America’s labor shortage and the ‘Great Resignation’: My long-read Q&A with Michael Strain

By James Pethokoukis and Michael Strain

As the COVID-19 pandemic drags on, millions of Americans are quitting their jobs in a labor market that’s already short on workers. On top of this “Great Resignation,” the labor-force participation rate still hasn’t rebounded to pre-pandemic levels. All the while, supply chain interruptions and trillions in government stimulus are pushing prices up. To find out what’s going on with the labor market and broader American economy, I’ve brought on Michael Strain. 

Mike is the Arthur F. Burns Scholar in Political Economy and the Director of Economic Policy Studies at AEI. 

What follows is a lightly edited transcript of our conversation. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Pethokoukis: The unemployment rate is falling. Lots of jobs seem to be created every month, but yet it seems people are concerned that Americans somehow are not coming back to work. I’ve heard the phrase, “The Great Resignation.” I’m not sure exactly what that means. Some people are resigning; other people are just not going back to work. What is the state of the labor market right now?

Strain: Well, I think the state of the labor market is confused. If you look at some indicators, you see a labor market that’s really exceptionally strong and it’s in great shape. We can tick through a few of those. The number of unemployed workers for every job vacancy is well under one. In other words, there are more vacancies than there are unemployed workers. A big problem that the US labor market has had in the past couple of decades has been the opposite — there are too few jobs for available unemployed workers.

We have the opposite problem right now. Jobs are chasing workers; workers are not chasing jobs. We have record numbers of job openings in the economy. We have a record number of workers who are quitting their jobs. And the reason why quitting is considered a sign of a strong labor market is that people wouldn’t voluntarily quit their job unless they were pretty confident they could get a better job or at least a job that was at least as good.

So the fact that workers are feeling like they’re able to quit in large numbers suggests that they have the upper hand in the labor market right now. Perhaps most compellingly, the strength of the labor market can be seen in wage growth. Right now, wages are growing at about a 5 percent annual rate. If you look at wages in the leisure and hospitality sector, they are growing at an 11 percent annual rate. So really rapid wage growth. It is common to hear businesses say, “There’s a labor shortage, we can’t find good workers,” etc. The right instinct is to be skeptical of those claims because those claims typically occur without wage increases.

A now hiring sign in Montgomery, Alabama, Sept. 1, 2021. Via REUTERS

And so, when you typically hear businesses talk about labor shortages or not being able to find workers, what they really mean is, “We’re unable to find workers at the wages that we’re currently able to offer.” And they’re not taking steps to be able to increase their wage offerings. That isn’t what’s happening now. You really are seeing businesses put their money where their mouths are, and nominal wages are growing really rapidly. So all of that really points to a very strong labor market.

So the confusion is that it also seems as if people are unhappy about their jobs. They’re not returning to their jobs. It’s almost been described as if the American labor force has had a great awakening — that they’ve all discovered that those jobs that they had before were terrible, and now they don’t want to go back. So what are those confusing factors?

Well, I think the most confusing factor is that workers aren’t coming back in any aggressive fashion. If you look at workforce participation among prime age workers — workers who are too old to be in school, too young to be retired — what you see is that there really has been no improvement in their workforce participation since the summer.

If you look at how this has evolved over the course of the pandemic, you see that workforce participation among this group of workers fell by around 4 percent during the lockdowns. Then in the spring of 2020, that recovered to a little over 98 percent of its pre-pandemic level. So employment was down about 2 percent for this group, and that’s basically where it still is today. One source of the labor shortage surely is early retirements. But when you’re looking at people who are in their 30s, 40s, and early 50s, that’s not going to be a big part of the story. So there must be other reasons keeping these workers on the sidelines other than early retirement.

Does the story that you’re about to tell differ by skill level, education level, income level? Is it a different case for lower-wage workers than for upper-wage workers, or is it a similar story?

You see this largely across the board. I mean, as it often happens, the job losses when the recession began were concentrated among lower-wage workers and lower-income households. And so the gains are disproportionately among those workers that are higher income or they’re just less sensitive to the business cycle in general. But fundamentally, we still have this economy where workforce participation really isn’t improving and where we are several million jobs in the hole — six million, seven million jobs below where we should be and below where we would’ve been, if it weren’t for the pandemic.

This is a confusing situation. On the one hand, labor demand is white hot, employers are rapidly raising wages. They are creating job vacancies that they’re trying to fill. At the same time, we’re six or seven million jobs in the hole, workforce participation isn’t really improving, and we have millions of people on the sidelines who shouldn’t be there. So this is why I characterize it as confusing.

Why aren’t they coming back to work?

Well, I think it’s a combination of factors. Some of these factors are related to the pandemic, for sure. I mean, I think you do still see in surveys that some people are still worried about the pandemic and don’t feel comfortable coming back to work as a consequence of that. This has been a consistent story throughout the last year and a half, pretty much since the lockdowns were lifted in the late spring of 2020, when you see the share of the population that is unable to work due to COVID dropping. But when there’s a COVID spike, like we’ve had with the Delta variant, you see that decline suspended, you see people saying, “Oh, well, yeah, I think COVID is making it hard for me to work.”

There are lingering childcare issues for sure. Schools are open for the most part, daycare centers are open for the most part, but they’re still really affected by the pandemic. And this is something that I think parents of school-aged kids all experience every day. Certainly, I do with my kids’ school. The likelihood that we might get an email or a phone call that says, “Hey, you have to come pick up your kids,” or, “Hey, your kid’s classroom is going to be shut down for a week or two,” is a daily reality for us, and that’s just not the kind of thing that people had to worry about before the pandemic. And I think that is keeping some people from reentering the workforce. I think some people are saying, “I’ll go back to work once I can be confident that I’m not going to be called home randomly, or my kid’s classroom is going to be closed down.”

Another big factor is the generosity of unemployment benefits. President Biden, as part of the American Rescue Plan, increased the generosity of unemployment benefits by $300 a week. On average, unemployment benefits are typically about $350 a week. So going from 350 to 650 is a really large increase, and that has kept people on the sidelines. That program expired last month, but it takes people a while to start their job search and to find a job. And so, I think that’s another factor keeping people on the sidelines.

It seems like every month numbers come out and people look at those numbers and say, “Well, see, we don’t detect any impact of these unemployment benefits.” So what is the case that you are wrong? But why aren’t you wrong?

Look, this has certainly been a source of controversy. Let me present three different buckets of evidence and we can sort through them. One bucket of evidence comes from the US labor market from the 1970s until the eve of the pandemic. And if you look at studies of that period, there’s a strong consensus in the evidence that when unemployment benefits become more generous, people stay unemployed for longer. And there’s debate about the magnitude of that effect, the size of that effect, but I think that’s pretty close to a consensus view.

When the pandemic began, the CARES Act, signed by President Trump in March of 2020, significantly expanded the generosity of unemployment benefits. And studies of that unemployment benefit expansion do not find that it led people to be unemployed for longer. So that’s in conflict with the evidence that came before that.

U.S. President Donald Trump signs the CARES Act in the Oval Office of the White House, March 27, 2020. REUTERS/Jonathan Ernst

The question, I think, about the effect of President Biden’s $300 expansion really kind of boils down to a question of whether the economy in the summer and fall of 2021 (the economy of June, July, August, September, October, where we are now) was more like the pre-pandemic economy — more like a normal economy — or more like the economy that existed in the spring and summer of 2020, during the initial months of the pandemic. And it has elements of both. I don’t think there’s any question about that. But in my view, the economy was much, much closer to normal in the summer and fall of 2021 than it was to a pandemic economy.

So our expectation should be that the relationship between unemployment benefits and the duration of unemployment looks a lot more like the half century before the pandemic than it looked like in 2020. There is evidence accumulating about this. About half the states, I think 26 states, turned off that $300 and reduced expanded eligibility.

When did they do that?

In June. You could look to see whether or not we have data for July, August, and September, and you can look to see, “Okay, in July, what does it look like? In August? Did those states that stopped participating, did they see employment recover faster?” And there’s some disagreement about this. I’ve done some work on my own on this, and it looks to me pretty clear that the states that stopped participating in this program in June really did see transitions from unemployment to employment accelerate. That looks especially true if you focus on the leisure and hospitality and retail sectors that are really heavily affected by the pandemic.

I think there’s some mixed evidence on that, but in my view, the evidence points to unemployment benefits as a real factor in keeping people on the sidelines. And I think it’s hard to make super strong conclusions with just two or three months of data. So we’ll have to let some time pass. But I think, in my view, that’s pretty clearly where the evidence is pointing right now. Another important factor is savings. The government has given households a lot of money.

Those cash balances have just really exploded. I mean, they’re up, what, maybe 50 percent?

Yeah. Excess savings are $2 trillion or $2.5 trillion right now throughout the economy. And so that is, I think, making it easier financially for some people to take a little longer searching for a job and to take a little longer reentering the workforce.

But those balances are going to be worked down. So those people will be coming back.

For sure. Those balances are going to be worked down and that’s going to be another factor pushing the labor market toward normalization as we end 2021 and go through 2022.

So, let’s go back to the great awakening theory, and that is something more systemic. Let’s take the early retirements and set those aside. But for the other kinds of workers, the people behind the great awakening theory are saying that they’re not going to go back because they’ve had this time away and they now realize they hated those jobs. They’re wildly underpaid. And unless the wage structure of the United States changes so people just pay a lot more for jobs, particularly on the low end, those people aren’t going to come back. I’m not sure what they’re going to do, but they’re not going to come back. To get those labor force participation rates back somewhere close to normal, the US has to stop being a low-wage country. It has to start being something better than that. Do you see something like that happening?

No, I don’t, and I hope that I don’t as well. In other words, I hope that I’m right that it isn’t happening. I think that people make decisions and they take into account all their options. And at a time when you could earn more money not working than working — which was true for a large share of the workforce over the course of the year — going back to a job similar to the one that you used to have doesn’t look all that appealing. If after your unemployment benefits normalize and after you burn through some of your savings, not working is a worse deal, then going back to a job that was similar to the job that you used to have all of a sudden becomes more attractive.

And I think that is going to be a lot of the dynamic that you see. If you are a low-wage services worker — and let’s say you’re a single mom going back to work at a time when your phone could ring at any minute and you have to go pick your kid up from school and your kid’s stuck at home for two weeks — then you’re worried you’re just going to get fired at that point or something. That kind of uncertainty in your job security is much more of a drawback at a time when your kid’s school situation is much more uncertain. If we get to a point where parents can really count on school staying open and kids being able to stay in their classrooms, then that affects the way that a job looks to you, too. The job starts to look better as well.

A school crossing guard holds a bus as a woman and child cross the street. Photo by Anthony Behar/Sipa USA

I think people, over the past several months, have been thinking about the jobs that they used to have. And there are aspects to those jobs that are unpleasant and that aren’t attractive, but they’re making those evaluations in a context. And that context is a pandemic context. It’s a context of schools being uncertain. It’s a context of still being able to get a decent income from not working. And I think when that context changes — and the context is changing right now, and the context will continue to evolve hopefully pretty rapidly over the next several months — their assessment of their employment opportunities, I suspect, will also change. And we should hope that it does.

One of the interesting economic realities right now is the ability of the economy to produce goods and services without all these workers. The level of economic output, GDP, is back to where it would’ve been if there was never a pandemic. And businesses are able to produce goods and services as if there never was a pandemic, even though we’re six or seven million workers in the hole. And my concern is that businesses will have figured out how to get by with fewer workers.

And if there are workers who are lingering on the sidelines — because their unemployment benefits were generous, or because their kid’s school can’t stay open, or because they have so much money in the bank from all the stimulus checks — those workers may be lingering. And by the time they’re ready to come back, labor demand might have cooled off and businesses might say, “Hey, we just need fewer workers than we used to need.” And the jobs that they’re counting on returning to may not be there for all of them.

And in that kind of situation, either these people need to increase their skills so they’re more attractive (I imagine that would take some time) or, what, we start paying people a basic income not to work? This is the great transition to a basic income. Because at the same time that you’re expressing this concern that these people might not have jobs to go back to if companies figure out they don’t need them, there are also people pushing for even higher minimum wages. They critique the United States economy for being a low-wage economy. Maybe we need a $20 minimum wage or a $25 minimum wage. That would seem to exacerbate the very issue you’re worried about.

Yeah, I think it would. Think about wages as coming from two places. One place that wages come from is from the productivity of workers. It’s kind of a market factor. And then another determinative of wages are things like bargaining power, the power balance between workers and firms and that sort of stuff. If you want wages to go up, then you either need to get people more skills so they can be more productive or you need to change the power balance between workers and firms, and neither of those things are happening right now. You’re seeing wages go up because, at the macroeconomic level, demand is surging and supply can’t keep up. And that is not increasing worker skills, it is tilting the balance of power away from businesses and towards workers, but not in a permanent way.

There are no institutional changes in the US economy that are permanently altering that balance. It’s not as if unionization rates are wildly increasing. It’s not as if there are all sorts of new laws being passed that restrict the freedom of businesses to design employment contracts for workers and things of this nature. It’s temporary. And as demand moderates (which it will over the course of 2022) and as the supply side of the economy is able to expand (as it will over the course of 2022) we’re going to start to look more and more like we used to, prior to the pandemic. And the power balance between workers and firms is going to normalize as well. We’re going to be left with a workforce that isn’t more skilled and dynamics between businesses and workers that look more like they always have. Nothing that’s happening this summer or fall is permanent.

Do you have a different philosophy of the value of work than some other people? As I hear about this “Great Resignation” and critiques of the US labor market, there’s a group out there that doesn’t look at work the same way, and maybe these are also the people pushing for a universal basic income. But there seems to be an actual disagreement about the value of work and whether people should really be forced to work. It’s almost like it’s a human rights issue.

Look, yes, I think that’s right. I mean, I think this is one of the big dividing lines in American public life right now: the importance of work and the inherent value of work. And that is a dividing line that I think has become sharper and more salient as a consequence of the pandemic. There are unpleasant jobs in the United States, certainly, and there are jobs that are physically demanding and that are unpleasant for a myriad of circumstances, for sure. And there are people in public life who argue that’s not a good thing. And one of the goals of public policy should be to make it so that people don’t have to hold those kinds of jobs if they don’t want to.

And I think that view gets some things right. We shouldn’t want somebody to be in a minimum wage job for 20 years, that shouldn’t be the goal. We shouldn’t want people to be stuck in jobs that they don’t want to hold. Another way to say that is that the labor market should be characterized by upward mobility — that people can climb a ladder and not just get stuck on one of the rungs. But I think that view misses a lot. I think it misses a lot about the inherent dignity in all work and about the ability of people to make real contributions to society in all those jobs.

I think you’re right to characterize it as a philosophical disagreement. A lot of it is an empirical disagreement as well, about the level of upward mobility and about the ability of those sorts of jobs to serve as a conduit to other and better jobs. But there is a real philosophical divide here, too. And in my view, the goal of public policy should be participation — that people participate in society, and that a lot of that participation takes place through participating in market activities, through participating in the economy. And that’s a normative view. It’s a view about what is important to lead a flourishing life and to lead a good life, a full life. And I think a full life and a flourishing life involves contributions.

Via Twenty20

And I think if you’re working a minimum wage job at a grocery store, or you’re flipping burgers at a McDonald’s, or you’re a custodian in a hotel or whatever, you’re making a contribution. You’re contributing to society through those jobs. And I think it’s unfortunate that there are prominent voices in public life who refer to those kinds of jobs as dead-end jobs, and who make arguments about how those jobs are beneath the dignity of Americans or things of that nature. I think that’s not true. And I think it’s a bad message to send, telling millions of people that their jobs are dead ends.

They’re not dead ends. They’re making valuable contributions, and they can serve as stepping stones to even larger contributions and even better jobs. So the goal of public policy shouldn’t be to make it so that people don’t have to work or to make it so that people don’t have to work in lower-wage jobs. The goal of public policy should be to get people involved in economic life, to set people up so that they can make contributions to society through their employment and through market activities, and to build skills and to create on-ramps of opportunities so that people can have a career and progress up the employment ladder and not get stuck on any one rung.

My guest today is Michael Strain. Mike, thanks for coming back on the podcast.

Thank you. It’s always a pleasure.

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