Both optimists and pessimists may find evidence of their outlook in recent business news.
The May Jobs report recorded an increase of 559,000 jobs and a decline in the unemployment rate to 5.8 percent in May. It also showed a marked improvement from the previous month’s weaker performance in a number of sectors, and the average hourly wage continued to rise. Before the monthly report, the weekly unemployment insurance claims are made report Thursday also revealed that the number of new unemployment insurance claims has fallen to 385,000 from 405,000 in the previous week, lower than the level that typically indicates a recession (400,000). This is the first time since the pandemic-related closings began. Further wage growth should help more workers return to the labor force.
At the same time, however, the most recent job report showed a huge error compared to the expected profit of 650,000 jobs. Restrictions in supply chains and reopenings of companies still make it difficult to return to work. And the workers are still not out of the woods: Thursday’s report showed that the total number of those already unemployed using benefits has not fallen since mid-March. If job creation is robust, this contrast between falling new claims and those still unemployed is strange.
What explains these confusing tensions? Unpack, take a look at the legacies of economists John Maynard Keynes and Friedrich Hayek.
In his day, Keynes advocated boosting aggregate demand during a recession to keep workers afloat – a recipe that clearly shaped the ultra-stimulating fiscal and monetary policies of both the Trump and Biden administrations. Its influence is also reflected in recent job reports: the imminent rebound in service consumption – restaurant meals, entertainment, and travel – will push demand above pre-pandemic levels, while the reopening and ample consumer cash, aided by policies that Demand for labor.
But while Keynes has paved the way for recovery after last spring’s catastrophic job loss, he offers us little to guide us through the impending labor shortage. If politics actively discourages the unemployed from getting back into their laps, as recent reports suggest, there will be no one to meet the impending demand surge, which threatens our economic rehabilitation.
In order to preserve the still shaky recovery, we must now turn to Hayek, the godfather of free-market thinking. He argued that politics should allow workers to adapt to changes in the economy. Looking ahead, policymakers must consider cutting increased unemployment benefits and focusing on old, pre-pandemic jobs so workers and the economy can adapt to new activities and new jobs that are more promising in the post-pandemic world. We don’t want unemployed workers to find that the post-pandemic economy has passed them by.
When demand picks up again, supply has to keep pace. Some industries, like automakers, can simply sell excess inventory, which is already happening. Tool and machine builders can increase their imports to keep up. But ultimately demand must be met by higher domestic production by workers. Once companies are exempted from the pandemic restrictions, we can expect some improvements in offering.
But halting faster improvements in employment and output are precisely the challenges Hayek identifies, including slowing the process of moving laid-off workers to new jobs after the pandemic. That is, growing demand with supply constraints will not create the sustained recovery of the jobs we need.
Many workers take the time to find a new job or choose to work less thanks to their generous pandemic unemployment insurance benefits. These benefits provided additional income for those who had lost their jobs at the beginning of the crisis. As a result, the economy will be slow to adapt to a new paradigm after the pandemic. These benefits also slow future profits in the form of higher wages workers could earn from a new and better job. But as Hayek tells us, the longer it takes for these workers to return to work, the longer it will take for them to receive these benefits.
In the coming months, we will be able to assess the effectiveness of addressing these forces of supply and demand by comparing employment gains in the 25 states that have chosen to end the federal pandemic performance bonuses against the 25 states that have keep them. While employment is likely to increase rapidly as the pandemic subsides and additional unemployment insurance benefits cease to exist, unemployment rates are likely to remain high for another year compared to pre-pandemic levels.
Looking ahead, wage increases for workers are expected to be robust, especially for the low-skilled in the service sector – especially if some workers delay return to work. These higher real wages are good news for recipients.
A less welcome wildcard would be inflationary pressures fueled by demand that exceeds supply. That pressure could be a brief spike in an adapting economy. Or they could propose a reduction in purchasing power through higher inflation over a longer period of time. Recently higher consumer price inflation data is a cause for concern.
Whether this happens depends on whether the federal government and the Federal Reserve turn back their additional Keynesian demand support in time to avoid a spike in expected inflation. Inflation risks rob them of the purchasing power gains due to their higher wages.
So the latest job report favors a more Hayekian solution – with an impetus: Politicians should support return to work and the assignment of workers to jobs by supporting re-employment and training for new skills, not just stimulating demand. This shift offers the best chance for sustained growth in jobs and demand as the pandemic recedes. In the Keynes v. So Hayek: Let Hayek win now.
Glenn Hubbard, Professor of Economics and Finance at Columbia University, served as Chairman of the White House Economic Advisory Council under President George W. Bush.