Labor Market Will Tighten Sharply: Not As Much Slack As Biden Assumes

The Black and Hispanic populations have also grown as a share of the total, and both have higher unemployment rates, on average. (We don’t have detailed enough data to adjust for age and sex and race and ethnicity all at once.)

Another measure of labor market tightness, the rate of voluntary quits, reached its highest sustained level in 2019 (though it had spiked a bit higher for one month in 2001).

At the same time that the Biden administration is trying to stimulate demand for labor, other policies diminish the incentive for people to work. Extra unemployment insurance payments have a statistically significant impact. The size of the effect is not usually large, but we don’t have full studies with the bonus payments that started last year. Plenty of business owners reported last summer that their laid-off workers were reluctant to return to their old jobs because they were taking home more money not working than when they had been working. The plus side of unemployment insurance is that it allows people to be picky, not needing to take a lower-paying job when more job search would enable them to find a higher-paying job. That effect, however, must be balanced against the direct disincentives of the program.

The effort to stimulate more jobs will, like all things, hit diminishing returns. It will be harder and harder to get more people into the workforce. It can be done, of course, but through higher and higher wages and benefits. A person who believes work is not worth the time and bother at $15 an hour may be willing to take a job at $20. But the stimulus needed to get that much higher demand for labor will certainly be inflationary.

The massive stimulus from the Biden administration and the Fed will certainly happen. Arguments against it are probably futile, The business implication is that companies will be competing for a limited pool of workers. Wage inflation will accelerate. More importantly, the labor retention rate will become the key metric for business success in the coming years.

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