The problems facing Minnesota’s small businesses: higher welfare
In April, I had an op ed in the Star Tribune titled: ‘A new unemployment problem: it pays too well.’ In it, I noted the phenomenon of elevated levels of…
The April jobs report, issued on Friday, showed that, across the United States, employers added just 266,000 jobs last month and the unemployment rate ticked up to 6.1 percent. This was well below economists’ expectations of 1 million new jobs and an unemployment rate of 5.8 percent. And, while February’s numbers saw an upward revision from 468,000 to 536,000, March’s were revised downwards from 916,000 to 770,000.
“I think this is just as much about a shortage in labor supply as it is about a shortage of labor demand,” said Jason Furman, an economist at Harvard University and a former Obama administration advisor. “If you look at April, it appears that there were about 1.1 unemployed workers for every job opening. So there are a lot of jobs out there, there is just still not a lot of labor supply.”
This is a point I made recently:
…the Minnesota Department of Employment and Economic Development says that there are over 100,000 job postings in the state while, at the same time, the Bureau of Labor Statistics’ Local Area Unemployment Statistics (LAUS) show that there were 9,700 fewer Minnesotans employed in March 2021 than there were in September 2020.
While demand for labor is rising, the supply of it isn’t rising fast enough to meet it. This should bring higher wages, and it is, but many businesses will struggle to match what the government is paying people not to work — as much as $26 an hour in Minnesota with ‘enhanced’ unemployment benefits.
In a decent review, economist Noah Smith notes that:
…demand seems robust, and fear and uncertainty on the part of either workers or businesses does not seem like the limiting factor for hiring. Instead, it seems like either businesses are just temporarily trying to get away with not raising wages, or there are some subgroups of workers who aren’t ready to get jobs yet, whether because they’re busy with child care or they’re happy to keep taking Pandemic UI for a little while longer.
Note that the theory of why Pandemic UI didn’t kill jobs when the economy was collapsing is perfectly consistent with the idea that it’s holding back employment now. When the main determinant of employment is how many people leave their jobs, it makes sense that people would hang onto them rather than go on a temporary dole. But when the main determinant of employment is how many people leave their homes and go get jobs, it makes perfect sense that those who are already on the dole might choose to stay there for a few more months.
Smith goes on:
The child care problem can only be addressed by reopening schools (and vaccinating the kids). There are probably ways to solve “wage hike hesitancy” as well. But just in case Pandemic UI is one of the big reasons holding back full recovery, we should modify the program.
It’s important to realize why we did Pandemic UI in the first place. It was a form of disaster relief — a kind of retroactive social insurance, to make sure people came through the pandemic in good financial shape instead of destitute and ruined. As soon as the disease itself is no longer a danger, that mission has been accomplished.
This echoes what I wrote for the Star Tribune recently:
Whatever the merits were of enhancing and extending unemployment benefits when the pandemic hit and unemployment skyrocketed, those extraordinary measures must be wound down as more Americans are vaccinated and as more states lift their COVID-19 restrictions. There should be no more stimulus payments and the enhancements and extensions to unemployment benefits should be phased out. If they are not, we risk a prolonged period of increased unemployment.
The labor supply issue is part of a broader supply side problem facing the American economy at present. Reacting to the April jobs numbers, Speaker Pelosi said: “the evidence is clear that the economy demands urgent action” and that is true, but the action required is not to try and boost the demand side with more monetary and fiscal stimulus. With supply constrained, that will only lead to inflation. What is needed is to get the supply side moving again by getting the obstacles to the production of goods and services out of the way.
Yesterday, President Biden announced: “We’re going to make it clear that anyone collecting unemployment who is offered a suitable job must take the job or lose their unemployment benefits.” Of course, if you just don’t apply for the jobs you don’t run this risk. The policy is unlikely to achieve what the president thinks it will.
John Phelan is an economist at the Center of the American Experiment.