Is the job market “healthy”?

Recent data shows a very strong labor market in the US. Some progressives have argued that this proves their longstanding claim that we could do better on the jobs front, and that for most of our history we’ve had an unnecessarily weak job market.

I have some sympathy for this argument, but I’d like to take an intermediate position between the fatalism of those who believe that nothing can be done about unemployment, and the optimism of the progressives.

Consider the following analogy. A philosopher claims that human life inevitably contains lots of drudgery and boredom. Someone responds that this cannot be true. They just inhaled a line of cocaine, and they are experiencing a pleasant sense of exhilaration. How would the philosopher respond? She might argue that the exhilaration is temporary and the after effects of the drug are unpleasant.  On the other hand, that doesn’t mean that most people are living life in the optimal fashion. Most people (including me) could probably take steps to make their lives more pleasant and fulfilling. Thus I’m not suggesting fatalism.

In 2022, the unemployment rate fell back to roughly 3.5%, similar to the level experienced during the late 2010s.  Other indicators such as the high ratio of job openings to unemployed workers, as well as fast rising wages, suggest a labor market that is even hotter than in the late 2010s.  But I would argue that the job market of the late 2010s was healthier than the current labor market.

People have often compared inflation to a drug, which produces a short-term euphoria at the expense of longer-term pain.  I believe the strong labor market of the late 2010s was sustainable, because it was not generated by a surge in NGDP growth (and inflation.)  If we had not been hit by Covid, the labor market might well have stayed strong during the early 2020s.  In contrast, a job boom generated by an excessive surge in NGDP growth is much less sustainable.  No one should point to the current job market and suggest, “See, this is what we should have been doing all along.”  It’s like saying “See, I can be happy anytime I consume cocaine.”

At the same time, I am less fatalistic than many other pundits.  During the 2010s, some pundits suggested that the weak job market reflected structural factors, everything from safety net work disincentives to the lure of video games.  In fact, much of the weakness was due to the lingering effects of the big drop in NGDP during 2008-09, and the unusually slow recovery in NGDP after 2009.  We really can and should do much better.  Some monetary stimulus during 2020 was appropriate; enough to get us back to the NGDP trend line (which happened in late 2021.)

In addition to demand shocks, supply side policies also affect the labor market.  At various times in history (albeit less so today), pro-union legislation and minimum wage laws have reduced employment.  Disincentives in our poorly constructed safety net have often reduced employment. 

Thus we have two unforced errors.  Substandard monetary policy has led to sharp NGDP growth slowdowns that created excess unemployment, especially in the 1930s, the early 1980s, and the early 2010s.  Other flawed supply side factors have boosted the “natural rate of unemployment”, even during non-recessionary periods.  BTW, “natural” doesn’t mean healthy, it means the rate the economy will move to when NGDP growth stabilizes.  

So the progressives are correct that we can and should do better in creating a job market where it’s relatively easy to find work, even for unskilled workers.  But they make two other mistakes.  First, they seem to view an overheated job market as healthy, when it’s actually quite unhealthy (even though it “feels good”.)  Second, they underrate the disincentive effects of well-meaning progressive legislation designed to help workers and the unemployed.