Supply-Side Constraints in Labor Market Performance

Eakinomics: Supply-Side Constraints in Labor Market Performance This past Friday, the Labor Department announced that employment rose by 850,000 in June. The top-line job growth exceeded expectations, but other indicators were less robust. Labor force participation was unchanged from May and remains well below pre-pandemic levels, and the unemployment rate rose by 0.1 to 5.9 percent. The report fed continued frustration with the pace of recovery. In its aftermath many are wondering, what can policymakers do? Unfortunately, their options are limited. To see this, consider the table (below) of labor market indicators by industry. The first column shows the share of employment in each industry in February 2020, just prior to the onset of the pandemic recession in March. One might imagine a stylized recession-recovery in which demand for all sectors contracts at the same pace, and then as income recover the industries expand equally. If so, the shares of employment would be unchanged. Under those circumstances, the actual employment in column 2 could be predicted by knowing overall employment (145.8 million) and the share in column 1. Those predictions are contained in column 3. They do not match the actual employment by industry in column 2. (The differences are in column 4.) Overall private employment is 17,700 below the predicted level, an amount offset by government employment being 17,000 higher. Within the private sector, employment has recovered faster in construction (101,200), manufacturing (86,600), wholesale trade (69,000), retail trade (388,900), transportation and warehousing (164,600), utilities (16,200), financial (318,600), professional and business services (319,100), and education and health service (61,400). The other sectors have all recovered much less than the overall economy would suggest. Most notably, the leisure and hospitality sector has 1.4 million fewer employees than aggregate employment would suggest. That’s pretty clear evidence that employment dynamics are not being driven exclusively by demand-side conditions. The other piece of evidence is shown in the final column of the table, which displays the year-over-year growth in average hourly earnings in each industry. For example, in the entire private sector, earnings are up 3.6 percent to $30.40 in June.  Most notably, employers in the leisure and hospitality sector appear to be competing strongly to get workers – average hourly earnings are up 7.1 percent in the past year. Demand conditions are relatively easy for policymakers to address. The Federal Reserve can lower and raise interest rates. Congress can cut and raise taxes or do the same with federal spending. But what to do about supply? Vaccinations are the best tool to address the interference of the coronavirus in work. Child care and schools are returning to normal, and parenting arrangements are normalizing as well. The final piece is the excessive unemployment insurance benefits, which nearly half of governors have rescinded and which will expire on Labor Day regardless. The economy is healing, perhaps slower than one would hope, but healing. At this point, policymakers will be tempted to accelerate the recovery, but there is little more that they can do.