw that effect in the wake of the 2008-2009 Great Recession where again people got conditioned to getting by without working.

P.S. Zachary Bartsch’s recent post on this blog, Redesigning Unemployment Insurance, speaks to some of these issues of incentivizing people to (not) work.

Redesigning Unemployment Insurance

How does unemployment insurance work?

From the worker’s perspective, unemployment insurance isn’t detectable unless the worker loses their job. Once that’s happened, the person can apply for benefits – a check that you can cash or deposit into your bank account. These benefits vary by state, with the composition of your family, and your income prior to separation. The most generous maximum benefit is provided by Massachusetts at $823 per week for an individual and the least generous is provided by Mississippi at $235 per week. States also vary by the length of time for which a person can collect benefits. Montana is the most generous at 28 weeks and North Carolina ties with Florida for the least generous at 12 weeks. If you find a job and become employed before the maximum benefit duration, then you stop receiving payments.

From the employer’s perspective, unemployment insurance is the premium that you pay per employee each year. The premium is not optional – so it’s a tax. Employers pay it for the privilege employing workers. There are two components of the tax: a state and federal portion. The federal portion is more or less constant per employee. The state portion changes with the incidence of unemployment claims and payments that a state makes in the prior year. When a lot of people get fired, state unemployment taxes rise as a policy response.

Why provide UI benefits?

There are two typical reasons for governments to provide unemployment benefits – and a 3rd not-so-typical reason. The first is as a matter of relief. People often lose a job through no fault of their own, and we don’t want those people to become destitute or to forego the bare essentials that money can afford. The second reason to provide benefits is as a matter of macroeconomic spending stimulus. Contrary to popular belief, this stimulus is not about encouraging greater production through greater sales. The stimulus is meant to encourage total spending in the economy to be higher than it would have been otherwise (See Irving Fisher on debt deflation and Scott Sumner on NGDP targeting). The 3rd and not so typical reason for governments to provide unemployment insurance is to keep people from going to work (See Tyler Cowen for why this might be desirable during a pandemic).

Incentives Matter

The 3rd reason above hints at a problem. People lose benefits when they become employed again. It is exactly because benefits provide relief that they reduce the incentive to find a job. Importantly, this is not a judgment of propriety or moral chastisement. It simply is the case that UI payments make being unemployed a little more tolerable. The tenacity with which people search for a job becomes a little less urgent. Anyone well acquainted with human nature (outside of a textbook) will tell you that it is good for humans to work. There are economic, social, and psychological benefits – not to mention the material benefits enjoyed by society. So, longer periods of unemployment are a problem.

Not only does the receiving UI benefits cause longer unemployment spells, losing benefits when you find a job acts as a penalty to finding a labor market match. It’s not happenstance that people who lose their UI benefits tend to become employed shortly thereafter. In terms of economic activity and gains from trade, society is materially better off when people find jobs more quickly (probably socially better off too). If you can get people to acknowledge the above logic, then there is plenty of room for people to disagree on the propriety of the UI benefits system.

Remove Disincentives – Keep the Relief

As Thomas Sowell is known for saying “There are no solutions – only trade-offs.”  That’s true. It’s also true that there is also no such thing as a free lunch. But some things are a lot more like a free lunch than others.

Wouldn’t it be nice if we could just help unemployed people and not disincentivize them from finding a job? In part it’s impossible. The UI payments do both and there is no separating them. But, the disincentive provided by removing payments when a job is found can be addressed. Why not just permit UI benefits even after someone has found a job?

An Outlay Neutral Prescription

What does the social program designer consider? Simply, the policy maker considers government outlays, government revenues, and economic impact. All else constant, policy makers like small outlays, high revenues, and good economic impacts.

I propose that states adopt the following policy. First, eliminate variables benefits. This part of the policy is not essential, but it clarifies the exposition. Now, it doesn’t matter whether you were an executive at a bank or a janitor at the bank – both receive the same weekly UI payment if they lose their job. What should the benefit be? For the purposes of outlay neutrality, the new benefit is the same as the average benefit was last year. The average benefit and total outlay across all claimants is unchanged.

When a person finds a job under the current system they are paying an implicit tax when their benefits get pulled. Let’s eliminate the employment disqualification. That’s right. When a person finds a job, they just continue to receive benefits. They don’t receive UI benefits indefinitely, however. In order to maintain outlay neutrality, the duration of UI benefit payments will be equal to the average duration last year.

Say what?!

Put yourself in the shoes of the person looking for a job under the current system. Say that your UI benefit is $800 per week and that you job-search for 10 hours each week. Say that you find a job that pays $1,000 per week. If you take the job, then you will go from working 10 hours per week to working 40 hours per week. And, you go from having an income of $800 per week to having an income of $1,000 per week. In other words, you get to work 30 more hours per week for $200 more income. The unemployed person is making the decision to take the job at $25 per hour, or stay home at $80 per hour ($1,000/40 Vs $800/10).

But what’s the perspective under the outlay neutral proposal in which the benefits continue even after employment? The decision is substantially different.  The unemployed person is making the decision to take the job at an average of $45 per hour, or stay home at $80 per hour ($1,800/40 Vs $800/10).

Of course, staying home still might look attractive. But it looks relatively less attractive than it did under the standard system of work-disqualifying benefits. If a person has 4 weeks of remaining benefits when they find the job, then continuing to receive UI benefits would mean that the total income over that month would be $7,200, versus $3,200 from staying home, or $4,000 under the standard system. Again putting yourself in the shoes of the unemployed, doesn’t this decision look different? Might you feel enticed to accept the job?

Under the proposed policy, government outlays are constant – there is no change in expenditures. Revenues increase because more employed workers means more employer-paid UI tax payments (not to mention other tax payments). Economic performance improves because greater employment increases total output. Let’s go ahead and throw in the additional social benefits too.

People Have Feelings

…And they’re complicated. Part of the sympathetic idea of unemployment insurance benefits is to provide relief. As a matter of gut instinct, this is why many people favor the UI transfer program over others. They can imagine themselves in such a circumstance through no wrong-doing of their own. But once we say that benefits will continue – even after someone finds their job – the UI program becomes less obviously a matter of sympathy-inducing relief. There is a political problem.

I say: put your feelings aside. Let’s get people employed again. Let’s increase tax revenues and increase economic activity. Let’s address the problem of unemployment in a better way – and spend not a dime more doing it.