June 03, 2021
The New York Times
When the Labor Department released a disappointing employment report for April, it caught many economists by surprise. Most of us had predicted the economy had created around 900,000 jobs and forecast a drop in the unemployment rate of 0.2-0.3 percentage points.
This seemed reasonable: Through March and April, most sectors of the economy showed strong growth and weekly unemployment claims dropped. But instead, there were just 266,000 new jobs and the unemployment rate edged up by 0.1 percentage point to 6.1 percent.
Many people blamed provisions in President Biden’s $1.9 trillion American Rescue Plan stimulus package. But one fact worth bearing in mind is that slower job growth implies faster growth in productivity, or the amount of output per hour worked. Indeed, despite the low April jobs numbers, the economy grew rapidly in the first quarter, a pace it is expected to maintain in the current quarter.
As we await the May labor report that is to be released on Friday, remember that the job numbers don’t tell the whole story. To understand not just the current health of the economy but the trajectory of the recovery and the threat of inflation, focus just as much on the report’s implications for productivity growth.
Most economists still expect the sort of job growth last month that we anticipated in April. But weak job performance is also possible — bad news for the millions who are still out of work. However, it’s good news for economists who fear “stagflation,” the combination of weak growth and inflation that plagued the economy in the 1970s.
That includes the Clinton and Obama administration economic adviser Larry Summers, who warns that the Biden recovery package is too large. He argues that it will create shortages of labor along with a host of other problems, leading to the sort of wage-price spiral that we saw in the 1970s. (The inflation of that era finally came to an end with a severe recession in 1981-82.)
Fortunately, more rapid productivity growth like the sort we’re experiencing counters the risk of stagflation by reducing pressure on costs. By one definition, inflation is equal to the rate of wage increases minus the rate of productivity growth. For example, if wages are growing at 4 percent annually, but productivity growth is just 1 percent, then inflation will be roughly 3 percent. But if productivity growth averages 2 percent, the inflation would be just 2 percent with that 4 percent wage growth. If we see rapid productivity growth, it is difficult to envision a scenario in which inflation becomes a major problem. Productivity growth slowed sharply, from 3 percent annually in the long post-World War II boom to just over 1 percent in the 1970s stagflation years.
All of this is to say that when looking at the May jobs data, keep in mind that weaker job growth, coupled with the strong G.D.P. growth evident in other data, implies rapid productivity growth. This should alleviate concerns about stagflation and discourage any efforts to curtail Mr. Biden’s recovery agenda.
Since the release of the April jobs report, many of the factors that stymied job growth have become clearer. State and local governments added back only 39,000 jobs for the month, leaving their employment still almost 1.3 million below the prepandemic level. Many schools had still not returned to in-class instruction, meaning teachers and support staff had not been rehired. The auto industry laid off 27,000 workers because the worldwide shortage of semiconductors was slowing assembly lines.
Yet even when accounting for these factors, much of the April weakness remains unexplained. One theory that has gained currency particularly among the right is that people are not taking jobs because of the weekly $300 unemployment insurance supplements in the American Rescue Plan, which will be available until early September. By this logic, workers have an incentive to not work.
The April report provided some evidence to support this theory. Wages for nonsupervisory workers in retail and restaurants, two of the lowest-paying sectors, both rose rapidly in the month — consistent with employers having trouble finding workers. Also, for restaurant workers, the length of the average workweek jumped more than 2 percent in April, suggesting employers were giving their existing staff members more hours.
But while low-wage employers may have had a hard time finding workers, it’s far from clear that the $300 supplements were the problem. Back in April 2020, the CARES Act included weekly $600 supplements. A study by economists at the University of Chicago and JPMorgan Chase found that employment shrank by only 0.2 to 0.4 percentage points as a result of the supplements. One could reasonably assume that the effect of supplements half as large would be considerably smaller.
What’s actually happening here? As businesses rush to reopen, they might find it tough to attract all the workers they need. One statistic that would support this possibility is the ratio of hires to job openings, a measure of the difficulty of finding workers, is somewhat higher in the South than in the rest of the country. In the March data, the most recent available, employers in the South reported they hired 2,322,000 workers, while they reported 3,068,000 job openings, for a ratio of hires to openings of 75.7 percent. By contrast, in the rest of the country employers reported 3,687,000 hires and 5,055,000 openings, for a ratio of 72.9 percent.
This gap is noteworthy. If the $300 supplement, explains why employers have had difficulty finding workers, we would expect it to have a bigger effect in the low-wage South. Since this supplement would represent a larger share of wages there than in the rest of the country, it should be making it more difficult for employers to find workers in the South. But it doesn’t seem to be having this effect.
Beyond Friday’s report, in the second quarter of 2021, G.D.P. growth — that is, productivity — is virtually certain to exceed prepandemic levels. If the economy produces more but with substantially fewer workers, this implies that productivity is growing rapidly. Higher productivity growth not only helps keep inflation in check, but also, in the long run, determines our standard of living. From the first quarter of 2020 to the first quarter of 2021, productivity increased at a rate of 4.1 percent. That is up from a rate of just over 1 percent annually between the fourth quarter of 2009 and the fourth quarter of 2019.
Of course, productivity data are highly erratic, and subject to large revisions. But the more sustained the growth, even at levels below 4 percent, the greater the likelihood that it’s no fluke.
I’m still betting on a report showing 900,000 or so new jobs. I don’t predict an uptick in average weekly hours, and I expect wage growth in low-wage sectors to moderate.
More generally, I expect that we will continue to see strong G.D.P. growth for the rest of the year and continued strength in productivity. We will see some jumps in inflation, partly the result of rebounds from price declines in the pandemic and partly the result of temporary shortages as businesses get back up to speed.
But Mr. Summers can rest easy. Seventies-style stagflation is not on the horizon.