CAN WASHINGTON PRINT ENOUGH MONEY TO RAISE RESERVATION WAGES?

The preliminary unemployment rate and job growth counts for April came in, and the people who keep track of such things were caught by surprise, with the unemployment rate increasing, and the increase in employment coming in at a quarter of expectations.

David Henderson suggests that the newsies whose narrative was "things are getting better" missed the incentives at work.  "When the federal government pays people an extra $300 a week to be unemployed, a few million people who would have taken the many jobs available will instead take a summer holiday."  A Libertarianism post trots out a few Marshallian crosses to suggest that the relief money and the corona tyranny rendered workers less responsive to wage changes.

The first reason is probably the most obvious: the generous unemployment benefits and multiple rounds of stimulus payments have meant that workers can do better, or at least close to as well, by not working as they can by working. This will be especially true in the entry level jobs in the service and hospitality industries that appear to be having the most difficulties finding workers. If you can make more staying at home, why take a job? And even if you can’t make more, is it really worth working dozens of hours a week to do just a little bit better than you could get from not working? Compensating workers who were denied the opportunity to make a living thanks to government lockdowns might well have been justified earlier on in the pandemic, but continuing to provide that support after more than a year has unsurprisingly led to withdrawal from the labor force and a more inelastic labor supply.

The second reason is less discussed. Another policy decision with huge implications for the labor market was the closing of public schools, many of which remain closed to one degree or another. With children at home all day, many couples had to withdraw their secondary earner from the paid labor force. As most secondary earners are women, the labor market effect has mostly been a reduction in the number of working women. The effects of that reduction on women’s human capital and future wages may well turn out to be a major long‐term negative consequence of the pandemic. But for the moment, this need to be home has also increased the inelasticity of the labor supply curve. The (mostly) women in this position are not likely to be enticed back to work with higher wages until the schools are fully open and the need for a parent at home is substantially reduced. Almost no matter how hard employers try, overcoming the opportunity cost of working (i.e., leaving kids home alone all day) is going to be very difficult.

It might be, though, that the latchkey kid will return, at least among those older than sixteen as the teen labor market appears to be adding employment again.

What are the normative conclusions, then?  To Brian Riedl, it's government undermining the incentives to work.  "But paying people more to stay home becomes a large problem when the economy begins reopening and “help wanted” signs go ignored."  To Kenny Stancil, it's government undermining the incentives to squeeze workers.  "Pushing back on the right-wing narrative about the reason for real or perceived labor shortages in some markets nationwide, progressives on Friday told corporations that if they want to hire more people, they'll need to start paying better wages."  For the time being, the transfer payments are sufficient that starting wages in excess of the magical $15 per hour aren't enough incentive.  Those, though, are supposed to be limited in scope and duration, although those might expand in the way of two weeks to slow the spread.  But when bond traders grow weary of paying $999 for a Treasury note, things might get interesting.