Delta Up, New Jobs Down

The American economy added a mere 235,000 jobs in August, perhaps one-third of what economists were predicting. Experts reckon that the Delta virus reduced job creation by about 600,000, as workers with child-care responsibility stayed home, and those exposed to contact with the public preferred the safety of their homes to the risk of taking available jobs in the leisure and hospitality industries. Those industries, which have grown at an average of 350,000 jobs in the past six months, added no jobs in August. Employment in retailing declined. Also, the data were gathered before this week’s expiration of the $300 per week federal top-up of state unemployment benefits, which made staying at home financially feasible.

Demand for Workers Stays High, Supply Stays Low

Here’s why the weak new-job number reflects a lack of available workers rather than a lack of available jobs:

  • Some 10.1 million job openings remain unfilled.
  • The labor force participation rate, at 61.7%, remains significantly below the pre-pandemic level of 63.3%.
  • Bidding for workers has taken average hourly earnings up at a 6.9% annual rate in August to a healthy 4.3% above last August’s level.[1]
  • The National Federation of Independent Businesses reports that 91% of firms with job openings could find only few or no qualified applicants.
  • Talk to any businessman and complaints about inability to fill openings rank right with complaints of other shortages – chips, merchandise from Asia, parts for machinery.

The disappointing jobs report should not obscure the fact that the economy is still running hot, at a growth rate of 6 percent, estimates Goldman Sachs. Not good enough, however, for Joe Biden or Federal Reserve Board chairman Jay Powell. Biden sees “an economic recovery that is durable and strong”, and job creation averaging twice that of any president at this stage of his term, presumably including George Washington. But he plans to pump at least $4 trillion into the economy over the next decade to create millions of jobs in a worker-short economy. If early signs that Democrats can’t agree on “pay-fors” are harbingers, more red ink will flow across the nation’s ledgers.

The Fed and the President Agree: Red Hot Beats Hot

Powell can find enough in the data to justify holding off on reducing the Fed’s several efforts to stimulate the economy, the uncertain course of Delta being only one. The black (8.8%) and Hispanic (6.4%) unemployment rates remain substantially above the white rate (4.5%). Recall: Powell has expanded the Fed’s remit to include making certain that any recovery is inclusive of these groups.

As was the case with the invention of Modern Monetary Theory (MMT) to justify levels of debt earlier thought to be the ruin of the nation, so with the problems of the President and the Fed chairman. For Biden there is an idea popular with Bidenistas: we need a high-pressure economy, a go-for-growth economy in which a bit more inflation is a price worth paying to improve the lives of marginalized groups. For Powell there are studies, including one by David Reifschneider and David Wilcox, former Fed senior staffers, suggesting that a 2% inflation target unnecessarily subdues growth, and that a 3% target would reduce volatility and is more consistent with an optimal growth rate. If lots of folks are being hospitalized because their body temperatures exceed 98.6°F (37°C), raise normal to 100°F, and reduce hospital over-crowding.

The shortage of workers has heightened the already-fierce competition among employers for staff. That competition is not limited to higher pay and better benefit packages. Offices are being remodeled to make them more Covid-resistant: better ventilation, more social distancing. One company is even allowing returning workers to pursue the interest in nature cultivated during at-home work. The New York Times reports firms offering tree-house lounges, roof-top vegetable plots, and even bee-hives with honey-tastings.

The Desires of Workers vs. The Needs of the Firms

That’s the easy part. The harder question is how far to go in offering flexible working days and hours. Workers know what they want, and will shop for employers willing to meet their demands. But it is not necessarily in the interest of a firm to satisfy the sum total of individual demands. That entity has needs not met when individual workers replace water-cooler serendipity with scheduled zoom sessions that permit the participation of pets.

As the great economist Ronald Coase pointed out, there is a reason firms exist. After all, individuals can produce stuff and services, and contract with each other to coordinate their activities. But with few exceptions they don’t. It is more efficient to form firms that make such individual contracting unnecessary.

Also, two advantages of coming together are lost when isolated silos replace workplaces. The first is what has come to be called “water-cooler creativity”, the unplanned stimulation and creativity resulting from chance confrontations with colleagues. The second is the camaraderie and morale that comes from working together on a problem or project – witness the after-work drinks gathering.

The shift of bargaining power from employer to employee is having the beneficial effect of raising wages at the lower end of the wage scale, and of giving workers an incentive to move from low-value to higher-value jobs. But executives with responsibility for the overall performance of their firms must seek to maximize that entity’s success rather than the individual happiness of its workers. That does not mean workers’ wishes can or should be ignored, but they cannot be allowed to submerge the interest of the firm in a diverse choice of work days, office accommodation, and other aspects of the workplace. The individual wishes must be accommodated within limits set by the firm’s requirements.

There are exceptions. I have seen workers drift in and out of Google’s New York office at all hours, their individual preferences in food, massages, and dry cleaners catered for.

It Takes a Team to Satisfy Customers

But managers of firms such as Walmart and Amazon, about to hire 20,000 and 50,000 workers, must represent the economic health of their enterprises when bargaining with prospective employees. And professional service firms, in which it takes a team with diverse talents to satisfy a client or get a rocket into the air, cannot allow aversion to commuting to dominate the configuration of their work forces, to convert a team into a series of silos. Consider the reaction of an investment banking client when told that a scheduled zoom meeting would be better for him or her than a leisurely lunch or dinner at which ideas are batted around. Or of a law-firm client with a hot merger deal who is told over the phone that the partner with whom he is speaking can’t answer a complicated tax question, but will find out from the tax specialist on Thursday’s intra-practice-group zoom call.

The End Game

The labor market is changing. It’s ultimate shape, the balance of bargaining power, won’t be clear until the Delta distortion is removed. But my guess is that when the virus is contained at the level of ordinary flu and workplaces have been made healthier, and jobs are less easily come by:

  • commuting will seem less of an evil than a promotion foregone for lack of presence in the sightline of supervisors,
  • the pleasures of shorts and sneakers will be outweighed by the annoying distractions of ordinary home life, and
  • executives, of late quick to adopt the latest fad, realize they have a responsibility to the future of their firms when deciding how far to go to please individual employees.`

Life after Covid-19 might not be as different as some are now predicting.

[1] Note, however, the Lindsey Group’s calculation that real (inflation-adjusted) wages dropped 1.2% over the twelve months ending in July, and have fallen every month since January. “One cannot solve the qualified worker shortage with falling real wages.” Unless Keynes was right that a “money illusion” causes people to react to nominal rather than real terms.