Why there are many jobs and still unemployment

Markets, we learn in economics classes, are supposed to purify; it should therefore be impossible for a huge unmet demand to exist at the same time as an excess of supply. That is clearly the case with wheat or widgets, but it should also apply to people looking to hire employees or people looking for a job. The supply and demand curves should intersect somewhere on the chart.

It’s a mystery that they don’t. As widely reported, there were more than 9.2 million unfilled vacancies at the end of May, according to the most recent Shocks, or Vacancies and Employment Turnover, Report, while there were 9.5 million unemployed in June, the Bureau of Labor Statistics reports. In other words, there were almost as many vacancies as the unemployed. And while nonfarm payrolls are 15.6 million above their April 2020 low, they are still 6.8 million below their February 2020 prepandemic level.

Many explanations are given, including a lack of affordable childcare that keeps parents out of the labor market; fear of Covid-19 for those considering working in public positions; and the effects of generous unemployment benefits in some states, including an additional $300 federal payment, making it more lucrative not to work, especially when factoring in the cost of commuting and other work-related expenses.

Finally, the pandemic has apparently led to a widespread reassessment of work-life balance, especially among those with a cash buffer built up while stuck at home and not spending money on work or pleasure.

All of these factors are difficult, if not impossible, to quantify. And we’re in the middle of a real-time experiment to manipulate some of them.

Additional unemployment benefits have been discontinued in about half of the states and will expire in early September in the rest. Reluctance to return to the workplace should have been reduced by vaccines. And assuming a return to school learning this fall, childcare concerns should ease.

One number that labor economists use to measure willingness to work is the reservation wage, the minimum wage a person would accept for a new position. The New York Fed keeps track of this in its Research into consumer expectations, and distributes it across demographic groups.

In its latest survey, in March, it found that the average annual reservation wage was $71,403, a surprisingly high amount needed to entice someone to a new job. That represented a sharp increase of 15.66% from the figure a year earlier, in the early days of the pandemic, when the unemployment rate hit a generational low of 3.5%.

Perhaps even more revealing, the percentage increase was greater among workers under 45, 17.30%, versus 14.15% for those over 45. For those without a college degree, it was 26.05%, versus 5.97% for those with one; 18.37% for women, compared to 11.05% for men; and 16.44% for the less well-paid ($60,000 or less), versus 2.85% for those who earn more.

Those results make perfect sense to Philippa Dunne of TLR on the Economy, as many of these cohorts have been “essential workers” during the worst of the pandemic, and women are mostly dealing with the issues of childcare.

But these results go against history. According to a working paper by economists Andreas I. Mueller and Alan Krueger, the reservation wage tends to fall during a period of relatively high unemployment. Normally, the longer you are out of work, the less choosy you are about salary and other work factors. That’s one of the things that makes the annual jump in reservation wages so puzzling.

Second, as noted, reservation wages rose the most among the less well-paid, younger workers, women and those without college degrees. And the gap based on education levels narrowed, with the reservation wage of undergraduates rising to 71% of that of college graduates, up from 60% a year earlier, according to A. Gary Shilling’s Insight monthly letter. Why?

A widely held hypothesis is that generous government benefits reduce the urgency to work. A 2009 study on the impact of tax credits in the UK found they were increasing reservation wages. But the preliminary evidence in the US is less clear, he says a paper published on July 21 by Arindrajit Dube, professor of economics at the University of Massachusetts, Amherst. Dube found that in states that took out the extra $300 in federal unemployment benefits, employment did not increase for the next two to three weeks. The evidence is still early and more data is needed, he adds.

One of the reasons why supply and demand curves for labor do not converge may be that many firms and workers remain far apart in terms of wages. The The Atlanta Fed’s Wage Growth Tracker showed an overall increase of 3.2% in June, down from 3.8% a year earlier, and well behind consumer price increases of 5.4% in the past 12 months.

“Maximum employment” is the The main goal of the Federal Open Market Committee. The other policy mandate is to keep inflation ‘moderately above 2%’, a mission that appears to have been accomplished.

The next New York Fed survey will show data from July that can show whether reservation wages remain high and whether many job openings remain unfilled. If so, that would mean that the employment portion of the dual mandate has not been fulfilled. That would probably deter the Fed from normalizing monetary policy.

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Write to Randall W. Forsyth at randall.forsyth@barrons.com