The True Causes of the Labor Market Shortage

Almost everywhere you look, businesses are hiring. There are help wanted signs everywhere. And every day, we hear more stories about a labor market shortage: Companies need people to work, but simply cannot find them. The dominant narrative in the media is that the labor market shortage has nothing to do with stimulus money and expanded or extended unemployment benefits. But that is simply ridiculous. Of course stimulus money is a factor in the current labor shortage. But it's not the only factor. Let's unpack this.

The woke take and the dominant media narrative is that workers are just fed up. So they are quitting their jobs. Full stop. There's some truth in that, but it's only one side of the equation. The corporate take - much ridiculed by the media and most woke publications - is that the labor shortage is purely a product of stimulus money and increased unemployment benefits. It should be obvious to any rational observer that both of these explanations offer insight into what is happening. But rational observations are rare in America these days. People like one-sided narratives that make them feel good and that fit with their own ideological biases. I will now explain the labor market shortage:

1. Stimulus money gave many working and middle class people a cushion. This is undeniable. Personal savings jumped significantly during Covid. Some of this money is still rolling out into the economy in the form of tax credits and refunds. It stands to reason that people who have even a bit of a financial cushion make different decisions about work than people who are living paycheck to paycheck.
2. People are making different decisions about work. This is happening for a variety of reasons. In connection with (1), people who now have a small financial cushion have different options (and often better options). Rather than stay at a job they don't want or accept a job they don't want, they have more flexibility. Accept that $15 an hour factory job? Or wait for something better to open up paying $20? There's lots of that happening. But these different work decisions go far beyond this segment of the labor market. People in higher income brackets also are making different choices. Consider this: In 2020, California lost 182,000 people. This was the first time California lost population since before 1900 (when they began keeping track). On the other coast, the NYC metro area lost more than 100,000 people. Many of the people leaving New York and California are high-earners. Many of these people now have the flexibility to work mostly or fully remote--- while commanding the same salary. Take a family living in the Bay Area. Both parents work. Their joint income is $350,000. The family moves to Austin, Texas. That family can maintain the same standard of living in Austin for around $150,000. That is mind-blowing. So it opens up possibilities like this: As a family, maybe they decide that one parent works and the one stays home with the kids. Or one partner works and the other partner writes the great American novel or pursues something entrepreneurial. All of this ties into people making different choices about work (for a variety of reasons).
3. More people are starting their own businesses. Since the start of the Covid pandemic in March 2020, there has been a surge of small businesses and micro-businesses. Again, this makes lots of sense. Take an employee whose hours were reduced during the pandemic. Faced with reduced work hours but also given the existence of a small financial cushion (see above), lots of Americans have opted to hang their own shingle. Or, based on numerous considerations (including (2) above), millions of parents have left the workforce to do something else-- including start a business.
4. Unemployment benefits. Yes, contrary to the dominant media narrative, this does play a role. Nationally, the average weekly unemployment benefit provided by the states is $317. When you add the $300 federal benefit, that amounts to $617. Divide that by 40 hours a week and you get $15.25 an hour. Interestingly enough, this is $15/hr figure is (a) what many are lobbying for as a new federal minimum wage and (b) a threshold at or below which companies are struggling to hire people.

The current tight labor market is a product of many factors. Stimulus payments and enhanced unemployment benefits undeniably have played a role in tightening labor. To suggest otherwise is just silly. But it's not so clear that ending federal unemployment benefits will result in labor market conditions returning to where they stood in January or February 2020. No doubt ending federal unemployment benefits will result in some folks returning to work. This is especially true for jobs that pay at or below $16/hr. But there have been some changes that will be longer term.

Consider this: In America, almost 1 million more small businesses were launched in 2020 than in 2019. I expect that trend has continued into 2021. Some of these businesses will fail. But many will succeed. You always hear about how many small businesses fail. But only 20% of small businesses fail in the first year. And slightly more than 50% make it five years. These numbers are very consistent historically. The upshot: An extra 1 million+ people started their own small business during the pandemic (year over year). Lots of factors contributed to this: stimulus money, financial cushion, remote work, family circumstances, moving to a cheaper area, one spouse or partner exiting the workforce, etc. Regardless of the factors that led to this, these 1 million+ extra entrepreneurs are not just going to shut it down and go back to work. If the usual small business attrition plays out over time, 500,000+ of these folks will still be in business for themselves five years from now.

At the same time, people are rethinking how much they want or need to work. This is happening at the higher end of the income spectrum. Some high-earning two income families are going to one income. And people are leaving insanely expensive cities like San Francisco and NYC and moving to places where they can work remotely and have the same lifestyle for literally half the cost.

All of these factors have played a role in tightening the labor market. And, at the end of the day, this will actually be a great thing for America. Why do I say that?

1. Huge surge in entrepreneurship and small business ownership.
2. When the additional federal unemployment benefits go away and there's a material increase in people looking for work, everybody pushing the WOKE narrative (MSNBC etc) will be revealed as idiots and ideologues.
3. People moving to small towns and lower cost cities. Huge influx of talent and capital into those areas.
4. People - especially middle class and up - reconsidering how much money they really need to be happy.

Jonathan Pollard is a competition lawyer, writer, and consultant. He grew up working class in rural Pennsylvania. He does not care who he offends. He's good bruh.