Posted by: Josh Lehner | July 20, 2021

Labor Supply Optimism

The labor market is tight. Firms are looking to fill record job openings and the number of available workers is lower than before the pandemic. The acute severity of these dynamics will persist for a few more months, but come late fall they should lessen some. But even then labor supply will merely rebound to roughly where it was pre-COVID. As such it’s important to keep in mind that the labor market will remain tight, largely due to demographics. Labor will not be abundantly available come the winter, just as it wasn’t in 2018 or 2019.

There are two main reasons I am a labor supply optimist. The first is we, as humans, like to do things. We like to feel productive, to receive feedback and affirmation. Of course when we don’t get this at our jobs, it creates its own challenges, which is something I think we’re seeing with our front-line service workers during the pandemic.

The second reason is at a base level we all need to pay the bills. To do this, the vast majority of us need to work to earn a paycheck. Given the current strong incomes and excess savings, there are fewer people who need to work today, but will again in the near future. My best guess is this will not happen immediately after UI expires in early September but rather a couple of months later as the savings is spent down.

This cycle is different. We know that. But one of the stories we told ourselves about the last cycle was labor would only return with jobs were more plentiful and paid better. Clearly this was not happening in the aftermath of the financial crisis but over the second half of last decade these dynamics did play out. I do think a similar pattern can be seen this cycle, but on a much accelerated time line.

First, job opportunities are already plentiful. Businesses are looking to fill a record number of vacancies. These vacancies are exacerbated, or increased more than expected, by a higher number of quits and retirements. Remember every time a worker retires or quits, it leaves an opening that needs to be filled. Furthermore, the lower participation rates during the pandemic means the normal industry churn and therefore the number of openings is exacerbated as well. Even so I think it is fair to say that given strong consumer demand, businesses are trying to staff back up and expand even more if they could find the workers. Labor demand is not holding back the economy, unlike a decade ago. This is encouraging!

Second, the jobs are paying higher wages today. This is different than last cycle as well. Wage growth, especially in the low-wage industries is rising quickly. Firms are competing more on price to attract and retain workers. This is a necessary condition to see strong labor supply. See our previous deep dive into wage growth for more.

OK, so how is this actually going in terms of the labor market? I would argue pretty well overall, but not perfectly. We are currently recovering much faster than recent cycles, but it is possible that we could recover even faster if not for the things temporarily holding back labor supply.

When it comes to those labor supply constraints the first (and only) one folks want to talk about is the enhanced unemployment insurance benefits. The average UI check in Oregon is equal to 100% wage replacement as of a couple months ago. That is a disincentive for some workers. The replacement rate is higher for some low-wage workers, especially those working part-time as the $300/week federal plus up is a lump sum given to all who qualify.

Two things.

One, the improvements in the labor market mirror the patterns seen in continuing UI claims. They are moving together. That said it does not mean that without UI the recovery couldn’t be faster. It also means there is not this giant pool of potential labor that is immune to the broader labor market changes. They may not be working but they are paying attention and responding to the job opportunities and higher pay.

Two, I argue it’s not just UI but the overall strong household income that matters most today. UI is a part of that. But remember that the recovery rebates in aggregate are the same size as UI. It’s just one was disbursed three times while the other trickles out a little bit every week. Additionally, underlying income growth absent federal aid is also strong, see our previous report for more on income trends during the pandemic. Finally, the new child tax credit will further strengthen household incomes today as well.

Bottom Line: Demographics will weigh on labor supply for the next decade. However among prime working-age Americans I am a labor supply optimist. Possibly even about teenagers as well.

Jobs are already plentiful and wages have leveled up. This cycle is different, and the accelerated labor market dynamics are proof of that. Once the temporary constraints of the pandemic ease, which will take months, not weeks, workers will return in greater numbers. That said firms will still find it challenging to attract and retain workers. Underlying increases in wages and benefits will continue.


Responses

  1. Thank you for sharing this analysis.

    One question I have. Are we seeing a divide between urban and rural workforce returning? I am the City Manager of Tangent, and we have some industries trying to fill positions that offer good pay and benefits. Most of our workforce is agriculture and construction.

    Thank you,
    Joe

    • Thanks Joe. Good question and I’ll update some of our regional work soon. Last I looked we know the big urban economies (Portland and Eugene in particular) are down a lot more than smaller urban and rural economies. That’s in terms of payroll employment. We chalk most of that up to lack of business travel and working from home, but at some point we expect the large urban areas to rebound stronger, in part due to faster population growth. I guess a question is whether some of the rural losses are more permanent than temporary. Let me work on that a bit.

  2. Attention Josh Lehner

    Good morning Josh,

    I appreciate your articles and commentary each week. I have a background in banking/economics and now teach for Umpqua Community College. I often use the Office of Economic Analysis information in my classes.

    This summer I am in Boise, Idaho on vacation and noticed a trend that I have been ignoring. Boise clearly has a tight labor market with far too many open jobs. But, and this is the key I want to share, I think we have an extraneous event that is not being captured.

    Boise, much like other college towns is dependent on student labor. But, the BSU campus has been closed and the dorms are empty, much like Corvallis. So, I’m seeing many jobs such as fast food, restaurants, and bars that would be typical hiring slots for the college students. These businesses are now having to compete with more traditional employment opportunities for workers.

    Perhaps, we need to start considering and analyzing the impact on the local labor markets when the college students are not on campus and available for the labor pool?

    Gary Gray
    Business and Economics Professor
    Umpqua Community College
    gary.gray@umpqua.edu

    • Thanks Gary. That’s a good point about the students working in the private sector. No doubt that’s a real challenge. Employment rates among that age are down the most (more next week). I do know actual student workers are a big part of the local government education employment declines (along with substitutes, and adjuncts). But that dynamic feeds through to everything you just mentioned.

  3. Interesting article as always. Any idea on how the openings are distributed?
    Was thinking most are in two camps:
    1) Min wage service jobs that lots of current workers don’t want or are trying to get out of
    2) Skilled high-pay gigs that need people with training, good work ethics and ability to pass the drug tests, which for those <35 are a distinct minority.

  4. […] while I am a labor supply optimist, that does not mean there are not some underlying changes in the workforce, and in the service […]

  5. […] It has been our office’s view that what matters most for labor supply is total household income. If you have the financial cushion to not work given *gestures at everything* then some individuals will choose not to do so. Initially federal aid kept households afloat financially during a global pandemic. One result of the federal aid was that households built up a tremendous amount of excess savings. Expectations were, and continue to be that as those savings are spent, more workers will return to the labor market as they need to pay the bills and put food on the table. I remain a labor supply optimist. […]


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