ONELATEST IN MERICA employment reports landed with a resounding thud. Upbeat Wall Street analysts had expected companies to create 1 million new jobs in April. Employers made them look foolish, hiring just under 300,000 new workers. Gamblers lowered their expectations for May but were still disappointed, when on June 4 the Bureau of Labor Statistics reported net employment growth of just 559,000: decent performance in normal times but unsatisfactory when millions remain out of work. Unremarkable job gains seem increasingly mysterious, given the desperation of companies to hire. With approximately one place available for every unemployed person, you’d think America’s labor market problems could be resolved soon. But a slow pace of job growth does not necessarily indicate that the economic recovery has gone wrong. A deeper dive into the numbers suggests that they may simply reflect the difficulties of equating millions of workers with jobs at a time of unprecedented economic flux.
On the surface, the American job market seems to be behaving strangely. The economy is undoubtedly booming. Actual production increased at an annualized pace of 6.4% in the first quarter of 2021 and is projected to have grown at an annualized pace of almost 10% in the second. Companies want to hire. The 9.3 million jobs posted in April were easily the most ever registered. Employers – some, at least – are trying to attract workers with generous pay. While overall wage growth remains subdued, wage rates for newly hired workers are skyrocketing in the service sector occupations that suffer most from labor shortages. In the first quarter of this year, the actual salary for new hires in such positions (say, in restaurants or hairdressers) was about 8% above the level you would expect them to earn before the pandemic, according to a recent analysis by Julie Hotchkiss of the Federal Reserve Bank of Atlanta. And faster job gains are certainly within the limits of possibility: employment increased by nearly 5 million in June 2020 and nearly 11 million in a four-month period in the middle of last year.
Look closely, though, and the image will become less mysterious and more complicated. Last year’s rapid recovery reflected the unique nature of the pandemic recession. Employers cut a staggering 22 million jobs in March and April 2020, but about 80% of those unemployed at the time were laid off temporarily, with a job they expected to be recalled once the blockages were eased. (During the Great Recession, by contrast, layoffs never accounted for more than 15% of all unemployment.) When businesses began to reopen, the temporarily unemployed could immediately resume work; its ranks have dropped 16 million since April of last year, or about 90%, contributing to a staggering decline in the unemployment rate of about nine percentage points. But there are fewer and fewer workers laid off temporarily waiting to be brought back (see chart, left panel). Meanwhile, workers who permanently lost their jobs, who made up just 9% of the unemployed at the start of the pandemic, now represent about a third of all unemployed.
This change in the composition of unemployment likely means that unemployment cannot fall as fast as it did last year. The rise in unemployment in a recession is often much faster than the speed at which it starts to fall during the recovery. This asymmetry stems in part from the fact that creating a new job (as opposed to retaking an old one) involves a time-consuming combination as the worker and the firm try to find each other. Congestion among the unemployed can slow this process down. A recent work by Niklas Engbom of New York University documents that an unemployed person applies for more than ten times more jobs per month than an employed worker, yet is less than half as likely, per application, to start a new job. So while there may be a vacancy open for every unemployed worker today, employers bombarded with applications must take the time to find their preferred candidate, delaying the time the vacancy is filled (or increasing the time needed to fill the job , if however, the chosen candidate accepts another offer).
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Also, note Robert Hall of Stanford University and Marianna Kudlyak of the Federal Reserve Bank of San Francisco, the path from unemployment to a permanent job match can include more than one round of searching. Workers looking for jobs often switch between short-term jobs before finding a long-term match, which helps explain why the pace at which unemployed individual job seekers find work is faster than the pace at which unemployed job seekers find work. aggregate unemployment returns to normal.
While the tepid numbers of headline jobs seem to be a cause for concern, there is a great deal of turnover taking place behind the scenes, as another survey indicates. In the first five months of 2021, an average of 2.4 million workers moved from unemployment to employment each month. Unemployment did not decline further during this period just because some workers changed direction, while others are classified as unemployed after rejoining the workforce. While net employment growth may not show this, hiring is robust. In April, employers hired more than 6 million workers – the highest ever, except for the reopening period last summer. In the same month, 5.8 million workers left their jobs, including 4 million who chose to leave voluntarily (see chart, right panel). The growing number of people leaving their jobs suggests that workers are taking advantage of a time of high labor demand and generous wage offers to find better opportunities. This increases the pressure on human resources departments in the short term, further preventing unemployed Americans from rushing back to work. But it’s also a sign of confidence in the economic recovery.
A prolonged period of high involuntary unemployment undoubtedly carries risks. But monthly payroll reports below a million are not much of a concern at the moment. The United States remains on track to eliminate the remaining pandemic unemployment within two years. And in the meantime, the turnover of workers into new and different jobs can leave the economy more productive than before and better equipped for a post-pandemic world. ■
This article appeared in the Finance and Economics section of the print edition under the title “Finding the Perfect Match”