In March, the economy created 916,000 new jobs and the unemployment rate edged down to 6%. At the same time, total employment remains roughly 10 million below trend.
This leads some people to assume that the unemployment rate is sort of meaningless, and that the total employment figures show the true state of the labor market.
That’s not quite right. If you want to know how far we are from a full recovery, then the total employment figures are indeed more relevant at the moment. But if you want to understand how hard it is to find a job, then the unemployment rate is probably the better indicator.
When these two series diverge sharply, it is because there has a been a drop in the total labor force. Million of people who were employed in early 2020 are currently not even looking for a job. As a result, the labor market is tighter than you’d normally expect from a situation where employment is 10 million below trend, and indeed far tighter than in 2009:
A record share of U.S. small-business owners reported unfilled positions in March, and firms are starting to boost wages to attract talent, a report by the National Federation of Independent Business showed Thursday. . . .
[A]n overwhelming number of small businesses are having trouble finding qualified applicants to fill open positions. Over 90% of owners looking to hire reported few or no “qualified” applicants for the jobs they were trying to fill last month.
“Where small businesses do have open positions, labor quality remains a significant problem for owners nationwide,” said Bill Dunkelberg, chief economist at NFIB. “Small-business owners are raising compensation to attract the right employees.”
I’m not sure what explains the recent drop in the supply of labor. Part of the decline might reflect workers that are skittish about contracting Covid-19. Some workers may be staying home to care for children, as many schools have closed. The expanded unemployment program pays some workers more in unemployment compensation than they earned on their previous jobs. I expect these roadblocks to mostly be eliminated by late in the year, and hence I expect a surge in labor force participation.
But as of the moment, it’s easier to find work than would normally be the case when employment is 10 million below trend.
The punch line here, as in so many of my posts, is to avoid thinking exclusively in supply or demand terms. When it comes to the labor market, both supply and demand matter. Never reason from a quantity change.
READER COMMENTS
bill
Apr 3 2021 at 9:22am
I think that we presently (or soon will as vaccination spreads to almost all those who want it in the next 6 to 10 weeks) have a much larger than usual group who are technically not in the workforce, but will soon jump back in. So we could even see in the next month or two a result like “economy adds 1.5 million jobs and unemployment rate jumps to 7%”. I don’t see this as contradicting anything you said, just expanding on it.
UU
Apr 3 2021 at 12:18pm
Should not we look at the wage rate to see whether the quantity change is due to supply change or demand change?
Scott Sumner
Apr 4 2021 at 12:02pm
Normally I’d agree with you. But during Covid the composition of the labor force has changed so radically that it’s hard to get accurate estimates of wage changes. You need to look at wage changes within a given job category.
Lizard Man
Apr 5 2021 at 2:06am
I guess it seems to me that the unemployment rate isn’t particularly useful as a measure of how far away the economy is from reaching inflation due to rising wages from competition for workers.
Also, never trust a business lobby to present a remotely accurate opinion of the labor pools they are trying to hire from. For businessmen, wages are always too high and the quality of applicants always unsatisfactory. What a businessman who complains about those things is really saying is that they are cr@p at managing and coaching employees.
anonymous
Apr 5 2021 at 8:24pm
“What a businessman who complains about those things is really saying is that they are cr@p at managing and coaching employees.”
Being a business owner, I strongly disagree. Most prospective employees cannot be coached or managed into being competent at their jobs. Nor is this something that I want to do. If I want to do it, I will pay a lower price and hire someone fresh out of school who has the ability to learn. What I mean if I say candidates are poor and I have to pay higher prices, is that candidates are poorer than when I was hiring IN THE PAST and I have to offer higher wages than I expected/am used to.
In my recent experience, candidates have been pretty good and wage expectations are around where I expected, maybe a bit higher. But still more interviews to do.
Lizard Man
Apr 5 2021 at 11:54pm
“Most prospective employees cannot be coached or managed into being competent at their jobs. Nor is this something that I want to do.”
“What I mean if I say candidates are poor and I have to pay higher prices, is that candidates are poorer than when I was hiring IN THE PAST and I have to offer higher wages than I expected/am used to.”
Combining these two things together, how do you stay in business when the labor pools you are trying to hire from get tight? It seems to me that competitors that do find a business model where they can coach prospective employees to competence at lower wages should be able to push your company out of business. At the very least that is the standard libertarian line about how the economy should work.
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