Money & The EconomyOpinion

Labor shortage! The real unemployment rate is probably under 4%

According to the Commerce Department, the current unemployment rate is 6.1%. That’s up slightly from the 6% rate recorded in March.  Surprisingly with the economy probably growing at an 8% rate this quarter, the number of new workers should have been in the 800,000 to 900,000 range.  Instead, it was only 266,000. What happened?

Normally when a low number of jobs are added in any month, the consensus reason is that the economy is not growing fast enough.  That doesn’t appear to be the case here.  Since there are more than 8 million job openings, our high-growth economy is providing job opportunities.  But the jobs are not being filled.

There are three reasons that are being offered to explain this.  Some say that with the extra federal payment to all unemployed workers receiving a state benefit, it is simply a better economic decision to stay unemployed.  Although these workers are supposed to be actively seeking a job, the reality is that when their employer calls them back, they don’t go.

Another reason offered is that some people are fearful of COVID and won’t seek employment until they feel comfortable.  Until then they will stay out of the job market.

The last reason has to do with children being taught remotely and in the home.  The children need supervision meaning a parent must leave their job.  When called back, they refuse since they must stay at home, meaning they are not actively seeking work and are not in the labor force.

When the Commerce Department calculates the unemployment rate, they simply determine the number of people working and divide that by the total labor force.  The labor force consists of all people working and all people actively seeking jobs.

The Commerce Department includes all workers receiving unemployment compensation as part of the Labor force.  But if they are not actively seeking a job, they should not be included.  That means, the people who fall into one of the three categories should not be included in the Labor force, since they are not really actively seeking a  job.

By removing those people, the unemployment rate would fall to under 4%, meaning we are in the beginning of what could be a severe labor shortage that will slow economic growth.  Already many businesses are reporting difficulty in finding enough workers to fill the jobs.  That means wages will rise.

That’s certainly good news for workers.  In some places that market wage for new employees has risen to $15 per hour, which certainly meets the goal of President Biden.

But higher wages, mean higher labor costs for the firm.  Because the economy is growing so rapidly and because the American consumer is flush with cash, businesses will likely be able to easily pass the increased labor cost onto the consumer.

Consumers will accept the price increases because the government has given every income earner free cash.  A family of four received more than $11,000 of free money from the government.  They are about to receive thousands more from child tax credits.

That coupled with the huge increase in personal savings and the large paydown in credit card debt will leave consumers willing to spend even when prices rise.  This will add to the inflation problem which already has to deal with rapidly rising energy prices, a continuing explosion in the growth of the money supply and $6.5 trillion worth of deficit spending in 2020 and 2021.

In addition to the inflation problem, the continued labor shortage will eventually slow economic growth.  It looks like growth for 2021 will be in the 8% range or higher.  Already GDP grew at 6.4% in the first quarter of this year, while the second quarter looks to be about 8%.  As long as there is sufficient labor and a full restoration of the supply chain, growth in the second half of this year could hit as high as 10%.

After this year the labor shortage and the inflation problem will hurt growth.  The Federal Reserve will eventually have to raise interest rates and stop flooding the market with new currency.  Because they waited so long, their actions may be very harsh. Those actions could lead to a recession.

Policy should now focus on getting more workers to re-enter the labor market.  Removing the extra federal unemployment compensation, increasing the number of Americans vaccinated and getting children back to the classroom, will lead to more workers returning to the labor market.

In the meantime, the Federal Reserve should begin to raise interest rates immediately and gradually.  They must also gradually stop buying $120 billion of government bonds each month.

Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.

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