In the wake of the last jobs report in the US, unemployment insurance has become a political football. The issue has some of the trappings of a labor vs capital tete a tete because of how the jobs report is being framed. Some thoughts below
Noisy economic data
I think it goes mostly without saying but one month’s jobs data are just one month’s jobs data. If you’re looking at the economy holistically, what you care about is the trend. And while the latest report was ugly, it may well be an aberration. We just don’t know yet. From what I can discern, the reverse radical trend is still intact. This is where a massive slug of jobs were added back to the economy after the the initial lockdown ended in 2020, followed by a slower trend upward.
The reverse radical trajectory is one where the job growth takes a long while to return to the pre-pandemic peak because of altered consumer, business and worker behavior. And so the question now is whether it makes sense to cut various parts of the economy free from government largesse in the hopes that doing so will spur greater economic growth.
Schools and Childcare
This is where unemployment insurance comes in. After the weak showing in the last month’s data, many pro-business types are saying that the primary reason the data were weak is because unemployment insurance is too rich relative to incomes. The concept here is that large swathes of the working class would rather be unemployed and risk being shut out of the labor market as long-term unemployed workers because they can collect a free ‘paycheck’ from the federal government in excess of what they would earn working 40 hours a week. And so, the thinking is that the best way to spur on the economy is to reduce unemployment benefits so that that tradeoff more reasonably favors employment over unemployment insurance.
I think this framing is overly simplistic though. First, most people know that being unemployed isn’t a free pass, even in a pandemic. The risk with longer bouts of unemployment is a perceived atrophy in skills, making those receiving unemployment insurance less attractive at the margin than those working and receiving wages. And while some workers are willing to take the risk, it isn’t clear to me we should assume getting a larger ‘paycheck’ while unemployed is the primary rationale for a large percentages of remaining unemployed — except as anecdotes.
Second, “schools are open, but many families are hesitant to return“.
A majority of Black, Hispanic and Asian-American students remain out of school.
[…]
In March, half of Black and Hispanic children, and two-thirds of Asian-American children, were enrolled in remote school, compared with 20 percent of white students, according to the latest federal data.
How is this going to work from a childcare perspective then? For a lot of people it won’t. And so, people are still in the process of figuring out how to adjust their lives to the changing situation now that vaccinations are happening and schools are re-opening.
“A lot of families have built life structures around their Covid reality,” she said. Now, the challenge is to “come out of crisis mode and let’s think about the future again.”
So the reasons one might not go back to work – even if one could do so – are complex. But the simplistic narrative about whether workers are getting too much unemployment insurance is dominating the discussion.
The Political Football
I would suggest this is mostly a political debate because of the shifting policy framework. In the past four decades, the policy framework has been one in which fiscal policies were to be used sparingly and only in extremis. Hence the discussion about withdrawing enhanced benefits more quickly. The central bank was supposed to fill the gap by adding accommodation at cycle troughs and ratcheting up interest rates when the business cycle really got going.
The result has been more substantial downward pressure on wage growth, as central banks have been quick to snuff out expansions before generalized wage growth took hold years into a recovery. Meanwhile asset prices have been buoyed by business cycles with ever lower interest rates. And tax policy has favored those who earn more money through capital gains, carried interest and other forms of ownership that are supposed to promote capital formation. That’s a recipe for inequality.
But, with the pandemic, we are seeing much more substantial fiscal support for workers than we have seen in any prior business cycle in living memory. And that threatens to change the acceptable policy mix – which is exactly why unemployment insurance has become a political football. Those who liked the old policy mix want to cut benefits as soon as possible, because that’s in line with the old thinking. Those that believe this policy mix is no longer viable are more accepting of keeping the fiscal measures in place or even adding more.
My View
I think this is a seminal debate which heralds a likely large shift in the use of fiscal policy as a policy tool. With interest rates at zero or negative across a wide swathe of countries, the scope of impact for the economy at cycle troughs with monetary policy is limited. By definition, fiscal policy has to play a bigger role if governments want to make a difference. And during a pandemic, governments in advanced democracy most certainly do lest they get booted from office.
The question now goes to how long past the cycle trough governments use fiscal policy. For example, in the US, with vaccination well advanced and lockdowns receding from view, the economy is growing at an annualized pace in excess of 6% and inflation is picking up in many places. That’s typically when the Federal Reserve is keen to remove accommodation. But not only is the Fed staying the course, the US federal government is adding trillions of stimulus on top.
So, I think the US, at a minimum, is ready to experiment with fiscal policy well beyond the cycle trough, with a return to near full employment the likely signal to change tack now rather than a rise in inflation, which was the old signal. And that makes sense right now because people are still unclear on how to organize their lives. The pandemic is still very much the biggest factor in daily lives. In that context, cutting back now is a risk too far.
Europe will face similar choices in due course. And I think they are likely to follow the US lead, with green initiatives as the big ‘toggle’ in additional permissible fiscal stimulus despite the Maastricht debt and deficit hurdles still being in place. To be continued