Wednesday, February 10, 2021

Help Wanted

In a recent Washington Post op-ed, Larry Summers trashed President Joe Biden’s American Rescue Plan as too stimulative and too inflationary. He also strongly implied that the plan included overly generous unemployment benefits that would discourage the unemployed from taking jobs. In fact, there is mounting evidence that the unemployment benefits provided by the CARES (Coronavirus Aid, Relief, and Economic Security) Act have been doing the same.

There actually seem to be lots of job openings, but fewer people willing to take them. That would explain why wages have been rising at a faster pace in recent months. At the start of the pandemic, many low-wage workers lost their jobs, while most high-wage workers could work from home. That explained the jump in average hourly earnings during March and April, for sure. But now, wages may be getting a boost from a shortage of workers. Of course, contributing to the problem may be a mismatch between the skills required for the available jobs and the skills of available workers.

This is obviously a controversial subject. Undoubtedly, there are many people who have lost their jobs and can’t find new ones. It makes sense to target government stimulus support to them until the pandemic is over. Now let’s see what the data have to say on this subject:

(1) Wages and salaries. Despite January’s disappointing payrolls report, our Earned Income Proxy (EIP) for wages and salaries in the private sector rose 1.1% m/m and 0.6% y/y, its first positive reading since last March. It had bottomed at -8.9% y/y last April (Fig. 1). Private-sector wages and salaries in personal income already rose to a record high during December and probably did so again in January according to our EIP!

How can this be? Payroll employment in January was still down 9.6 million y/y, with 10.1 million people still unemployed, i.e., 4.3 million more than at the start of 2020. And the labor force was down 4.3 million from a year ago. Yet private wages and salaries in personal income rose 3.2% y/y in December (Fig. 2).

(2) Hourly wages. The measures of hourly wages all jumped during March and April as low-wage workers bore the brunt of the job losses from the lockdowns (Fig. 3). That might still explain the solid y/y percent increases in average hourly earnings for all workers (5.4% through January), average hourly earnings for production and nonsupervisory workers (also 5.4% through January), and hourly compensation in nonfarm business (7.8% through Q4).

However, there is mounting evidence that wages may be starting to get a boost from a shortage of workers willing to take jobs, perhaps because they can make more with government unemployment benefits, as Summers suggested.

(3) Payroll tax receipts. Allow me to keep you in suspense while I also observe that despite the terrible numbers of unemployed workers and labor market dropouts, total payroll taxes rose to a record high of $1.48 trillion (saar) in personal income, more than reversing its Covid-related decline and exceeding the previous record high during October 2008 by 48%! The 12-month sum of just federal payroll tax receipts rose to a record $1.34 trillion during December, up 6.2% y/y (Fig. 4). Both had declined sharply during the Great Financial Crisis (GFC) and remained weak during the subsequent recovery.

How can this be? Perhaps many of the job losses have occurred for low-wage workers who were paid off the books in cash. In addition, unemployment income is taxable, and many beneficiaries may have elected to have the payroll taxes withheld from their benefit checks.

(4) Income tax receipts. Individual income tax receipts in personal income have rebounded along with personal income and were down only 2.4% during December from last February’s record high (Fig. 5). The 12-month sum of federal income tax receipts also rebounded but was still down 10.9% during December compared to the record high last March.

(5) Small businesses. Yesterday, the National Federation of Independent Business (NFIB) released its January survey of small business owners. Overall, it was a downbeat report, with the Small Business Optimism Index taking a dive during January (Fig. 6). Many of the small business owners in the NFIB survey reported being depressed about poor sales and higher taxes (Fig. 7).

Yet remarkably, when asked about their staffing, 33.0% of respondents said they have job openings (Fig. 8). The net percent of small businesses hiring over the next three months was 17.0% last month. The percent with few or no qualified applicants for job openings was 46.0%. All these readings are within shouting distance of their pre-pandemic peaks. They rebounded dramatically following the lockdowns. Truly amazing!

(6) Indeed. Yesterday, The Wall Street Journal reported, “The number of help-wanted ads returned to pre-pandemic levels in January, particularly among industries that have weathered the pandemic relatively well, a sign that hiring could pick up from its sluggish pace at the start of the year. Available jobs on job-search site Indeed were up 0.7% at the end of January from Feb. 1, 2020, according to the company’s measure of job posting trends. The number of postings to the site has grown since hitting a low in May, though the pace of new openings has slowed in recent months, Indeed said.”

(7) JOLTS. I saved the best for last. Yesterday’s JOLTS report for December provided plenty of jolts on developments in the labor market. JOLTS is the Job Openings and Labor Turnover Survey compiled monthly by the Bureau of Labor Statistics.

For starters, total job openings rebounded from last year’s low of 5.0 million during April to 6.6 million during December (Fig. 9). It’s up 1.4% y/y. That represents a V-shaped recovery, especially compared to the experience during and after the GFC.

The number of unemployed workers as a ratio of job openings fell to a record low of 0.81 during October 2019 (Fig. 10). It jumped to peak last year at 4.63 during April. It was back down to 1.62 during December. The conclusion is that there are more jobs available and fewer unemployed workers competing for them in recent months.

(8) Causalities. By pointing out the above, I don’t mean to diminish the pain and suffering experienced by lots of people on the health, financial, and economic fronts of the world war against the virus. Our labor market has too many unemployed people and too many people who have been forced out of the labor force by the pandemic’s lockdowns of schools and businesses.

On a y/y basis through January, the labor force is down 4.3 million, with women accounting for 58% of the drop. Many no doubt had to quit jobs to take care of children whose schools were operating online only. Also, many individuals in the high-risk age group may have decided to retire early, especially those in face-to-face jobs like teaching.

We can see that in the JOLTS report, where the number of quits jumped from last year’s low of 1.9 million in April to 3.3 million in December (Fig. 11). The quit rate is especially high in the leisure & hospitality industry (Fig. 12). Usually quits rise during good times as people find better jobs. This time, many of the quitters may be dropping out of the labor force.

(9) Bottom line. The data do support Summers' notion that the government’s unemployment benefits were helpful at first but now may be contributing to a shortage of workers and may continue to do so under the Biden plan.

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