This morning, the Bureau of Labor Statistics (BLS) released “The Employment Situation – July 2021.” I won’t mince words, it was a good report, and better than many were expecting after the somewhat disappointing ADP Employment Change release on Wednesday. While the two don’t always jibe, many investors were apprehensive about this morning’s report. It seems their worry was in vain.
Truthfully, the data was so solid across the board I found myself literally scratching my head in disbelief. No, it wasn’t shocking, but it was vastly different to June’s beyond tepid report. If you recall, the Household Data suggested actual job losses during June and a tick up in the Unemployment Rate.
This past month, the same survey reported job growth of 1.043 million jobs, an increase in the Participation Rate, and a decrease in the official Unemployment Rate from 5.9% to 5.4%. All ethnicities, genders, age groups, and education attainment levels saw nice job growth.
But why? Particularly now with COVID-19 cases picking up and businesses starting to take preventive measures? It isn’t necessarily intuitive, at least not to me at first blush.
Those that know me well know I can be a cynic, although I prefer to think of myself as pragmatic. If my pragmatism comes across as cynicism, then so be it. At this point in the game, I am not going to change.
With that said, and I won’t know for certain until we get the state and local data, I imagine this sharp improvement in July probably had something to do with some states ending the extra $300/week in Federal pandemic unemployment benefits. By the end of June, 26 states had announced they were going to do so. As I type here today on August 8th, the following states have already stopped accepting claims for the additional Federal benefits: Alabama, Alaska, Arizona, Arkansas, Florida, Georgia, Idaho, Iowa, Louisiana, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, West Virginia, and Wyoming. Both Indiana and Maryland are embroiled in the court system after announcing an end to the benefits.
I would be willing to bet $1 the data is more robust in the states listed in the previous paragraph. That is the pragmatist, or cynic, in me, as it makes perfect sense. As I have written here and said everywhere, people respond to incentives and will do what they get paid to do.
As I previously wrote here in Common Cents, with the $300 Federal sweetener, an unskilled worker could more than double their weekly unemployment benefit here in Alabama. The maximum state benefit here is $275/week. With that Federal boost, literally every unemployed person in the state more than doubled their weekly benefit. If we add the two together, that $575/week works out to be around $16.52/hour when assuming a 34.8/hr. workweek (which is the average for all employees per the BLS).
Trust me, that is a pretty smart hourly rate for a lot of folks in this state, and works out to be an annual equivalent of $29,900. While this isn’t a king’s ransom, and a paltry amount when compared to wealthier states, it is higher than the Census Bureau’s 2019 estimate for per capita income in Alabama: $27,928. Two individuals collecting the bloated unemployment benefit would have also been making comfortably more than the 2019 estimate for median household income here: $50,536. If that isn’t eye-popping enough, consider the poorest county in our poor state, Wilcox, with respective numbers of $16,841 and $31,014.
Why would anyone down there worry with holding a job when they can just say they tried to find one and collect much more than what they would have possibly made? Indeed. Perhaps it is not so surprising Wilcox County’s official Unemployment Rate is, get this, 10.4% for June. Of course, you could easily counter with it is always ridiculously high there, and you would be right. Even so, it will undoubtedly be lower in July, once we get the data.
Last year, I didn’t argue with the added unemployment insurance benefit out of Washington. After all, when the government forces people out of work by shutting down the economy, it should come off the hip with some cash. It caused the problem. Now? With most state economies fully reopened, why are we still padding the unemployment insurance? Paying people more not to work than to work? Creating the potential for fraud?
I understand if this might seem a little hard-hearted to some. In my defense, I would counter with I strongly believe in the virtuousness of having a strong work ethic and doing everything in your capabilities to earn your own way in the world. This fosters greater ingenuity, self-confidence, and a whole host of other positive attributes. So much so, I strongly believe the government should be doing everything in its awesome power to get people TO work and not FROM work. I would further argue incentivizing people not to work by giving them more money than they could earn themselves is, in effect, infantilizing.
That doesn’t mean you don’t lend people a hand when they need one, and it certainly doesn’t mean we shouldn’t be charitable or not take care of the disadvantaged amongst us. We should, in buckets. However, we need to replace ‘hand outs’ with ‘hand ups.’ In my estimation, at this point in time, the continued $300/week Federal unemployment pandemic benefit is more of a hindrance than a help.
That is why 26 states have already ended, or attempted to end, this scheme. Further, other states are offering ‘back to work incentives’ in an effort to get people off the couch and back at the job. I applaud this, even if it might seem a bit hypocritical to some. However, to me, it isn’t the amount of money that is the real issue, it is how it is being used. I hope you catch my drift.
In the end, the labor market was apparently red-hot during July, despite the uptick in COVID-19 cases and concern about the Delta Variant. There are a lot of reasons for this, but I would argue a big one is states have reopened and many of them are no longer incentivizing their citizens to not work, 24-26 at present. Not surprisingly, these states currently seem to have the healthiest labor markets. Unless something dramatic happens, the remainder will see a marked improvement after the Federal boost ends on September 6th.
After all, people are generally pretty rational. The tend to respond to incentives and will do what they get paid to do. If it is to be idle, they will be idle. If it is to find a job, they will do so. That, I believe, is the real message in this morning’s ‘The Employment Situation – July 2021.’
Take care, have a great weekend, and be sure to listen to our Trading Perspectives podcast.
Chief Economist
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