For many economists, the American labor market remains a puzzle.
The November jobs report, released on Friday by the Labor Department, shows that the unemployment rate edged down to 4.2 percent and is getting closer to its level before the pandemic. The number of nonfarm payroll jobs rose by 210,000, disappointing expectations of a more rapid recovery. By one estimate, there are still around six million fewer jobs than would have been expected, based on prepandemic trends.
This chill in employment might lead one to conclude the economy’s too cold, while the record numbers of people quitting their jobs might suggest that it’s too hot. And even if the unemployment rate isn’t quite where it should be in a healthy economy, an improving trend suggests that it soon will be.
These mixed signals reflect the fact that some parts of economic life are driven by current conditions, while others are shaped to a greater extent by expectations of a healthier and more prosperous future — unless the Omicron variant knocks the recovery off course.
In a typical business cycle, unemployment “rises like a rocket,” but then “falls like a feather,” declining by only about a tenth each year, according to research by Robert E. Hall of Stanford and Marianna Kudlyak of the Federal Reserve Bank of San Francisco. And so when jobs become scarce, workers usually grow anxious and fearful about their prospects for employment.
This fear might lead them to take whatever work they can find and scare those who have jobs from quitting. But a pandemic downturn is different. Think of it more as a reboot than a recession.
While the economy’s pandemic-driven malaise might feel as if it has dragged on forever, in reality we have been experiencing an unusually rapid recovery. Starting from April 2020, it took only 17 months for the unemployment rate to fall below 5 percent (from a postwar high of nearly 15 percent), while in the previous three post-recession recoveries, it took 75 months, 26 months, and 59 months. Unemployment never dropped below 5 percent during the prior three recoveries.
The rapid reboot has created a peculiar situation. The economy is still missing millions of jobs. Yet workers remain optimistic.
This optimism is evident in recent surveys from the Conference Board, which show that 58 percent of consumers say jobs are “plentiful,” while only 11 percent say they are “hard to get.” The University of Michigan’s Survey of Consumer Attitudes reveals that a large plurality of workers expect unemployment to continue to fall next year. The Federal Reserve is also optimistic. It predicts that the unemployment rate will fall to 3.5 percent by the end of 2023 — the lowest rate since 1969. Private-sector forecasters tell a similar story.
This optimism during a time of economic weakness explains why this recovery has confounded many economists: They’re accustomed to a pattern where labor-market indicators are either nearly all weak or all strong.
This optimism may also explain why millions of people are not looking for work, which has been an important factor keeping the unemployment rate low. Why rush back if there will be plenty of good jobs available in the near future?
Of course, this isn’t the whole story. The pandemic has made working life harder and less safe in countless ways. And because workers spent less last year even as the government sent out checks to keep them afloat, many more households now have the funds to get by for a few months without work. Workers, then, have the means, the motive and the opportunity to be patient.
That’s why older workers are choosing not to rush back to unsafe workplaces. Parents are choosing to wait for schedules at schools and child care centers to become more reliable. And unhappy workers are telling their bosses to take this job and shove it. They’re confident that better job offers are coming soon. Whether the Omicron variant will displace this confidence remains to be seen.
As bosses have struggled to find workers they’ve been forced to offer higher pay, particularly for low-wage jobs. The result has been a burst of wage gains of the sort that typically only occur when the economy is strong, even though the economy remains relatively weak.
This points to a rather intriguing possibility: Perhaps the expectation that workers will be able to get a better deal in the future is creating the reality that they’re getting a better deal today.
Justin Wolfers is a professor of economics and public policy at the University of Michigan and a host of the “Think Like an Economist” podcast.