A natural experiment in the US labor market commences next week as pandemic benefits (including pandemic unemployment insurance) are scheduled to end on Labor Day.
The US labor market suffered a terrible shock from the COVID19 pandemic in early 2020, and experienced a remarkably rapid initial recovery — a snap back of unprecedented speed and magnitude. Curiously, however, the return to pre-pandemic employment rates seemed to stall out last fall. While employment rates for men and women 20 and over remain below their Great Recession nadir, they have risen only by a mere one percentage point since October 2020.
Yet, while no one was vaccinated in October 2020, today, thanks to the advent and rollout of three highly effective coronavirus vaccines over 60 percent of the US adult population — over 160 million men and women — are fully inoculated. So what is constraining the return to paid work?
It does not seem to be a demand side problem — i.e., a lack of disposable income on the part of consumers. Far from it. Thanks to emergency measures during the pandemic, US disposable income has never been higher than during the pandemic. It remains decidedly above trend even today, thanks to extraordinary and continuing government transfer payments originally intended to prevent an economic collapse.
Part of the original intention of the government’s stimulus program was to protect financially vulnerable households and to keep the economy from crashing. This brought about apandemic unemployment insurance program that did not require its beneficiaries to be technically unemployed. From the end of World War II to 2020, America always had more unemployed individuals than recipients of monthly unemployment insurance benefits. That situation flipped in 2020: we now have consistently more unemployment insurance recipients than unemployed workers. Last month alone, over 3 million more people received benefits than those who were out of a job and looking for work. In other words, current policy is paying millions of nonworking people unemployment stipends as if they were unemployed, and as if there were no work to be had.
This despite the fact that currently in America, work is going a-begging anywhere one goes, and employers are short-handed and desperate for more paid help. According the US Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey, America has never had so many unfilled positions: over 10 million open slots as of June 2021. (Many millions of these jobs, we may note, are for occupations that do not require more than a high school diploma, if that.) Note also that since October 2020, when US work rates began to stall, openings for jobs in the USA have shot up by over 3 million. And yet, while America is awash with unfilled jobs, the work rate (employment to population ratio) for a key component of the US labor force, prime age men 25-54 years of age, is lower today than it was in 1940—at the tail end of the Great Depression.
These charts suggest that our current labor market problems reflect unintended consequences of government policy. We seem to face a supply side constraint that may have been exacerbated by transfer payments — including payments to working age people who are currently neither working nor looking for work. Have these policies caused long-term changes in expectations and attitudes about work in modern America? We are about to find out.
