PROJECT SYNDICATE DRAFT: What Is þe Puzzling State of þe U.S. Labor Market Telling Us?

Forthcoming at <http://project-syndicate.org>...

Approximately 1/5 of low wage jobs in Germany would not be viable if workers understood how good their outside options truly were. That is the conclusion of my colleague here at Berkeley Benjamin Schoefer, along with his coauthors Simon Jäger, Christopher Roth, and Nina Roussille <https://eml.berkeley.edu/~schoefer/schoefer_files/JRRS_Beliefs_Rents_Outside_Options_July2021.pdf>. If something were to shake up low-wage workers’ false beliefs about how poor their outside options were, things would change. I guess that things are the same, but only more so, here in the United States where our minimum wage is far lower relative to average productivity than in Germany.

Perhaps here in the United States the COVID-19 plague has been that shake-up, has been that wake-up call. The rate at which U.S. workers are quitting their jobs is now a remarkably high 3%/month. This is unheard of, especially given that the employment-to-population ratio is still only 58.8%, 2%-points below full employment, back at its level of 2014 <https://fred.stlouisfed.org/series/EMRATIO>. So what is going on in the U.S. labor market—what we would see in normal times as a great shortage of jobs, but coupled with a greatly outsized willingness of workers, especially low-wage workers, to quit and look for something better for themselves?

There is a standard list of explanations: fear of the COVID plague—especially among those who live with elderly or immunocompromised relatives—disrupted childcare and other arrangements; households flush with cash from the plague-relief programs; a decision to smell the roses rather than work too hard at an unpleasant and badly paying job. But the problem with that, as Paul Krugman observes, is that western Europe is not seeing this “Great Resignation” and depression in the share of adults who are employed <https://www.nytimes.com/2021/11/29/opinion/united-states-europe-jobs.html>.

Step back. One effect of the COVID plague has been to lead to a transformation of work and the workplace that would have taken decades in the plague’s absence, or that might have never come to pass at all. The shift to remote white-collar work. The replacement of substantial components of service work by technology. The transformation of retail—many more delivery drivers, many fewer in-store sales workers—in a way that seems to many consumers to add convenience as online tools finally get good enough that one can feel one need not shop in person to get a sense of quality. And one can always return it, if it turns out to not be what was expected.

Unless workers are explicitly on temporary layoff, reknitting the division of labor to restore employment is always a long and painful process. In the 2010s it seemed to be bound by a speed limit of 1%-point per year. Admittedly, that was because demand remained relatively slack as fiscal and monetary policy fought not the last war but the several-wars-ago phantom dragons of debt and inflation. But I really do not think it would be good policy for the U.S. to be bound by this speed limit of recovery now. Rapid recovery requires that American provide low-wage workers with the better bargains in the workplace that the high quit rate says that they are demanding. Rapid recovery requires that the supply-side blockages to labor participation—the COVID plague, and childcare—be rapidly removed. And rapid recovery requires a high-pressure economy to make it obvious to workers reentering where the good opporunities are.

The Biden administration—and the Democratic congressional majority—needs to recognize that both workers and entrepreneurs need a great deal more support right now than America’s business-as-usual can provide. Western Europe points the way. Copy what it does.

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