Thinking like a labor economist

Julie Trivitt


The news headlines currently include anecdotes, pictures and quotes from employers who desperately want to reopen their business to the public, or return production to pre-pandemic levels, but cannot find enough people willing to work, even if the current wage is slightly higher than those offered right before the shutdown.

People familiar with economic principles recognize something has changed, and people are responding to incentives. The logical conclusion many have reached is that the enhanced unemployment insurance (UI) benefits have made low wage work unprofitable. This is a rational conclusion and is no doubt one of the contributory factors in the current labor shortage. Several states have opted out of the enhanced benefits paid by the federal government early to alter the incentives and encourage workers to accept one of the many openings available. The federal supplement is currently set to expire in September for all states that have not opted out early.

We may well see an increase in employment as the expanded benefits expire and states re-implement the weekly job search requirements. However, anyone who claims ending the expanded UI benefits will single-handedly resolve the labor shortage is probably thinking like a political pundit rather than a labor economist. A more holistic view of the labor market suggests we consider additional changes in the last year that have influenced the supply of labor.

Economists recognize that labor is different from other productive resources in that labor is provided by people . . . people have preferences. The bulldozer doesn’t care whether it moves organic dirt or chemical sludge or smelly trash, but the driver does. Getting workers to accept employment that involves unpleasant job characteristics frequently requires paying higher wages. Economists call these excess wages compensating differentials. One unpleasant job characteristic is risk exposure since people prefer to avoid risk when possible. Our economy has seen a multitude of other changes that increase the risks, or make jobs more unpleasant, than they were prior to the pandemic.
Here are some of the factors beyond the enhanced UI benefits that have reduced the supply of labor or labor force participation rate over the past year, especially for jobs that involve interacting with the public in the service sector:

  • The public health crisis caused people to place a higher value on health insurance and prioritize full-time positions that come with benefits.
  • Being required to wear a mask all day and implement more stringent cleaning processes comes with physical and/or psychological discomfort.
  • Dealing with customers or co-workers who refuse to wear a mask, or who harass/make fun of those who choose to continue wearing a mask, is stressful and a potential risk exposure.1,2
  • The general climate on civil behavior has deteriorated, and there is a higher probability of being insulted or assaulted. This is especially true for Asian Americans3 and health care workers.4
  • Approximately 1.5 million workers retired earlier than planned last year.5
  • School and childcare closures have increased the cost of working for parents. Plus, no vaccines are approved for children under 12. This may make parents hesitant to send children to schools or daycare, even if they can. While only a few hundred children have died from COVID-19, this number of fatalities made it one of the most common causes of death among children.6
  • In the U.S. there were more than 500,000 deaths beyond what demographics predicted in 2020.7 Many of these people were employed or provided unpaid childcare that allowed parents to work.
  • With more than 32 million COVID cases in the US, there are millions of people still experiencing long COVID8 effects which may influence their willingness or ability to work for employers (or support the household so other family members can work). Extreme cases may even prompt family members to leave the labor force to provide care for them.

We need to recognize that our product supply chains and labor markets have been enormously disrupted in the past year. There have been multiple changes to the supply and demand of every resource and every product in our market. We will be innovating and hopefully adapting to intentionally establish an improved economy that works better for all of us going forward. To speed up the transition to the “new and improved” normal, we should recognize that it will require multiple adjustments within all of our markets, including labor markets, and not just assume we can go back to the pre-COVID status quo.