With Unemployment Still High, why are Some Businesses Struggling to Hire?

Hint: it's not your stimulus check — or your neighbor's unemployment benefits

Headlines are abuzz with “labor shortage” stories, often featuring employers in restaurant and other service industries who are apparently unable to hire enough staff to meet customer demand.  With unemployment still high, Republican governors in 18 states have prematurely ended federal emergency unemployment benefits, claiming unemployment insurance and pandemic stimulus payments are to blame. That may be convenient political calculus, but the math doesn’t add up.

To understand why, let’s take a short trip back to early 2020, when employers were laying off workers so rapidly, the state’s unemployment rate skyrocketed from less than 4 percent to over 16 percent in just two months. In Washington, more than one-quarter of jobs lost during that time were in accommodation and food services alone. Collectively, the various service sectors of the state’s economy  accounted for a staggering 41 percent of all job losses from February through April 2020.

Fast-forward to March 2021, and the situation has reversed. Driven largely by increased demand as vaccinations have become more widespread, job openings have rebounded strongly in some of the same sectors which saw the deepest losses in 2020. Those openings are being filled too: the leisure and hospitality sector saw the fastest national job growth in April by a substantial margin. And as the analysts at the Economic Policy Institute (EPI) note in their excellent blog, wages in those sectors are also rising due to increased demand for workers.

Given the typically low yearly pay in these sectors (average yearly pay in accommodation and food services was just $25,321 in 2019, for example), if stimulus checks and unemployment insurance benefits were a problem, we’d see fewer jobs and less hiring, because those benefits are replacing a higher percentage of potential wages. But the exact opposite is occurring: with demand and job openings climbing, hiring and wages are also going up.

So: supply and demand are at work as a recovery in the leisure and hospitality sector is getting underway. But even so, tourism and business travel are still sharply restricted and many office workers are still working from home. Few restaurants and hotels are yet operating at full capacity, and the catering industry is still flagging.

Ending unemployment insurance benefits won’t improve that situation — but it will needlessly hurt every remaining unemployed person, along with their families and communities that are struggling against poverty.

What is actually limiting the economic recovery right now?

One factor is likely vaccinations, given that restaurants and other service sector jobs (as well as many others), require a high degree of face-to-face contact. Economist Aaron Sojourner found a correlation: for each 10-percentage-point increase in the share of people fully vaccinated, there is a 1.1-percentage-point increase in their employment.

There’s also strong evidence that school closures and the lack of affordable, reliable day care is a major bottleneck in labor supply. Vaccination of teens is just getting started and remains unavailable for kids younger than 12. At present, just 26 percent of Washington students are enrolled in traditional daylong in-person schooling. Many childcare providers, already operating on a shoestring prior to the pandemic, have either shuttered or severely limited enrollment. This puts a large barrier in front of many parents returning to normal working schedules.

As the New York Times recently noted, U.S. Census Household Pulse survey data shows caregiving remains a major reason for adults not to be in the job market. Based on surveys taken in late March, 6.3 million people were not seeking paid jobs because of a need to care for a child not in a school or day care center, and a further 2.1 million were caring for an older person. Combined, those numbers amount to nearly 14 percent of the adults not working for reasons other than being retired. What’s more, those numbers have actually gone up since the start of the year — an additional 850,000 people.

This is backed up by other labor supply data, according to EPI:

…the disappointing net job gains this month were not due to a slowdown in gross inflows into employment; instead, they were due to a large pickup in outflows out of employment. The uptick in transitions out of employment in April were dominated by women.

Simplistic and punitive policy choices, like cutting unemployment benefits, will only prolong the pain of the recession for workers, families and communities. Rebuilding Washington’s economy on a strong foundation requires protecting the economic security of people who are still looking for work, ensuring all jobs provide good pay and benefits and safe working conditions, and removing structural barriers — like a lack of affordable childcare — to full employment.

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