This Friday, the Bureau of Labor Statistics will release the July jobs report, which will be closely watched for the latest on how labor shortages are impacting the economy. The report will be the first complete report after 25 states withdrew from federal enhanced unemployment programs from mid-June to mid-July, and will follow a June jobs report which found the fastest payroll growth since last August. The July jobs report is likely to show a steady continuation of solid jobs growth, but a burst in growth seems unlikely.
Here are four things I’ll be looking for:
- Steady payroll gains: Payroll gains are likely to mirror June’s strong growth with 800,000 jobs added. Breaking above 1 million jobs added per month is possible, but is not likely to happen until later in the recovery.
- Unemployment decline resumes: The unemployment rate unexpectedly rose to 5.9 percent in June, but we expect the longer term decline to resume in July, with the rate dropping to 5.7 percent. If non-employed workers are increasingly searching for new jobs but hiring remains slow, the improvement in the unemployment rate could slow modestly.
- Labor shortages continue: Reports of labor shortages continue, and any impact from state withdrawals from enhanced unemployment programs are unlikely to significantly accelerate the recovery. The leisure and hospitality industry is likely to have added around 350,000 jobs, in line with previous months.
- Rising wages and hours: The crunch from labor shortages is likely putting upward pressure on average hourly earnings as employers raise wages to attract more workers. Average weekly hours are also likely to rise as employers seek to get more out of the workers they do have. Similarly, the share of workers who are part-time for economic reasons may have shrunk in July to pre-pandemic levels.
Unemployment Program Withdrawals Unlikely to Show Impact in July
Twenty-five states withdrew from federal enhanced unemployment programs in June and July. Supporters of the move argued that enhanced unemployment benefits were reducing the incentive for claimants to look for jobs and return to the workforce. Opponents argued that the disincentive effect was economically negligible or premature in the context of an economy and populace still hurting from the pandemic.
So far, there is little evidence that the state withdrawals from these programs are pushing job seekers to flood back into the workforce. Several research papers on earlier points in the crisis suggest that the impact on overall employment is likely to be muted. While UI claims have fallen at a faster rate in withdrawing states, they were declining at a faster rate prior to the withdrawals as well.
Multiple factors may be mitigating the effect of these withdrawals. The states that withdrew from the enhanced unemployment programs represent only a little over one-third of unemployed Americans, so aggregate-level effects may be muted until the programs expire nationally as expected in September. Additionally, government aid during the pandemic has helped build up American households’ savings, which may allow some to more slowly ease back into the workforce. Lastly, the withdrawals don’t necessarily help with retention. The tight labor market is resulting in elevated turnover, as employers poach workers from each other. If employers are just competing for the same set of workers rather than pulling in new ones, they could be cannibalizing jobs growth.
Friday’s report will be closely examined for evidence that labor shortages are easing. If hiring or labor force participation picks up in affected industries, that will provide preliminary evidence of the withdrawals working as intended. Ultimately, however, the July jobs report will be only a preliminary look at the economic impact of the state withdrawals, and it will not be the final word.
Outlook Marred by Delta Variant Outbreaks
In the last few weeks, concerns about the Delta variant have reached a new high. The impact of the latest infection surge is unlikely to show up in Friday’s jobs report. The reference week for the jobs report was the week of July 12, when the latest Delta wave was only beginning in the U.S. Next month’s jobs report is the earliest any impacts are likely to show up in labor market data.
There are factors suggesting that the economic impact of the Delta variant outbreak may be more limited than past waves. In contrast to the winter wave earlier this year when vaccines had not yet been approved, about half of all Americans are now fully vaccinated. And more stringent policy interventions including lockdowns seem unlikely during this wave.
Certain high-frequency indicators are currently indicating little slowdown in Americans’ mobility and economic activity and can act as a canary in the proverbial coal mine. If these high-frequency indicators take a turn for the worse, it could indicate lower demand, especially for hard-hit service industries like leisure and hospitality, meaning reduced demand for workers and slower jobs growth.
As always, each phase of the pandemic brings with it enormous amounts of uncertainty. If the current Delta variant wave can be mitigated quickly and effectively, the economic outlook for the fall may be more optimistic. The end of the wave, combined with reopening schools in the fall and climbing vaccination rates, could drive a modest acceleration in the recovery.