September 17, 2021

Restaurant labor shortages show little sign of going economywide: Policymakers must not rein in stimulus or unemployment benefits

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Recent economic data suggest labor shortages in leisure and hospitality have popped up—but there is...

Recent economic data suggest labor shortages in leisure and hospitality have popped up—but there is little reason to worry about spillover into the rest of the economy and no reason to change policy course.

Yes, last week’s jobs report was disappointing, with employment growth slowing significantly from the months before. It would be a mistake, however, to make too much of a single month’s data—the monthly jobs report data are notoriously volatile, and there are still excellent reasons to believe that coming months will see very strong job gains. Further, as disappointing as last week’s report was, there is nothing in it that demands a reorientation of the general policy stance taken by the federal government. The relief and recovery aid already passed (including the boosts to unemployment insurance) should be continued and proposed packages (like the American Families Plan and the American Jobs Plan) should be passed.

The argument that last week’s report demands a rethink of today’s policy orientation rests on claims that it contained clear evidence of damaging labor shortages induced by either too-extensive stimulus or too-generous unemployment insurance (UI).

There is not compelling evidence of either of these. In fact, nothing in last week’s jobs report calls for a wholesale change of policy course from the federal government. The key takeaways from the data are:

1) Labor shortages—which we would define by a large acceleration of wage growth to a rate that would be hard to sustain over the next year—do seem to have popped up in the leisure and hospitality sector. But unless this dynamic threatens to spill over into other sectors or reduce growth within the leisure and hospitality sector enough to change aggregate trends, a short-term sectoral labor shortage does not come close to being sufficient justification for changing national policy priorities.

2) There is very little reason to worry that labor shortages in leisure and hospitality will soon spill over into other sectors and drive economywide “overheating.”

  • The leisure and hospitality labor market is highly segmented off from other sectors, and wage pressures—upward or downward—have typically not spilled over from it to other sectors.
  • For example, jobs in leisure and hospitality have notably low wages and fewer hours compared to other sectors. Weekly wages of production and nonsupervisory workers in leisure and hospitality now equate to annual earnings of just $20,628, and total wages in leisure and hospitality account for just 4{e5fab30bc1af2ab9862fe5c16f5be581fd243b6ad78468b48e940aadfb2b849d} of total private wages in the U.S. economy. All of these facts make it highly unlikely to meaningfully change the wage trajectory of other sectors.

3) The labor shortages in leisure and hospitality so far do not seem to be dragging sharply on growth even within this sector—the sub-sectors within leisure and hospitality saw by far the most rapid employment growth in the last month.

4) Any signs that the more-generous UI benefits included as part of the American Rescue Plan (ARP) are driving wages higher in this sector are very faint—far too faint to justify a scaling back of these benefits or to justify state-level policymakers depriving their own workers of a needed boost to the safety net. For example:

  • Low-wage sectors—where UI benefits should be a more binding constraint on labor supply—saw notably faster job growth than others.
  • Evidence strongly suggests that continued caregiving responsibilities are impinging on the labor supply of women and constitute the primary labor supply bottleneck. Cutting back on pandemic UI provisions will not increase the labor supply of those who cannot work because of COVID-related caregiving responsibilities.
    • For example, the disappointing net job gains this month were not due to a slowdown in gross inflows into employment, instead they were due to a large pickup in outflows out of employment. The uptick in transitions out of employment in April were dominated by women.
    • Labor force participation rose rapidly last month, but more than 100{e5fab30bc1af2ab9862fe5c16f5be581fd243b6ad78468b48e940aadfb2b849d} of the gains were accounted for by men.

5) Further, millions of Americans continue to cite health concerns as a reason for reluctance to return to work—as further evidence of this, vaccination rates correlate positively with increased employment across states.

6) Cutting pandemic UI benefits now, as some states have done or are considering, will not just hurt workers who are depending on federal benefits while they cannot find work or are unable to work, it will also drag on the economy, as those benefits are supporting spending.

7) Finally, even if overall growth was constrained by voluntary labor supply decisions made by workers, this would be far less damaging to human welfare than growth that was constrained by too-slack aggregate demand. The goal of economic policy should not be to chase as many adults into paid work as possible, it should be to provide good options and economic security for all. The current policy orientation does that far better than an alternative one that reeled back on relief and recovery measures.

There is evidence of labor shortages driving wage acceleration, but only at the sectoral level

Wage growth accelerated markedly in the leisure and hospitality sector in April (a sector which includes arts, entertainment, and leisure as well as accommodations and food services). Taking the last three-month average of wages and comparing it to the previous three months, we find wage growth running at an annualized rate of nearly 18{e5fab30bc1af2ab9862fe5c16f5be581fd243b6ad78468b48e940aadfb2b849d}. It seems clear that in April, customers were coming back to leisure and hospitality establishments faster than employers were able to staff up to serve them at the going wages that recently prevailed in this sector.

But the rapid wage growth of the past three months is exactly what is supposed to happen when there is a sectoral imbalance between supply and demand. Such wage accelerations only become worrisome to economywide performance if the imbalance seems poised to spill over into other sectors and cause widespread economic overheating (wage and price growth that is unsustainably faster), or if sectoral wages are not rising fast enough and supply constraints are markedly impinging on growth in the sector.

There is very little evidence that the leisure and hospitality sector’s hot labor market is about to catch the rest of the economy on fire. This sector seems notably segmented off from much of the rest of the economy. For example, a striking feature of the COVID-19 economic shock was just how insulated other sectors in the economy were from the extreme labor market distress felt by face-to-face services like leisure and hospitality. Essentially half of the 14.4 million workers in the accommodations and food services sector in February 2020 lost their job in the following two months, and even as of March 2021, employment in that sector was down by more than 15{e5fab30bc1af2ab9862fe5c16f5be581fd243b6ad78468b48e940aadfb2b849d} relative to pre-COVID times. Wage growth in the sector predictably tanked due to this extreme labor market shock. Yet very little of this sectoral distress spilled over into wage growth in other sectors, which saw only the smallest dip in wage growth trends.

If workers outside of face-to-face services did not have their wage growth damaged by the employment disaster in face-to-face services over the past year, it seems hard to see why they would have their wage growth boosted significantly by a recovery in these sectors. To put it bluntly, why would, say, blue-collar factory workers in manufacturing or white-collar workers in professional services all of the sudden be able to demand notably higher raises because restaurant workers (still overwhelmingly part-time) have seen uncommonly fast wage growth—but growth which essentially just leaves their wages where they would have been based on pre-COVID trends?

Getting back on pre-COVID trends for leisure and hospitality workers means returning to wages that are still far lower than what prevail in other sectors, and hence unlikely to create pressure. For example, weekly pay for production and nonsupervisory workers in leisure and hospitality is consistent with annual earnings of just $20,628. Crucially, because of low average hours and low hourly pay, the accommodations and food service sector—as large as it is in employment terms (more than 14 million workers pre-COVID)—accounts for barely 4{e5fab30bc1af2ab9862fe5c16f5be581fd243b6ad78468b48e940aadfb2b849d} of all labor costs in the U.S. economy currently. Labor shortages leading to wage acceleration in this sector just are not working with a long-enough lever to push up wages across the board.

Additionally, the rapid wage growth seems to have worked in keeping the shortage from measurably impinging on growth. In fact, the leisure and hospitality sector was an outlier in last week’s report in how fast jobs were created. Figure 1 below shows each industry’s share of the remaining 8.2 million jobs gap relative to February 2020, and then each industry’s share of job growth last month. The leisure and hospitality sectors are punching far above their weight, with their share of April job growth far exceeding their share of the remaining jobs gap. In fact, if other sectors had matched the pace of job growth scaled to remaining employment gaps that leisure and hospitality saw, job growth for the month would have been closer to 800,000—a perfectly respectable figure under current economic conditions.

Figure 1

Unless this very recent sectoral labor shortage spills over into other sectors or threatens to markedly throttle off growth within its own sector, there is very little reason why national policy priorities should change. Why should policymakers do anything (say cut off UI benefits or reel back in macroeconomic stimulus) that would reduce economic security or job-finding prospects for (say) the million workers still laid off from state and local governments, just because restaurant owners actually had to raise wages in order to staff back up following the COVID shock?

Finally, any recovery from an economic downturn requires a period of labor shortage and accelerating wage growth, unless policymakers are willing to allow recessions to inflict permanent damage on the wage levels of U.S. workers. Wage growth slows during recessions and, to get back on pre-recession trends, there must be a period of above-normal growth unless one wants to allow recession-induced scarring to become permanent. In April, this normal period of wage acceleration in one sector was clearly rapid, and will be hard to sustain for too long. But some degree of wage acceleration was clearly necessary.

Very little evidence that enhanced unemployment insurance benefits created sectoral labor shortages

While the wage acceleration in leisure and hospitality is unlikely to cause economywide overheating, it has been used to call for the scaling back of enhanced UI benefits. However, the data fingerprints supporting the case that UI is a primary impingement on labor supply to sectors like leisure and hospitality are faint.

For one, UI benefits should put more downward pressure on labor supply in low-wage sectors (as they replace a higher percent of wages in these sectors). Yet low-wage sectors saw the fastest job growth in April by a substantial margin.

Second, the disappointing net job growth number for April was actually not driven by a decline of flows into employment (a decline in people getting hired after being unemployed or out of the labor force), as one might expect if workers choosing to live happily on UI instead of searching for jobs were the driver of these trends. As Figure 2 shows, flows into employment increased in April by 252,000, relative to the average of the previous three months. Instead, the net job growth number was held down by an atypically large uptick in flows out of employment (an increase in people being laid off or otherwise separated from a job and becoming unemployed or leaving the labor force).

Figure 2

Figure 2

It’s not shown in Figure 2 but crucially, while all transitions out of employment in April increased by 331,000 relative to the previous month, women accounted for 392,000 such transitions—more than 100{e5fab30bc1af2ab9862fe5c16f5be581fd243b6ad78468b48e940aadfb2b849d}. Related, labor force participation actually grew quite strongly in the month, but more than 100{e5fab30bc1af2ab9862fe5c16f5be581fd243b6ad78468b48e940aadfb2b849d} of the gain in the labor force was accounted for by men. These last two data points are consistent with caregiving responsibilities—which still fall far more heavily on women—being a key bottleneck for labor supply.

It remains the case that more than a quarter of school districts are not fully open, and this likely puts a large barrier in front of many parents returning to normal working schedules. There is a very good case to be made that we won’t have a serious read on the underlying state of U.S. labor supply until September, when a near-universal reopening of schools seems likely.

Labor supply is also likely being held back by legitimate health concerns from workers about returning to jobs. The Household Pulse Survey of the Census Bureau showed that, as of late April, there were still roughly 4.2 million Americans indicating that health concerns were keeping them from looking for a job. Further, Aaron Sojourner has found a robust positive relationship between employment status and vaccinations, with one obvious potential causal link running from vaccinations to people feeling more confident in looking for work safely. Until vaccinations are near-universal among the willing, this may pinch a bit on labor supply growth.

In today’s economy, labor supply constraints on growth are not as damaging

Finally, we should be clear that if economic growth is constrained because workers make voluntary decisions to not accept jobs at the going rate (that is, growth is constrained by labor supply), this is far less damaging to human welfare than economic growth that is constrained because workers who would be eager to work at today’s wage just can’t find any job offer (demand-constrained growth).

Policymakers currently face a choice of guarding against growth constraints driven by demand or driven by supply. The Biden administration has chosen to zealously guard against demand shortfalls, even at the risk of running into some supply constraints in the near term. If policymakers change this orientation and reel back macroeconomic stimulus and cut off UI benefits, they will be making the other choice—guarding zealously against supply-constrained growth and being willing to risk growth running into demand constraints. This would be a huge mistake for human welfare, even if it was true that some workers were choosing to pass on available jobs due to enhanced UI benefits. A worker who is jobless because they have voluntarily decided that they’d rather wait out the next month or two on enhanced UI benefits—rather than throwing their caregiving responsibilities into disarray by taking on work in the face of continued school closures or braving a job they feel might be unsafe for them—suffers far less than a worker desperate for work who just can’t find it because the economy is unnecessarily running at too-cool a pace.

Many face-to-face service-sector jobs have become unambiguously worse places to work over the past year. This has in no way been fully restored to the pre-COVID normal, as the coronavirus remains far from fully suppressed. Well-functioning labor markets should account for this degraded quality of jobs by offering higher wages to induce workers back. If enhanced UI benefits and a demand-increasing dose of fiscal stimulus are allowing these higher wages to be quickly offered in the face of supply constraints, then it seems like they’re improving labor market efficiency in this regard. Policy boosts to labor supply that aim to expand opportunities and remove key barriers to work—like the investments in care work provided in the American Jobs Plan and the American Families Plan—are excellent examples of this kind of progressive labor supply policy.

Policy boosts to labor supply that simply aim to rip the safety net out from under workers and return the consequences of not working to the same catastrophic levels they were before the pandemic UI programs should be rejected.

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