5 questions for Michael Strain on the labor market

By James Pethokoukis and Michael Strain

Since the economic downturn of the COVID-19 pandemic, production has rebounded to pre-pandemic trends. But the effects of the pandemic are ongoing in the US labor market, with stagnant labor force participation rates and a shortage of workers to fill vacant positions. Michael Strain joined a recent episode of “Political Economy” to explain what’s going on.

Mike is the Arthur F. Burns Scholar in Political Economy and the Director of Economic Policy Studies at AEI.

Below is an abbreviated transcript of our conversation. You can read our full discussion here. You can also subscribe to my podcast on Apple Podcasts or Stitcher, or download the podcast on Ricochet.

Pethokoukis: What is the state of the labor market right now?

Strain: If you look at some indicators, you see a labor market that’s in great shape. There are more vacancies than there are unemployed workers. A big problem that the US labor market has had in the past couple of decades has been the opposite. Now, jobs are chasing workers; workers are not chasing jobs. People wouldn’t voluntarily quit their job unless they were pretty confident they could get a better job or at least the job that was at least as good. Nominal wages are growing really rapidly. So all of that really points to a very strong labor market.

Labor demand is white hot, employers are rapidly raising wages and creating job vacancies that they’re trying to fill. At the same time, we’re six or seven million jobs in the hole, workforce participation isn’t really improving, and we have millions of people on the sidelines who shouldn’t be there.

A sign in Augusta, Maine advertises job openings amid the shortage in labor due to the Covid-19 pandemic. Photo by Samuel Rigelhaupt / Sipa USA

Why aren’t they coming back to work?

Well, I think it’s a combination of factors. Some people are still worried about the pandemic and don’t feel comfortable coming back to work as a consequence of that. Schools are open for the most part, daycare centers are open for the most part, but they’re still really affected by the pandemic. The likelihood that we might get an email or a phone call that says, “Hey, your kid’s classroom is going to be shut down for a week or two,” is a daily reality for us, and that’s just not the kind of thing that people had to worry about before the pandemic. And I think that is keeping some people from reentering the workforce.

Another big factor is the generosity of unemployment benefits. President Biden, as part of the American Rescue Plan, increased the generosity of unemployment benefits by $300 a week. On average, unemployment benefits are typically about $350 a week. So going from 350 to 650 is a really large increase, and that has kept people on the sidelines. That program expired last month, but it takes people a while to start their job search and to find a job. And so, I think that’s another factor keeping people on the sidelines.

Some people are saying workers are not going to go back because they’ve had this time away and they now realize they hated those jobs. Those people aren’t going to come back unless the wage structure of the United States changes. Do you see something like that happening?

No, I don’t, and I hope that isn’t happening. I think people have been thinking about the jobs that they used to have, but they’re making those evaluations in a pandemic context. It’s a context of schools being uncertain. It’s a context of still being able to get a decent income from not working. As that context changes, their assessment of their employment opportunities, I suspect, will also change. And we should hope that it does.

Businesses are able to produce goods and services as if there never were a pandemic, even though we’re six or 7 million workers in the hole. And my concern is that businesses will have figured out how to get by with fewer workers. By the time workers are ready to come back, labor demand might have cooled off and businesses might say, “Hey, we just need fewer workers than we used to need.” And the jobs that they’re counting on returning to may not be there for all of them.

And in that kind of situation, either these people need to increase their skills so they’re more attractive or, what, we start paying people a basic income not to work? Is this a permanent shift?

Right now, wages are growing at about a 5 percent annual rate. One place that wages come from is from the productivity of workers. And then another determinative of wages are things like bargaining power, the power balance between workers and firms. You’re seeing wages go up because, at the macroeconomic level, demand is surging and supply can’t keep up. And that is not increasing worker skills; it is tilting the balance of power away from businesses and towards workers.

But there are no institutional changes in the US economy that are permanently altering that balance. It’s not as if unionization rates are wildly increasing, or it’s not as if there are all sorts of new laws being passed. As demand moderates and as the supply side of the economy is able to expand, we’re going to start to look more and more like we used to, prior to the pandemic. And the power balance between workers and firms is going to normalize as well. We’re going to be left with a workforce that isn’t more skilled and dynamics between businesses and workers that look more like they always have. Nothing that’s happening this summer or fall is permanent.

As I hear about this “Great Resignation” and critiques of the US labor market, there seems to be an actual disagreement of the value of work. Do you have a different philosophy of the value of work than some other people?

There are jobs that are physically demanding and that are unpleasant for a myriad of circumstances, for sure. And there are people in public life who argue that that’s not a good thing. And I think that their view gets some things right. The labor market should be characterized by upward mobility — that people can climb a ladder and not just get stuck on one of the rungs. But I think that view misses a lot about the inherent dignity in all work and about the ability of people to make real contributions to society in all those jobs.

I think it’s unfortunate that there are prominent voices in public life who refer to those kinds of jobs as dead-end jobs. I think it’s a bad message to send, telling millions of people that their jobs are dead ends. They’re making valuable contributions and they can serve as stepping stones to even larger contributions and even better jobs.

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