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The Great Resignation

One of the wonderful joys of being a parent involves guiding your children through the ups and downs of life.  While it may be more difficult in the moment to say “no” or work through a disappointing outcome, on the other side, we’re often able to reflect on how these moments made us stronger and better human beings.  The most recent example in our household came at the expense of my five-year-old son’s dessert.  We try to be consistent when it comes to eating dinner together as a family, and on this particular evening, he decided he wasn’t going to join us.  After informing him his ice cream was at stake, he stayed his course and refused to join us.  When it came time for dessert, he was unsurprisingly upset about his lack of a treat despite us telling him the outcome of his decisions beforehand.  The next night, he cheerfully joined us for dinner and was delighted when ice cream was served shortly thereafter. There’s a cause and effect to most things in life, and learning this pattern while young is far better than being surprised when you’re an adult.

This leads us to one of the more persistent themes of our current economy: the labor market.  There has been an incredible case study occurring beneath our feet related to unemployment benefits and labor demand.  Is there a “cause and effect” for this relationship between increased unemployment payments and restaurants struggling to find workers?  While it seems clear there should be a relationship here; it may not be as straightforward as we think.

A few schools of thought are floating around as to why companies, especially within the services industries, continue to struggle with hiring.  The first and most prevailing theory is that the massive deluge of cash getting distributed through increased unemployment benefits is keeping workers away from current job openings.  The second theory suggests potential workers remain wary of COVID even despite the rollout of incredibly effective vaccinations.  The third, and less discussed theory, says individuals who previously worked in the services industry used the time and money provided to them during the pandemic to “level up” their skill set and find better paying, less physically demanding jobs.  Let’s dig into these three theories to see if we can better define what could be driving this supply gap in the labor market.

Unemployment Benefits Impacting Worker Supply

There’s little question that enhanced unemployment benefits helped to stymie the worst potential outcomes of the pandemic-induced recession.  A study done by the National Bureau of Economic Research in March of this year concluded that for every 10% increase in unemployment benefits, there was a 3.6% decline in job applications.  This inherently makes sense as potential service workers may be earning a similar wage through increased unemployment benefits and would no longer need to seek work.  If we use this study as proof of the “cause” for lack of job applications, then the “effect” could be seen as the lack of supply for labor.

JP Morgan has published multiple reports comparing states that have removed enhanced benefits early vs. those that haven’t.  While not crystal clear, the data suggests we’re seeing claims for jobless benefits fall faster in the states removing benefits early vs. those planning to maintain them through the end of September, when they’re set to naturally expire.  Should this trend hold, the labor supply could return throughout the final quarter of the year.

Pivoting to COVID as a cause for labor shortages, there’s less empirical evidence to support this theory, but we can make some educated guesses.  Roughly 68% of the adult population has at least one vaccine shot as of July 13.  While a strong start for a process that only began a few months ago, there are still pockets of the country that have been slow to adopt the vaccine, and as a result, has seen COVID cases increase.  The more viral Delta variant of COVID now accounts for 52% of all new COVID infections within the US.  Further, if we find a booster shot is needed to stave off the chances of infection, we could find ourselves in a situation where COVID never fully goes away, leaving vulnerable pockets of the country prone to contracting and spreading the virus.  We know the virus spreads most easily indoors, thus making services jobs less desirable due to the heightened risk of exposure.

Climbing the Job Ladder

Finally, let’s discuss the idea of “leveling up” one’s skillset.  According to Natixis, throughout the pandemic, cumulative household income has increased by $13,455 on average.  This converts to approximately $2.6 Trillion in excess savings since the beginning of the crisis.  We also know consumer consumption has only just recently returned to pre-pandemic levels.  Taken together, households are now sitting in a far more comfortable position financially than they ever had prior to the pandemic, providing greater flexibility in how these households earn their income.

What would we expect one to do if they’re flush with cash and seeing many more job opportunities than they ever had in the past? Presumably, you’d go after them!  In a fundamental sense, people who fulfill these entry-level service industry jobs do so to make an income and not necessarily because they love washing dishes or cleaning hotel rooms.  If you’re able to upgrade your work situation, you’re likely to take advantage of it.

Separately, a record 4 million people quit their jobs in April this year, with over 1.3 million of those jobs coming out of retail and hospitality services.  Reports of a “Great Resignation” occurring as workers reevaluate their work/life balance have employers rapidly increasing benefits and compensation to retain talent.  Combine the fear of COVID and a robust job vacancy rate; it’s not too far of a stretch to suggest former hospitality and restaurant workers (who are on average more financially secure than they were before the pandemic) are seeking higher-paying, less physically demanding jobs.

Who’s to Blame?

In reality, of these three theories, each one on its own is likely impacting labor market tightness.  However, only the “level up” theory has longer-lasting implications for the workforce.  We anticipate COVID to lessen its impact on consumer behavior over the coming months and years, while increased unemployment benefits are set to expire at the beginning of September.  Should individuals continue to find opportunities to increase their skillset and find work more aligned to their desired lifestyle, we could see a workforce gap remain longer than expected.

As is often the case, businesses in these industries will find ways to persist through these challenges.  Though it could materialize in the form of these services getting reduced for their customers.  Talks of turndown service at hotels going from daily to “as needed” or restaurants remaining closed for Monday and Tuesday could become the norm until there are enough workers to fulfill these jobs.  There’s plenty of waste in these services, and becoming more efficient as a business can help profitability and employee satisfaction.  The downside from an employer’s perspective is wage inflation is likely to persist in this type of environment, even if employers can find efficiencies elsewhere within their business. The increase in wages as an input cost is likely to be passed along to consumers as the battle against margin compression moves to the front line, creating an adjustment period for consumers and businesses alike.

As more Americans climb the economic ladder, their increased wages should ultimately find their way back into the economy through consumption of discretionary goods, creating more consistent growth and consumer demand longer-term.  This cause and effect, it turns out, will be one of the many adjustments from the pandemic era we’ll grapple with in the years to come.



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Bernicke Wealth Management, Ltd. (Bernicke) is an independent, multi-disciplinary firm with 25 employees located outside Eau Claire, in Altoona, Wisconsin. Our financial advisers provide wealth management services for individual investors, businesses, foundations, and nonprofits, including investment planning, retirement planning, estate planning, and tax planning.

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