Why are there so many unemployed workers and job openings at the same time?

The Inland Empire Economic Partnership’s mission is to help create a regional voice for business and quality of life in Riverside and San Bernardino counties. Its membership includes organizations in the private and public sector.

Recent job reports contain good news overall. National, state and regional unemployment rates keep falling and show levels that are a clear improvement from the abyss of early 2020. We are healing steadily, and the “doctors,” or economic policymakers, are optimistic that the administered medicine (fiscal and monetary policy) will result in a full recovery. This is expected to have happened sometime during the current quarter.

However, other vital economic signs suggest that not everything is rosy. We have only recovered 69.7% of the jobs nationwide lost during the initial coronavirus pandemic shutdown. When you add to that the number of people who dropped out of the labor force, it would be ridiculous to claim that we are completely healthy already. Yet some economists and policymakers have worried openly about the patient (national economy) having received an overdose of medicine that may generate a new type of illness (lasting elevated inflation) in the near future.

If we focus for the moment on the labor market, here is a puzzle: There are as many job openings as there are unemployed workers.

You could ask naively why the unemployed cannot be matched to the job openings, thereby generating full employment? According to some, we give the unemployed insufficient incentives in the form of supplemental unemployment insurance payments (part of the American Rescue Plan of 2021) to get off the couch and work. This does not imply that the earlier rounds of those payments were ineffective; at that point, the unemployed spent the additional money rather than saving it or paying off credit card debt, thereby helping to keep the economy afloat. The current concern is that it may be unsuitable during this stage of the recovery. According to this argument, it may be slowing down the process of getting back to normal in the labor market.

To start, where else do you commonly encounter two parties seeking each other to form a relationship? It happens when two individuals want to get into a partnership and try to determine if the other party is a “good fit.” Once you look at it this way, the parallels become clear: You quit a relationship or your partner breaks up with you (layoff), after which you can stay single without seeking a new partner (discouraged workers) or you look for a new relationship (unemployed but searching). It is also possible that you decide to give each other “some space” for a while before getting together again (temporary layoff, rehire). In general, some job openings from certain companies are more attractive than others, and some workers look better to job openings of companies than others.

Then what is the obstacle between the workers seeking an employment relationship and the job openings?

First, there is not just one type of worker and one type of job opening. There are many ways to describe the heterogeneity between them, but a simple one is to look at the wages they pay. There are the high wage (above $60,000) and medium wage ($27,000$60,000) relationships, and those that are based on low wage.

Second, there may be problems within the job categories. In the lowwage sector, employment is still 25% below January 2020 levels. In particular, the low-wage leisure and hospitality industry has many unemployed but also has many openings. Are the potential workers not applying because of high unemployment benefits or are other considerations coming into play?

Evidence from the Federal Reserve in Atlanta shows that, perhaps somewhat surprisingly, sectors most impacted by the downturn — i.e., low-wage sectors such as leisure and hospitality — have the most problems finding workers at this stage of the recovery. Interestingly, until now, that sector has had the most hirings and significant wage increases over the past months, suggesting shortages or excess demand. But the initially hired workers had just been temporarily unemployed (“give me some space”); the partners knew each other well, and it was easy to determine if they should match again. The remaining in that pool are typically permanently separated, and therefore it will take longer to generate a new match. Complicating the process, job seekers often fill out multiple job applications, leading to lengthier evaluations and delayed decisions. And finally, there is also evidence that when you engage in a new relationship rather than return to a previous one, you’re more likely to quit again and search until you find a match that is what you were looking for and hence you stick with it for a longer time (stay employed).

The unemployment insurance supplements will expire in the near future, at which time we will have a clearer idea of their impacts. The evidence from the earlier $600 boost to weekly benefits in March 2020 (Federal Pandemic Unemployment Compensation) does not suggest that it had a significant effect on unemployment. If the forces of supply and demand work as they should, wages in the industries that are more intent on filling job openings will adjust to lure workers to available jobs. In the meantime, is it really that bad to have seen wages in the lower tier increase significantly? Income inequality in the U.S. has worsened steadily in the past few decades, with low wage workers being left behind. This problem will linger long after restaurants and other establishments are fully restaffed.