Unemployment is high. Why are businesses struggling to hire?

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There are two distinct, and completely opposite, ways of looking at the American job market.

One would be to consult the data tables produced every month by the Bureau of Labor Statistics, which suggest a plentiful supply of would-be workers. The unemployment rate is 6%, representing 9.7 million Americans who say they are actively looking for work.

Alternately, you could search for news articles mentioning “labor shortage.” You will find dozens in which businesses, especially in the restaurant and other service industries, say they face a potentially catastrophic inability to hire. The anecdotes come from the biggest metropolitan areas and from small towns, as well as from tourist destinations of all varieties.

If this apparent labor shortage persists, it will have huge implications for the economy in 2021 and beyond. It could act as a brake on growth and cause unnecessary business failures, long lines at remaining businesses, and rising prices.

What explains the disconnect? There are competing theories, all plausible — and potentially interrelated. Meanwhile, the economic and public health situation is evolving too quickly for research to keep up. So consider this a guide to these potential explanations, and an accounting of the evidence for each.

Benefits too generous?

“The government is making it easy for people to stay home and get paid. You can’t really blame them much. But it means we have hours to fill and no one who wants to work.” — Tom Taylor, owner of Sammy Malone’s pub in Baldwinsville, New York, quoted inThe Syracuse Post-Standard.

Business leaders have been quick to blame expanded unemployment insurance and pandemic stimulus payments for the labor shortages.

The logic is simple: Why work when unemployment insurance — including a $300 weekly supplement that was part of the newly enacted pandemic rescue plan — means that some people can make as much or more by not working? And the combined $2,000-per-person cash payments enacted since late last year created a cushion people can rely on for a time.

Ample economic research shows that more generous unemployment benefits are a disincentive for people to seek or accept work. But several studies on what happened when a $600 weekly supplement was added to benefits last spring suggested that the early pandemic had unique dynamics.

Research by Ioana Marinescu, Daphné Skandalis and Daniel Zhao, for example, found that every 10% increase in the jobless benefits a person received corresponded to a 3% decline in the number of jobs applied to. But in the context of mass closings of businesses, that didn’t matter for how many people were employed—there were still far more job seekers than jobs.

By contrast, “right now what seems to be happening is that job creation is outpacing the search effort that workers are putting forth,” said Marinescu, an economist at the University of Pennsylvania. “Compared to how people reacted last spring, it’s not that long ago, but the situation has changed a bit.”

That is to say, a similar decline in workers’ desire to pursue jobs matters more when there are plenty of jobs to go around, which is increasingly the case as the economy reopens.

In other research on the expanded jobless benefits, Peter Ganong of the University of Chicago Harris School and five co-authors found a smaller decrease in the inclination to search for jobs than earlier research would have predicted. In other words, those $600 weekly supplements didn’t decrease employment very much.

But those were circumstances that may no longer apply.

“The goal of government should be to get everyone back to work as soon as possible while continuing to provide economic support to workers who have not gone back to work yet,” Ganong said. “Those two things were not in tension in 2020, and they are in tension in 2021. All of those things that made 2020 special are receding, so we now face a more traditional set of trade-offs.”

Arindrajit Dube, an economist at the University of Massachusetts Amherst who has also studied the impact of last year’s expanded benefits, is skeptical that the lure of jobless benefits is the primary explanation. He notes that even with the reported shortages, businesses appear to be successfully hiring at a breakneck pace.

Companies added 916,000 employees to payrolls in March alone, a number matched only by the initial rebound from pandemic shutdowns last summer and in the immediate aftermath of World War II. Moreover, the expanded benefits are scheduled to expire in September.

“Maybe an unemployed person spends several additional days unemployed because of the $300,” Dube said. “But if it’s a problem, it takes care of itself. It’s nothing compared to the broader trajectory of the reopening, which swamps anything on the unemployment insurance front.”

Which brings us to other factors that may be keeping would-be workers away from the job market, especially in the service sector.

Worried about getting sick

“We’ve been taking lockdown pretty seriously. My wife and son have some autoimmune conditions. I didn’t want to put my family in a position where I’d be working in a very public-facing job and potentially bringing something home.” — Paul Hofford, former bartender at A Rake’s Progress in Washington, quoted in Washington City Paper.

Nobody wants to get a potentially deadly disease for a job slinging eggs Benedict. And more so than many other occupations, restaurants and other parts of the service sector require face-to-face contact with the public.

One piece of evidence supporting this idea: There appears to be a relationship between vaccinations of people and a rise in their employment rate.

Aaron Sojourner, a University of Minnesota economist, used the Census Bureau’s Household Pulse Survey to explore that relationship among 3,600 finely grained groupings of Americans by demographics and geography.

A 10-percentage-point increase in the share of people fully vaccinated corresponded with a 1.1-percentage-point increase in their employment. There are many ways to interpret the finding — it doesn’t tell us anything about causation — but one possibility is that vaccinated people are more comfortable taking jobs.

“The first-order issue is the virus, and if that’s what caused the crisis, then it is also the path out of the crisis,” Sojourner said. “Crushing the virus is the solution to both the supply problem and the demand problem.”

Health concerns and the expanded jobless benefits can operate hand in hand. It’s easier for a person nervous about the virus to stay out of the workforce when benefits are more generous.

Still needed at home

“Lot of kids are still at home doing school so, depending on age, they’ve got to have a parent there, somebody who would have been in the workforce. We need them back and we need them back in force.” — Stacy Roof, president of the Kentucky Restaurant Association, quoted in The Lexington Herald-Leader.

Someone has to oversee the school-age children stuck at home taking classes. The same goes for older or disabled relatives who might have had other forms of care before the pandemic.

The Census Household Pulse survey shows that this remains a major reason for adults not to be working. Based on surveys taken in late March, 6.3 million people were not working 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% 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.

That speaks to the interrelated challenges of reopening the economy. Many businesses may be opening and seeing a surge of demand, but so long as schools, day care centers and elder care are still limited, there will be constraint in their ability to get workers.

Show me the money

“If you can swing a hammer, you can go make $25 an hour.” — Brandt Casey, manager of Cafe Olé in Meridian, Idaho, quoted in The Idaho Statesman.

The simple, Economics 101 answer to what a company should do when it has trouble recruiting enough workers is to pay them more. That is the logic that underpins the economic policy of the Biden administration and the Federal Reserve: Achieving a tight labor market will result in higher pay for workers.

But the restaurant industry faces a particular challenge. The sectors that have thrived during the pandemic have been on hiring binges, often paying higher wages than restaurants do. Amazon alone added 500,000 employees in 2020, with a wage floor of $15 an hour. Companies like Walmart, Target and home-improvement and grocery chains have all been hiring aggressively with wages at or not far behind those levels.

And as Casey suggested, those with some in-demand skills — whether in construction or commercial truck driving — can do even better. Knight-Swift Transportation Holdings has raised its wages for newly certified drivers by 40%, to the point they can average $60,000 salaries.

That puts restaurants in a tough spot competitively. According to federal data, the median cook or food preparation worker made $13.02 an hour in May 2020, and dishwashers $12.15.

For tipped workers like waiters and bartenders, the pandemic has made potential earnings more erratic. In an era of outdoor dining, a rainy day can mean a drastic loss of income.

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