Deciphering the April Employment Report

On Friday May 7, 2021, the Bureau of Labor Statistics (BLS) released its monthly “Employment Situation Report.”  The BLS estimated that nonfarm payroll employment had increased by 266,000 from March to April. The average forecast of the Wall Street Journal’s panel of economists was for a much higher increase in employment of  1 million. The unemployment rate increased from 6.0% to 6.1%, rather than falling to 5.8% as economists had forecast.  

Keep in mind that employment data is subject to revisions. What does this employment report tell us about the state of the economy and the state of the labor market?  First, it’s always worth remembering that the BLS revises its employment estimates at least three times in subsequent months as more complete data become available. (The unemployment rate estimates are calculated in a separate survey of households and are not revised other than as seasonal adjustment factors change.)

Employment data gathered during and immediately after a recession are particularly subject to large revisions. In the principles textbook, Chapter 19, Section 19.1 includes a discussion of the substantial revisions the BLS made to its initial employment estimates during the 2007–2009 recession.  Today’s report noted that the increase in employment from February to March, which had originally been reported as 916,000 had been revised downward to 770,000.

Explaining the slow increase in employment. So, the estimated employment increase the BLS reported today may well end up being revised upward. But the revisions will almost certainly leave the increase far short of the forecast increase of 1 million.  We can discuss two types of explanations for this relatively disappointing employment increase: 1) factors affecting the demand for labor, and 2) factors affecting the supply of labor.

The demand for labor.  During the recovery from a typical recession, increases in labor demand may lag behind increases in production, limiting employment increases and causing temporary increases in the unemployment rate.  Employers may be reluctant to hire more workers if the employers are uncertain that the increase in demand for their products will be maintained. During a recession, firms also typically reduce employment by less than they reduce output because searching for workers during a recovery is costly and because they may fear that if they lay off their most productive workers, these workers may accept jobs at competing firms. As a result, during the early months of a recovery, firms are in position to increase output by more than they increase employment. That this outcome occurred during the first months of 2021 is indicated by the fact that productivity increased 5.4% during the first quarter of 2021, as firms increased output by 8.4% but hours worked by only 2.9%.

The recession caused by the pandemic was unusual in that many businesses decreased their supply of goods and services not because of a decline in consumer demand but because of government social distancing requirements. During March 2021, as more people became vaccinated against Covid-19, state and local governments in many areas of the country were relaxing or eliminating these requirements. But upsurges in infection in some areas slowed this process and may also have made consumers reluctant to shop at stores or attend movie theaters even where such activities were not restricted. Finally, partly due to the pandemic, some U.S. manufacturers were having trouble receiving deliveries of intermediate goods. In particular, automobile companies had to reduce production or close some factories because of the difficulty of obtaining computer chips. As a result, during April 2021, employment declined in the motor vehicle and parts industry despite strong consumer demand for cars and light trucks.

The supply of labor. In the weeks leading up to the release of employment report, the media published many articles focusing on firms that were having difficulty hiring workers. BLS data for February 2021 (the most recent month with available data) showed that the estimated number of job opening nationwide was actually 5% higher than in February 2020, the last month before the pandemic.

That employment grew slowly despite a large number of available jobs may be an indication that labor supply had declined relative to the situation before the pandemic. That is, fewer people were willing to work at any given wage than a year earlier. There are several related reasons that the labor supply curve may have shifted: 1) Many K-12 schools were still conducting instruction either wholly or partially online making it more difficult for parents of school-age children to accept work outside the home; 2) although vaccinations had become widely available, some people were still hesitant to be in close proximity to other people as is required in many jobs; and 3) under the American Rescue Plan Act proposed by President Biden and passed by Congress in March 2021, many unemployed workers were eligible for an additional $300-per-week federal payment on top of their normal state unemployment insurance payment. These expanded unemployment benefits were scheduled to end September 2021. In the case of some low-wage workers, their total unemployment payment during April was greater than the wage they would have earned if employed.

These three factors affecting labor supply were potentially interrelated in that the expanded unemployment insurance benefits provided the financial means that allowed some workers to remain unemployed so that they could be home with their children or so that they could avoid a work situation that they believed exposed them to the risk of contracting Covid-19.

That at least some firms were having difficulty hiring workers seemed confirmed by the fact that average weekly hours worked steadily increased from February through April, indicating that employers were asking their existing employees to work longer hours. 

Summary. It’s never a good idea to draw firm conclusions about the state of the economy from one month’s employment report. That observation is particularly true in this case because April 2021 was a period of continuing transition in the U.S. economy as vaccination rates increased, infection rates declined, and government restrictions on business operations were relaxed. All of these factors made it likely that during the following months more businesses would be able to resume normal operations, increasing the demand for labor.

In addition, by the fall, the factors affecting labor supply may have largely been resolved as most children return to full-time on-site schooling, increased vaccination rates reduce fears of infection, and the supplementary unemployment benefits end.

The three figures below show: 1) total nonfarm private employment; 2) the employment-population ratio for workers aged 25 to 54; and 3) the unemployment rate. Together the figures indicate that in April 2021 the recovery from the worst effects of the pandemic on the labor market was well underway, but there was still a long way to go.

NEW! – 04/16/21 Podcast – Authors Glenn Hubbard & Tony O’Brien discuss monetary policy and the tools available to the Federal Reserve.

Authors Glenn Hubbard and Tony O’Brien follow up on last week’s fiscal policy podcast by discussing monetary policy in today’s world. The Fed’s role has changed significantly since it was first introduced. They keep an eye on inflation and employment but aren’t clear on which is their priority. The tools and models used by economists even a decade ago seem outdated in a world where these concepts of a previous generation may be outdated. But, are they? LIsten to Glenn & Tony discuss these issues in some depth as we navigate our way through a difficult financial time.

Just search Hubbard O’Brien Economics on Apple iTunes or any other Podcast provider and subscribe! Today’s episode is appropriate for Principles of Economics and/or Money & Banking!

Please listen & share!

NEW! – 04/09/21 Podcast – Authors Glenn Hubbard & Tony O’Brien discuss the longer-term impact of several post-pandemic fiscal policy efforts and the new Biden administration infrastructure investment proposal.

Authors Glenn Hubbard and Tony O’Brien discuss the long-term impacts of recent fiscal policy decisions as well as the proposed infrastructure investment by the Biden administration. The most recent round of fiscal stimulus means that we’re spending almost 4.5 Trillion which is a high percentage of what we recently spent in an entire fiscal year. They deal with the question of if the infrastructure spending will increase future productivity or will just be spent on the social programs. Also, Glenn deals with the proposed corporate tax increase to 28% which has been designated to fund these programs but does have an impact on stock market values held by millions through 401K’s and IRA’s.

Just search Hubbard O’Brien Economics on Apple iTunes or any other Podcast provider and subscribe!

Please listen & share!

NEW! – 02/19/21 Podcast – Authors Glenn Hubbard & Tony O’Brien discuss early thoughts on the Biden Administration’s economic plan.

Authors Glenn Hubbard and Tony O’Brien discuss early thoughts on the Biden Administration’s economic plan. They consider criticisms of the most recent stimulus packages price tag of $1.9B that it may spur inflation in future quarters. They offer thoughts on how this may become the primary legislative initiative of Biden’s first term as it crowds out other potential policy initiatives. Questions are asked about what bounce we may see for the economy and comparisons are made to the Post World War II era. Please listen and share with students!

The following editorials are mentioned in the podcast:

Glenn Hubbard’s Washington Post Editorial with Alan Blinder

Olivier Blanchard’s comments on the Stimulus in a Peterson Institute for International Economics post

Larry Summer’s WaPo editorial about the risks of the stimulus:

Just search Hubbard O’Brien Economics on Apple iTunes or any other Podcast provider and subscribe!

Please listen & share!

How the Effects of the Covid-19 Recession Differed Across Business Sectors and Income Groups

The recession that resulted from the Covid-19 pandemic affected most sectors of the U.S. economy, but some sectors of the economy fared better than others. As a broad generalization, we can say that online retailers, such as Amazon; delivery firms, such as FedEx and DoorDash; many manufacturers, including GM, Tesla, and other automobile firms; and firms, such as Zoom, that facilitate online meetings and lessons, have done well. Again, generalizing broadly, firms that supply a service, particularly if doing so requires in-person contact, have done poorly. Examples are restaurants, movie theaters, hotels, hair salons, and gyms.

The following figure uses data from the Federal Reserve Economic Data (FRED) website (fred.stlouisfed.org) on employment in several business sectors—note that the sectors shown in the figure do not account for all employment in the U.S. economy. For ease of comparison, total employment in each sector in February 2020 has been set equal to 100.

Employment in each sector dropped sharply between February and April as the pandemic began to spread throughout the United States, leading governors and mayors to order many businesses and schools closed. Even in areas where most businesses remained open, many people became reluctant to shop in stores, eat in restaurants, or exercise in gyms. From April to November, there were substantial employment gains in each sector, with employment in all goods-producing industries and employment in manufacturing (a subcategory of goods-producing industries) in November being just 5 percent less than in February. Employment in professional and business services (firms in this sector include legal, accounting, engineering, legal, consulting, and business software firms), rose to about the same level, but employment in all service industries was still 7 percent below its February level and employment in restaurants and bars was 17 percent below its February level.

Raj Chetty of Harvard University and colleagues have created the Opportunity Insights website that brings together data on a number of economic indicators that reflect employment, income, spending, and production in geographic areas down to the county or, for some cities, the ZIP code level. The Opportunity Insights website can be found HERE.

In a paper using these data, Chetty and colleagues find that during the pandemic “spending fell primarily because high-income households started spending much less.… Spending reductions were concentrated in services that require in-person physical interaction, such as hotels and restaurants …. These findings suggest that high-income households reduced spending primarily because of health concerns rather than a reduction in income or wealth, perhaps because they were able to self-isolate more easily than lower-income individuals (e.g., by substituting to remote work).”

As a result, “Small business revenues in the highest-income and highest-rent ZIP codes (e.g., the Upper East Side of Manhattan) fell by more than 65% between March and mid-April, compared with 30% in the least affluent ZIP codes. These reductions in revenue resulted in a much higher rate of small business closure in affluent areas within a given county than in less affluent areas.” As the revenues of small businesses declined, the businesses laid off workers and sometimes reduced the wages of workers they continued to employ. The employees of these small businesses, were typically lower- wage workers. The authors conclude from the data that: “Employment for high- wage workers also rebounded much more quickly: employment levels for workers in the top wage quartile [the top 20 percent of wages] were almost back to pre-COVID levels by the end of May, but remained 20% below baseline for low-wage workers even as of October 2020.”

The paper, which goes into much greater detail than the brief summary just given, can be found HERE.

The Wall and the Bridge – an article from Glenn Hubbard in National Affairs.

Advances in technology and expanding international trade have disrupted some key U.S. industries. These developments have made new products available, lowered the prices of existing products, and fostered the creation of new companies and new jobs. Yet, there has also been a downside. Some U.S. manufacturing firms have disappeared and some workers have been left unemployed for long periods. How can economists help frame a discussion about policies that will help everyone participate as the economy continues to evolve? Glenn Hubbard discusses a new approach in his article “The Wall and the Bridge”, published in National Affairs in September 2020.

COVID-19 Update – The Double-Edged Sword of Unemployment Insurance

Supports:  Econ (Chapter 19) & Micro (Chapter 9): Unemployment and Inflation; Essentials: Chapter 13.

Apply the Concept:  The Double-Edged Sword of Unemployment Insurance  

Here’s the key point:  Unemployment insurance payments during the pandemic cushioned worker income losses but made layoffs more likely and made some workers reluctant to return to work.

            When workers lose their jobs, they are usually eligible for unemployment insurance payments. State governments are responsible for funding the payments, although the federal government provides guidelines states must meet and contributes funds to pay for administering the program.  As the following figure shows, the U.S. experienced an extraordinary surge in weekly unemployment insurance claims during April 2020. The increase in claims was much greater than occurred at any point during the Great Recession of 2007-2009, which was the most severe recession the U.S. economy had experienced since the Great Depression of the 1930s.

The spike in people losing their jobs and applying for unemployment insurance was primarily due to many mayors and governors ordering the closure of nonessential businesses to fight the spread of the Covid-19 disease caused by the coronavirus.  Unemployment insurance payments vary across states but typically last for 26 weeks and are intended to replace about 50 percent of a worker’s wage, subject to a cap.  In 2020, Congress and President Donald Trump enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide funds to support firms and businesses suffering from the effects of the coronavirus pandemic. Included in the act was a provision to increase the normal state unemployment insurance payment by $600 per week for up to four months.

Congress and President Franklin Roosevelt created the U.S. unemployment insurance system during the Great Depression as part of the Social Security Act of 1935. The first payments were made in 1939.  Congress has had two main goals in establishing and maintaining a system of unemployment insurance: (1) To provide the means for workers who have lost their jobs to continue to buy food, clothing, and other necessities; and (2) to help support the level of total spending in the economy to avoid making recessions worse.  From the beginning, some members of Congress and some state legislators were concerned that payments to the unemployed would reduce the recipients’ incentive to quickly find a new job.  In establishing the program in the 1930s, policymakers were influenced by the experience in England where high rates of unemployment throughout most of the 1920s had resulted in many people receiving government payments—being “on the dole”—for years. In reaction, most states established 26 weeks as the length of time the unemployed could receive payments and kept the amount of money at roughly half a worker’s previous wage.

Economists believe that any type of insurance results in moral hazard, which refers to the actions people take after they have entered into a transaction.  In particular, insurance makes the event being insured against more likely.  For instance, once a firm has purchased a fire insurance policy on a warehouse, it may choose not to install an expensive sprinkler system thereby increasing the chance that the warehouse will burn down.  People with health insurance may visit a doctor for treatment of a cold or other minor illness, which they would not do if they lacked insurance. Similarly, moral hazard resulting from the unemployment insurance system may result in workers not accepting jobs that they would have taken in the absence of unemployment insurance.

Economists debate the extent to which the moral hazard involved in unemployment insurance has a significant effect on U.S. labor markets.  Most studies indicate that unemployment does increase the length of time that workers are unemployed—the duration of spells of unemployment—thereby reducing the efficiency of the economy by decreasing the size of the labor force and the quantity of goods and services produced.  But because unemployment insurance reduces the opportunity cost of searching for a job—since workers give up less income during the time they are searching—it may also result in a better fit between workers and jobs, thereby increasing worker productivity and economic efficiency.  Most economists conclude that, on balance, unemployment insurance that lasts for only 26 weeks and replaces only 50 percent of previous income probably does not significantly reduce economic efficiency in the United States.

            After passage of the CARES, some policymakers and economists again raised the issue of whether the unemployment insurance system provides disincentives for people to work.   The additional $600 that an unemployed worker received under the CARES act increased the average unemployment insurance benefit from $378 per week to $978 per week. That income was equivalent to a wage of $24.45 per hour for a 40-hour week and was greater than the wage rate received by more than half of workers in the United States in early 2020, before the coronavirus pandemic began.  As a result, some workers were reluctant to return to their previous jobs as some firms began to reopen during May.

A restaurant owner in Oregon noted that one of his cooks was receiving $376 more per week in unemployment insurance than he had earned working: “Why on earth would he want to come back to work?” The restaurant was having difficulty attracting enough workers to provide takeout and delivery services while the restaurant’s dining room was closed. As the head of the National Restaurant Association put it: “It’s not that these workers are lazy, they’re just making the best economic decision for their families.”

Some firms that were unsure whether to continue to employ workers during the period the firms were ordered closed. Retaining workers would make it easier to restart once mayors and governors had lifted restrictions on operating. But the availability of higher unemployment insurance payments made some of these firms decide to lay off workers instead. For example, according to an article in the Wall Street Journal, Macy’s chief executive stated that “the new benefits in the federal stimulus program played a role in the company’s decision to furlough 125,000 workers this past week.”

The supplementary unemployment insurance payments included in the CARES act succeeded in cushioning the income losses workers suffered from the layoffs during the pandemic, but they had also made it more likely that firms would lay off workers and made some workers more reluctant to return to work. Given that the additional $600 payments were scheduled to end after four months, it remained unclear whether the payments would have a lasting effect on the U.S. labor market.

Sources: Kurt Huffman, “Our Restaurants Can’t Reopen Until August,” Wall Street Journal, April 12, 20202; Eric Morath, “Coronavirus Relief Often Pays Workers More Than Work,” Wall Street Journal, April 28, 2020; Patrick Thomas and Chip Cutter, “Companies Cite New Government Benefits in Cutting Workers,” Wall Street Journal, April 7, 2020; Henry S. Farber and Robert G. Valletta, “Do Extended Unemployment Benefits Lengthen Unemployment Spells? Evidence from Recent Cycles in the U.S. Labor Market,” Journal of Human Resources, Vol. 50, No. 4, Fall 2015, pp. 873-909; Congressional Budget Office, “Understanding and Responding to Persistently High Unemployment,” February 2012; Daniel N. Price, “Unemployment Insurance, Then and Now, 1935-85,” Social Security Bulletin, Vol. 48, No. 10, October 1985, pp. 22-32; and Federal Reserve Bank of St. Louis.

Question: An article published in the New York Times during April 2020, quoted a policy analyst as stating that: “I would never two months ago have ever thought of advocating for 100 percent income replacement.”

  1. What does the analyst mean by “100 percent income replacement”?
  2. Why during an economic expansion or mild economic recession would most policymakers be reluctant to adopt a policy of 100 percent income replacement?
  3. Are there benefits to such a policy during an economic expansion or mild economic recessions? How is the desirability of such a policy affected if the economy is in a severe recession?

SourceElla Koeze, “The $600 Unemployment Booster Shot, State by State,” New York Times, April 23, 2020.

For Economics Instructors that would like the approved answers to the above questions, please email Christopher DeJohn from Pearson at christopher.dejohn@pearson.com and list your Institution and Course Number.

4/17/20 Podcast – Glenn Hubbard & Tony O’Brien discuss the Federal Reserve response and toilet paper shortages.

On April 17th, Glenn Hubbard and Tony O’Brien continued their podcast series by spending just under 30 minutes discuss varied topics such as the Federal Reserve’s monetary response, record unemployment numbers, panic buying of toilet paper as compared to bank runs, as well as recent books they’ve been reading with increased downtime from the pandemic.

4/10/20 Podcast – Glenn Hubbard & Tony O’Brien discuss the economic impacts of the pandemic.

On April 10th Glenn Hubbard and Tony O’Brien sat down together to discuss some of the larger impacts of the pandemic.

In these 18 minutes, Glenn and Tony discuss the fiscal & monetary response, the future relationship of the US Treasury and the Federal Reserve System, as well as several other topics.

Coronavirus Pandemic & the Economy: An Overview

On March 19th Glenn Hubbard sat down with the editorial team at Pearson to talk through some of the high-level economic issues involved in the coronavirus pandemic.

In this 10 minute podcast Glenn discusses the nature of the economic shock and what we should expect, based on historical shocks. We explore every day topics students are wondering about like what will the job market look like to the policy ideas of what could help stabilize the US economy.

Give your students the link and ask them any of the following discussion questions to get them thinking about the pandemic in an economic context:

1. Is this kind of economic supply shock a new concept or something that the U.S. has experienced before? Is there any precedent for whether this should be a short or drawn out recession? What factors will contribute to the length of the recession?

2. What economic policies would you prescribe for dealing with this crisis and why? Which policy would be the most beneficial for families given the current state of the economy? Which policies would be the most beneficial for businesses and long-term economic growth?

3. What current mandates as a result of the pandemic could translate into longer-term modifications to how we learn and work? Discuss the possible structural changes to the economy.

4. What are the trade-offs involved in controlling the pandemic? Assuming there will be a significant impact on the economy, what macroeconomic policies would you implement to soften the shock to allow people to more easily follow the guidelines to reduce the pandemic without suffering severe economic consequences? Will your policies help restart the economy once the pandemic has passed?

Instructors can access the answers to these questions by emailing Pearson at Christopher.dejohn@pearson.com and stating your name, affiliation, school email address, course number.