There Aren’t Two Labor Markets

There Aren’t Two Labor Markets

By |2018-04-13T17:35:50+00:00April 13th, 2018|Currencies, Economy, Federal Reserve/Monetary Policy, Markets|

Allusions to a labor shortage continue to be ubiquitous. Two weeks ago, the Wall Street Journal published yet another such story under the headline Iowa’s Employment Problem: Too Many Jobs, Not Enough People. Ostensibly about the experiences of companies trying to hire in the one state, the implication was clear enough. If Iowa, IOWA, has a labor shortage, how bad (good) must it be everywhere else?

At the end of last year, the Washington Post wondered the same thing. Using nearly the same headline, 2018’s Challenge, Too Many Jobs, Not Enough Workers, this article describes how they can’t find enough snowplow drivers in Maine, truckers in Texas to haul machinery for the oil boom, and construction jobs in Florida where for many parts of the state it rarely pauses too long without a construction boom.

Yet, for all the hand wringing, small “e” economics still dictates there can’t be any such thing. Businesses faced with opportunity will pay for labor. Period. If they can’t find workers at the current rate, then wages will rise. They aren’t. Not even close.

Only buried deeper within these stories are there ever written more primary objections. The latter article from the Post sums it up pretty well in the one place it’s referenced:

The share of Americans who are either employed or actively looking for work has also shrunk in recent years and is down to 62.7 percent, compared to 66 percent in December 2007, the start of the last economic downturn. The reason is still up for debate, but economists generally agree the tumble is troubling.

That’s ultimately, I think, the point. It isn’t up for debate but should be. According to all these categorical accounts of this labor shortage the matter has been completely settled. Even the CBO’s latest figures for economic potential agrees with that conclusion. The unemployment rate is accurate, they claim, therefore the labor shortage has to be real, wage inflation will be, too, and a boom that has somehow been avoided won’t be for much longer.

A good part of the problem relates to JOLTS. This part of the BLS labor data suggests that American businesses are desperate for employees at a rate never before seen (the data only goes back to 2000, but still). But if demand for labor is high, supply is not. The rate of hiring in each and every month remains consistently below what true “full employment” would be.

It’s that remaining gap that is perplexing for two reasons. The first is the structural, long-term factors of the Great “Recession.” The second is more recent, owing to what sure looks like a slowdown in employment factors around 2015.

Taking the second first, that much is confirmed in any related data. The Establishment Survey records the same slowing at practically the same time (earlier in 2015). We can also use any number of income figures that all signal a downward shift in labor income growth, therefore the labor market overall stemming from that one particular downturn (an event still unacknowledged anywhere).

You could still argue that the coincident slowing in Hires as well as the Establishment Survey is related to full employment. In other words, the labor market after absorbing all leftover “slack” produced by the Great “Recession” created a ceiling of sorts on jobs growth. The plateau in hiring would then be this labor shortage we constantly hear about, suggesting the same for the Establishment Survey as it has turned persistently lower.

But to believe that we have to believe in the unemployment rate (yes, it all goes back to this one ratio). As noted earlier this month, not even Janet Yellen did at the very moment all of this came together – in 2014.

Recall that the unemployment rate was falling far, far faster than any of the most optimistic econometric models had anticipated. It wasn’t output that was growing (see: CBO) nor potential output but rather the participation problem. There was palpable apathy within the US labor supply at the very time JOLTS data in Job Openings suggested labor demand was going through the roof.

As you can see above, the unemployment rate reached the modeled central tendency for full employment right around the time the labor market started slowing down and just after Job Openings had spiked upward. Since a wave of new entrants and re-entrants to the labor force was never triggered, it would seem plausible there were structural, non-macro factors creating this ceiling. It might have seemed that opioids and Baby Boomers thwarted the full power of recovery.

Whether or not that was true, and therefore whether the alternate, macro explanation was more accurate, entirely rests upon small “e” economics. It is the decisive factor.

If there has been a labor shortage, and for years no less, wages would have been exploding higher; not merely growing finally at an historical pace but surging beyond that range. There is no other possibility. For it to have been otherwise requires a structural explanation for not only labor force lassitude but that of businesses, too. They are desperate for more people and employees but they really don’t want to be bothered enough to compete for them? No way.

Making the claim for apathy in the labor force is dubious but at least plausible. To try make any claim for the same on the business side is impossible. Which is why no explanation is ever put forth for it. Despite innumerable articles written about the labor shortage, we are always expected to take these anecdotes as sort of self-evident proof. There is a labor shortage because there is a labor shortage.

The problem with Job Openings is Hires; the problem with Hires is participation; the problem with participation is this shrunken economy. The Great “Recession” wasn’t a recession, and the labor force knows it. Businesses do, too, just not those written about in these labor shortage stories.  

The matter should be up for debate, though only long enough for it to be settled again the way it should have been all along. It wouldn’t take very long if there was honest inquiry in Economics.

 

Print Friendly, PDF & Email