Make the Recovery Faster, Push Down Unemployment

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I’m pleased to say that after my article on the employment gap in the IE was published on Wednesday 3/31, there was an article on the PPIC blog on Thursday 4/1 on the overall California labor market. They also estimated a gap in employment, very similar to my analysis. My back-of-the-envelope calculations based on their analysis shows a gap of 36% of jobs that still need to be restored.  However, the PPIC’s definition of the gap, unlike mine, fails to account for the fact that employment would be higher today than it was a year ago, in the absence of the pandemic. What we should be targeting is not whatever employment level was pre-pandemic; instead, we should target pre-pandemic employment plus however more jobs we would have had in the year since the pandemic started. That suggests we have much more to go – not 36-40%, but closer to 45-50%.

Anyway, the big news today is the unemployment rate, which was 8.1% in February 2021. To put that into perspective, in February 2020 unemployment was 4.0% and spiked to 14.7% in April 2020 and 15.1% in May 2020. In recent months, labor force growth and the pace of decline in unemployed workers has slowed down.

Unemployment needs to keep going down if we hope to recover, because unemployment is closely linked to worker incomes. Higher unemployment means workers have a harder time arguing for raises at their jobs. Lower unemployment gives them a better chance because the demand for their labor is more competitive.

My estimate shows that a 1 percentage point decline in the unemployment rate will increase (nominal) annual private industry wage growth in the region by 0.83 percentage points - a very strong relationship. Replication files here. Data from the BLS’ State and Metro Area series (“average hourly earnings”) and Local Area Unemployment series. Data based on Quarterly Census of Employment and Wages data (included in replication file) produced similar, though weaker, results.

Reducing the unemployment rate is not the only way to boost worker income, but it is a solid and direct way of doing so.