Job Shortages are the Norm

Monday, August 24, 2020

Chart of the ratio of jobs to unemployed people, using three different
measures of unemployment. Data from FRED, Federal Reserve of St. Louis

Since the pandemic began, there aren’t enough jobs to go around. You might be thinking that this is obvious, but many people either forget this fact or leave it out of their analysis. The graph above of the ratio of unemployed people to job openings actually shows that jobseekers outnumbered openings for much of the past 20 years. This includes when we weren’t technically in a recession (recession years are marked in grey).

A major concern among Republicans in Congress is that the relatively generous1 unemployment benefits—the $600/week payment on top of regular unemployment insurance—were discouraging work. It’s not clear (full-text) this is happening, but even if it were, it wouldn’t matter. This recession differs from prior recessions in a major way: We don’t want people getting jobs in many cases because their jobs are either dangerous in themselves or are at a business that would be dangerous to reopen.

But again, the shortage means workers simply cannot all find jobs, regardless of any discouragement effect. The job shortage is particularly acute if you use the Bureau of Labor Statistics’ expanded measures of unemployment, which they call U-4 and U-5. U-4 adds workers who’ve given up looking but still want jobs, and U-5 adds still more workers who want to be part of the labor force but can’t for reasons other than being discouraged (maybe they’re taking a class).

This doesn’t even include U-6, which I excluded because that figure includes people who have jobs. Specifically, it adds people who have a part-time job and are looking for a full-time job. In theory, if one of these workers gets a full-time job, a new part-time job will open up that meets another unemployed person’s requirements. That’s probably not always the case, but talking about a full-time job shortage is beyond the scope of this post.

Intuitively, workers benefit when the ratio is at or below 1.0, and as far as I can tell, that intuition is correct. However, there are there are some complications. For example, near the end of the recovery more people started voluntarily leaving jobs to find better ones. These people likely have the savings or secondary income to tide them over while they search, so a delay in finding a job isn’t a big deal. During times like that, a ratio over 1.0 might not be bad. Also, this ratio is an average. It’s likely some positions are extremely hard to fill, while others still have more applicants than positions. But these caveats don’t change the fact that a smaller ratio is better for workers. There’s the obvious: If there aren’t enough open positions, some people won’t get hired. The demand for labor did seem to help push up wages. Also, it’s easier to pass on work environments that are generally toxic or simply not a good fit if you know you can find a job elsewhere.

While it’s no surprise that the ratio rises during recessions, I wouldn’t have guessed that the ratio never even dipped below 1 until 2018 or so. More than just a surprising fact, I think it’s important to note how often demand for jobs outstrips supply. Much of the time, it’s simply not possible for every unemployed person to get a job, let alone for every person will a poor paying job to find a higher paying one. And yet, so much thinking on unemployment and poverty ignores this.

Correction Friday, August 5, 2022

A previous version lacked attribution of the data. I’ve added data source attributions and alt text to the graph and data source attributions to tables.

Further Reading

  1. Relative to before. It’s hard to say how generous they are generally because unemployment insurance payout formulas are complicated. Also, should we factor in policies that affect wages (higher wages means higher unemployment payments) or reduce health insurance premiums? Finally, they’re temporary. If you go on unemployment now (late August 2020) you won’t receive them, despite the ongoing pandemic and recession. That undercuts the generosity somewhat.