Unemployment benefits and inflation contribute to the growing worker shortage.

July 25, 2021

By Cale Clingenpeel

Key Takeaways:

  • Today, newly released unemployment insurance (UI) data includes information from the first week after four states ended the $300 federal UI supplement. In these four states, new UI claims fell 28 percent in just a single week, while claims in the states not ending the $300 supplement rose by 1 percent.
  • This data highlights that enhanced federal unemployment benefits are likely a substantial contributing factor to the shortage of workers willing to fill the record number of available job openings around the country.
  • In addition to enhanced unemployment benefits, inflation is erasing the average wage gains experienced so far in 2021. The resulting decline in real wages acts as a drag on the incentive for Americans to return to the workforce.
  • Twenty-six governors in total have announced that their states have ended or will soon end participation in federally enhanced unemployment benefits because these enhanced benefits pose a substantial risk to the continued economic recovery from the pandemic.
  • Time is of the essence; the longer individuals are unemployed, the more their long-term job prospects dim, and the higher likelihood they end up permanently out of the labor force and not economically self-sufficient. Additional states and Congressional leaders should take action to improve return-to-work incentives.

Businesses around the country—large and small—are grappling with a shortage of qualified, available, and willing workers to help meet rising demand as Americans return to pre-pandemic levels of economic activity. Among small businesses in May, nearly half (48 percent) reported job openings needed to be filled, and nearly all (93 percent) of those businesses with open positions reported difficulty finding qualified candidates to fill the openings. This shortage of available and willing workers is not isolated to small businesses. Just this past week, America’s largest airline was forced to cancel hundreds of flights and reduce future flight schedules in part as a result of a shortage of workers. Nationally, the total number of unfilled job openings has soared to a record high of 9.3 million openings, increasing 40 percent so far this year. This shortage of workers has led to no shortage of anecdotes from across the country regarding the financial toll businesses, and communities face from such labor market disruption.

At the heart of the national discussion regarding the worker shortage is the federal government’s $300 weekly supplement added to normal state-provided unemployment benefits. During the pandemic, as lockdowns and business closures proliferated across the country, the federal government stepped in to provide affected workers with more generous benefits—to the tune of $600 per week—with the goal of replacing 100 percent of the income of unemployed workers. This supplement expired in July of 2020, and while emergency funding was used to partially continue this supplement, the federal government did not legislate an additional $300 supplement until December of 2020, choosing at the time to extend it just for 11 weeks given the pronounced recovery in the labor market since summer 2020. By December 2020, the number of individuals claiming unemployment insurance was roughly a third of the number claiming benefits in July 2020 (figure 1). In March of 2021, despite the improving job outlook from wider vaccine availability and the easing of lockdowns and business restrictions, the federal government signed legislation that extended the $300 supplement until September 2021. Since then, in the face of record job openings, the number of people claiming unemployment insurance has edged down only slightly. As of early June, the number of people collecting unemployment benefits remains twice the level before the pandemic. Analysis has found that in states continuing the $300 federal supplement, a household with two unemployed adults can—in most cases—earn far more remaining unemployed and collecting benefits than the median household income in 2019.

Figure 1. Continued Claims for Unemployment Insurance

Recognizing this challenge, a bipartisan and majority coalition of governors across the country announced that their states would end early their participation in the federal government’s pandemic-related enhanced UI benefits. The announcements from 26 governors were made as early as the first week of May, with Montana leading the way and Louisiana’s decision late last week marking the most recent instance. These announced policy changes, however, take effect on a rolling basis throughout the summer. The first set of states—Alaska, Iowa, Mississippi, and Missouri—saw the $300 enhanced UI expire on June 12, 2021. Due to a lag in when UI data is reported, however, today marks the first data release from the Department of Labor that includes the week ending June 19, 2021—the first week in which some unemployed Americans did not receive the $300 federal supplement to unemployment benefits.

Among the first four states ending the $300 supplement, initial claims for unemployment benefits last week fell by seven times more than the decline nationally. Between the weeks of June 12, 2021 and June,19, 2021, initial claims fell 28 by percent in total in Alaska, Iowa, Mississippi, and Missouri (figure 2). Nationally, initial claims fell by a much smaller 4 percent. Among the other 22 states where governors have announced an early end to participation in the federal supplement, though where the expiration of the supplement is not yet reflected in the data available, initial claims fell by 11 percent. Workers anticipating the end of the $300 supplement may start their job search earlier than when the benefit actually expires. As such, since the week ending May 8, 2021, when the first governors began making announcements to end their states’ participation in the federal supplement, initial claims in Alaska, Iowa, Mississippi, and Missouri—in total—have been cut in half. Similarly, in the remaining 22 states, initial claims fell by 36 percent over the course of 6 weeks. By contrast, in the 24 states and the District of Columbia that have not announced an early end to the federal supplement, initial claims fell by just 8 percent since the week ending May 8, 2021, and actually rose by 1 percent on over the most recent week. It is important to note that traditional unemployment benefits remain available to workers in states that have ended participation in the federal supplement. These trends indicate that the $300 federal supplement to unemployment benefits is likely driving many Americans to state unemployment offices to collect generous benefits rather than returning to work and filling the millions of current job openings. 

Figure 2. Initial Claims for Unemployment Insurance

A primary contribution to the growing shortage of willing workers is almost surely unemployment benefits in excess of the prevailing average wage one could earn through employment. Another looming threat to the labor market recovery, however, is the decline in the prevailing real average wage facing workers. So far this year, the nominal average hourly wage—before accounting for inflation—has increased 1.4 percent, which the White House has been quick to tout. Over this same 5 month period, however, consumer prices have increased by nearly twice the rate, with the overall Consumer Price Index increasing 2.7 percent. This inflation has erased in its entirety the nominalaverage wage gains experienced so far this year, with the real (inflation-adjusted) average hourly wage falling in each consecutive month of 2021 and exhibiting a total 1.2 percent decline through May. Ultimately, what incentivizes individuals to enter the workforce and fill job openings is the value their labor provides them in terms of the goods and services they can purchase—that is, the real wage—relative to what they receive in other income and leisure from not working. As the $300 supplemental unemployment benefits approach their September 2021 legislated end date, the realwage decline poses a looming threat to the return to work. If real wage declines persist, the incentive to return to work and earn a wage will also decline.

While the contributions of enhanced unemployment benefits and the threat posed by declining real wages to the worker shortage challenge are evident, the White House has cited childcare as a principal cause for workers’ unwillingness to fill the record number of job openings. Amidst pandemic-related closures of schools and childcare facilities, many Americans reported being unable to work as they had to provide care for their children. As the country emerges from the pandemic, however, it remains a question whether childcare—or lack thereof—plays a major contributing role in keeping Americans away from work and, in aggregate, keeping the level of employment far below pre-pandemic levels. New research from Jason Furman—former chair of the Obama Administration’s Council of Economic Advisers—and co-authors finds that job losses among parents of young children are not drastically different from adults with similar characteristics. Their findings imply that pandemic-related childcare stresses do not meaningfully contribute to the number of Americans who remain out of work.

The evidence suggesting childcare is not a factor in the ongoing worker shortage issue underscores the role of enhanced unemployment benefits and the real average wage decline in the ongoing labor market weakness. The $300 federal supplement is set to expire, regardless of which states take early action or not, in early September. Despite this, given the record job openings, the longer that policy maintains disincentives to returning to work—even if just for 2 more months—the greater the risk of long-term costs to workers, businesses, and communities in light of the fact that the likelihood that an unemployed individual finds work in the future is strongly tied to the length of time that they remain unemployed. Consequently, policymakers should move without delay to evaluate the role enhanced unemployment benefits play in discouraging a return to work and be mindful of the corrosive inflationary forces that reduce the real wages of American workers. As additional states see the federal supplement expire, optimism for businesses struggling to fill openings is on the way up thanks to the leadership of a bipartisan coalition of 26 governors.  

Cale Clingenpeel is the Chief Economist at AFPI. Previously he served as Senior Adviser to the Chairman of the White House Council of Economic Advisers.