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Claudia Sahm
May 4, 2023
(Sources: Department of labor)
With the Federal Reserve having raised its key interest rate to the highest since 2007 in an effort to get inflation back under control, attention now turns to whether the jobs market and wage gains have cooled enough to keep the central bank from further increasing borrowing costs. We’ll find out Friday with the release of the government’s employment data for April. The forecasts are for another solid report, keeping the jobless rate near record lows and reinforcing what Fed describes as a “very tight” national labor market. But is it tight?
On a more granular level, a highly uneven labor market has emerged depending on what part of the country you consider. This is a problem because the geographic differences are sizable but are generally ignored in the “Jobs Day” conversation about the labor market’s strength and could lead to policy mistakes. So, although employment reached its pre-pandemic level last summer on a national basis, about 40% of states, including some large ones such as New York and Ohio, remain well below where they were. And employment in some states, such as Florida and Texas, is far above their pre-pandemic levels.
Moreover, the Fed’s characterization misses the scope for geographic realignment that could help address some of the national labor shortages. The reasons for the divergence are complex, relating to conditions before and after the pandemic began. Both deserve consideration.
Local economic conditions before the recession have been an important factor in the resilience to Covid-related shocks, including lockdowns and social distancing. August Benzow, a researcher at the Economic Innovation Group, a bipartisan think tank, says one clear pattern is that strong local economies before the pandemic, like the Sunbelt states, have bounced back more quickly, and employment is now up to 5% higher than before the pandemic. In contrast, areas struggling before the pandemic - think Cleveland and Detroit – have fallen further behind. Ohio and Michigan’s levels of employment are both about 3% lower.
As the Great Recession showed, working in a labor market with a slow recovery is incredibly damaging. Back then, it took five years for national employment to reach its prior level — twice the time as after the Covid recession. That led to several harmful outcomes, including millions of long-term unemployed and young adults struggling to find their first job and not starting families. The longer the recoveries in local labor markets drag on, the higher the risks of such hardships, including permanent damage referred to as hysteresis. A strong national economy is not enough to help communities recover.
A lackluster recovery in a community affects workers in marginalized groups the most. Although the gap between the unemployment of Black and White workers is one of the smallest on record on a national basis, it is the largest in New York City in two decades, according to the Center for New City Affairs at the New School. Similarly, young workers and those without a college degree are struggling in New York. A strong labor market is key for employers to hire workers they would typically not consider.
The first step to addressing the geographic differences is to recognize that they exist. Releasing geographic statistics for employment simultaneously with the national statistics would build awareness. The state employment statistics are published two weeks after the national ones and the metro and county ones a month later. In addition, adding demographics, such as race, to the geographic data would allow us to track the extent to which narrowing disparities at the national level are broadly shared.
Next, Congress should tie stimulus programs, like the extra benefits for the unemployed, to the recovery in local employment. At the start of the Covid recession, Congress set one date for the country when the extra benefits would end, ignoring the likelihood that the recovery would vary geographically. That mistake of using a calendar date caused a lapse in the program in the summer of 2020 when Congress failed to re-authorize it even though unemployment remained broadly elevated. It was later renewed, but in 2021 and Republican Governors — only some of whose states had fully recovered employment — ended the program early. A better approach would be to automatically phase out the stimulus programs as the state unemployment rate returns to its pre-recession level. Tying the duration of benefits to local economic conditions, not the calendar or politics, would use funds more efficiently.
Finally, state and federal governments should target some long-term investments from the Infrastructure, Chips, Inflation Reduction Acts and state budgets to localities where the economic recovery is lagging behind to reduce scarring and bolster resilience in the future. Current employment lower than before the pandemic is a sign of need. It would also locate projects in areas that do not have acute labor shortages. Spreading dollars evenly across the country would not narrow the geographic disparities in the recovery. The varying strength of local labor markets is another form of diversity that policymakers should consider.
The US is not one labor market, and our geographic differences are primarily advantageous. They also create a responsibility for policymakers to tailor economic policies to the realities of local labor markets.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Claudia Sahm is the founder of Sahm Consulting and a former Federal Reserve economist. She is the creator of the Sahm rule, a recession indicator.
©2023 Bloomberg L.P.
With the Federal Reserve having raised its key interest rate to the highest since 2007 in an effort to get inflation back under control, attention now turns to whether the jobs market and wage gains have cooled enough to keep the central bank from further increasing borrowing costs. We’ll find out Friday with the release of the government’s employment data for April. The forecasts are for another solid report, keeping the jobless rate near record lows and reinforcing what Fed describes as a “very tight” national labor market. But is it tight?
On a more granular level, a highly uneven labor market has emerged depending on what part of the country you consider. This is a problem because the geographic differences are sizable but are generally ignored in the “Jobs Day” conversation about the labor market’s strength and could lead to policy mistakes. So, although employment reached its pre-pandemic level last summer on a national basis, about 40% of states, including some large ones such as New York and Ohio, remain well below where they were. And employment in some states, such as Florida and Texas, is far above their pre-pandemic levels.
Moreover, the Fed’s characterization misses the scope for geographic realignment that could help address some of the national labor shortages. The reasons for the divergence are complex, relating to conditions before and after the pandemic began. Both deserve consideration.
Local economic conditions before the recession have been an important factor in the resilience to Covid-related shocks, including lockdowns and social distancing. August Benzow, a researcher at the Economic Innovation Group, a bipartisan think tank, says one clear pattern is that strong local economies before the pandemic, like the Sunbelt states, have bounced back more quickly, and employment is now up to 5% higher than before the pandemic. In contrast, areas struggling before the pandemic - think Cleveland and Detroit – have fallen further behind. Ohio and Michigan’s levels of employment are both about 3% lower.
As the Great Recession showed, working in a labor market with a slow recovery is incredibly damaging. Back then, it took five years for national employment to reach its prior level — twice the time as after the Covid recession. That led to several harmful outcomes, including millions of long-term unemployed and young adults struggling to find their first job and not starting families. The longer the recoveries in local labor markets drag on, the higher the risks of such hardships, including permanent damage referred to as hysteresis. A strong national economy is not enough to help communities recover.
A lackluster recovery in a community affects workers in marginalized groups the most. Although the gap between the unemployment of Black and White workers is one of the smallest on record on a national basis, it is the largest in New York City in two decades, according to the Center for New City Affairs at the New School. Similarly, young workers and those without a college degree are struggling in New York. A strong labor market is key for employers to hire workers they would typically not consider.
The first step to addressing the geographic differences is to recognize that they exist. Releasing geographic statistics for employment simultaneously with the national statistics would build awareness. The state employment statistics are published two weeks after the national ones and the metro and county ones a month later. In addition, adding demographics, such as race, to the geographic data would allow us to track the extent to which narrowing disparities at the national level are broadly shared.
Next, Congress should tie stimulus programs, like the extra benefits for the unemployed, to the recovery in local employment. At the start of the Covid recession, Congress set one date for the country when the extra benefits would end, ignoring the likelihood that the recovery would vary geographically. That mistake of using a calendar date caused a lapse in the program in the summer of 2020 when Congress failed to re-authorize it even though unemployment remained broadly elevated. It was later renewed, but in 2021 and Republican Governors — only some of whose states had fully recovered employment — ended the program early. A better approach would be to automatically phase out the stimulus programs as the state unemployment rate returns to its pre-recession level. Tying the duration of benefits to local economic conditions, not the calendar or politics, would use funds more efficiently.
Finally, state and federal governments should target some long-term investments from the Infrastructure, Chips, Inflation Reduction Acts and state budgets to localities where the economic recovery is lagging behind to reduce scarring and bolster resilience in the future. Current employment lower than before the pandemic is a sign of need. It would also locate projects in areas that do not have acute labor shortages. Spreading dollars evenly across the country would not narrow the geographic disparities in the recovery. The varying strength of local labor markets is another form of diversity that policymakers should consider.
The US is not one labor market, and our geographic differences are primarily advantageous. They also create a responsibility for policymakers to tailor economic policies to the realities of local labor markets.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Claudia Sahm is the founder of Sahm Consulting and a former Federal Reserve economist. She is the creator of the Sahm rule, a recession indicator.
©2023 Bloomberg L.P.
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