In March, the economy created 916,000 new jobs and the unemployment rate edged down to 6%. At the same time, total employment remains roughly 10 million below trend.

This leads some people to assume that the unemployment rate is sort of meaningless, and that the total employment figures show the true state of the labor market.

That’s not quite right.  If you want to know how far we are from a full recovery, then the total employment figures are indeed more relevant at the moment.  But if you want to understand how hard it is to find a job, then the unemployment rate is probably the better indicator.

When these two series diverge sharply, it is because there has a been a drop in the total labor force.  Million of people who were employed in early 2020 are currently not even looking for a job.  As a result, the labor market is tighter than you’d normally expect from a situation where employment is 10 million below trend, and indeed far tighter than in 2009:

A record share of U.S. small-business owners reported unfilled positions in March, and firms are starting to boost wages to attract talent, a report by the National Federation of Independent Business showed Thursday. . . .

[A]n overwhelming number of small businesses are having trouble finding qualified applicants to fill open positions. Over 90% of owners looking to hire reported few or no “qualified” applicants for the jobs they were trying to fill last month.

“Where small businesses do have open positions, labor quality remains a significant problem for owners nationwide,” said Bill Dunkelberg, chief economist at NFIB. “Small-business owners are raising compensation to attract the right employees.”

I’m not sure what explains the recent drop in the supply of labor.  Part of the decline might reflect workers that are skittish about contracting Covid-19.  Some workers may be staying home to care for children, as many schools have closed.  The expanded unemployment program pays some workers more in unemployment compensation than they earned on their previous jobs.  I expect these roadblocks to mostly be eliminated by late in the year, and hence I expect a surge in labor force participation.

But as of the moment, it’s easier to find work than would normally be the case when employment is 10 million below trend.

The punch line here, as in so many of my posts, is to avoid thinking exclusively in supply or demand terms.  When it comes to the labor market, both supply and demand matter.  Never reason from a quantity change.

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