Cruel To Be Kind?
The National Bureau of Economic Research (NBER) recently announced that the recession began in February. It’s over. While the nation lost a combined 22.2 million jobs in March and April, it recovered 2.7 million jobs in May, 4.8 million jobs in June, and 1.8 million in July. Between April and July, unemployment dipped from 14.7 percent to 10.2 percent, hardly the type of dynamic one would expect were the nation still in recession.
Though frequently deemed an essential industry, construction failed to escape the virus’ wrath. The industry lost 1.1 million jobs in total over the course of March and April, but as of this writing, has recovered 59 percent of what had been lost.
The pattern of massive job loss followed by partial recovery neatly mimics the response of policymakers to the pandemic, who broadly shuttered the economy in March and April and have been striving to reopen it ever since. With COVID-19 lingering, some states have begun to rollback reopenings, and that has begun to flatten what had been an explosive recovery.
Nonetheless, according to the Bureau of Labor Statistics (BLS), by the final day of May, the number of available job openings in America had increased to 5.4 million, up from a bit less than 5 million in April. Job openings in leisure and hospital (e.g. hotels, restaurants) rose by 233,000. In retail, job openings climbed by 147,000. In construction, they were up by 118,000.
But at that time, many unemployed Americans were receiving $600 federal supplements each week on top of standard state unemployment insurance benefits. Not surprisingly, many employers have been reporting difficulty inducing workers back to work.
Economists at the University of Chicago report that 68 percent of those eligible for unemployment insurance benefits stood to make more than they had been while working. For many entry-level workers, the benefits for which they were eligible exceeded twice their prior earnings.
The following puts matters into financial context. Last year, the average weekly unemployment insurance payment was $370. With the federal subsidy, people who lost their jobs as a result of COVID-19 would receive, on average, $970 per week (the average $370 payment plus the $600 federal subsidy). If paid out over the course of an entire year (which will not be happening), that would translate into $50,440, a considerable amount of money to receive for not working. When people are paid more to work than not work, many will choose to moderate the intensity of their respective job searches. While the additional income supports household demand for goods and services, it can stifle the supply side of the economy, resulting in overall slower economic recovery.
One of the phenomena that has received less attention is America’s dwindling labor force participation rate. In February 2020, when the recession was beginning but matters had not reached crisis levels, the U.S. labor force participation rate stood at 63.4 percent. It had been expanding steadily over prior quarters as a strong U.S. economy pushed down unemployment and pushed up wages. Many Americans jumped into the nation’s labor market in response, with some ending up in construction.
But the pandemic has upset that dynamic. By April, the U.S. labor force participation rate had plunged to just above 60 percent, meaning that about 40 percent of American adults were neither working nor looking for work. By June, it had recovered to 61.5 percent, but that means that many Americans were still not looking for work, and this may have something to do with the federal unemployment insurance policy.
What This Means for Contractors
Those federal unemployment insurance supplements expired in July, but remain the topic of intense negotiations regarding the next stimulus package to emerge from Washington, D.C. Presumably, if federal policymakers determine that federal supplements to unemployment should remain in place, employers will continue to report difficulty attracting back staff.
There’s more. During times of economic stress, construction workers have demonstrated a capacity to disappear. In 2015, roughly halfway through the prior economic expansion, the U.S. Census Bureau conducted a study examining what happened to millions of construction workers who had been displaced by the decline in activity pursuant to the housing bust. The research determined that more than 60 percent of construction workers who lost their jobs as a result of the housing bust and ensuing economic downturn found employment in other industries or had left the labor market altogether by 2013. Thus, even the Great Recession did not solve the nation’s construction worker shortfall.
Recent survey data from Associated Builders and Contractors indicate that the next several months will be challenging for contractors. Many report burning through backlog quickly, encountering fewer opportunities to bid on projects, and facing fierce competition. Given the challenges facing commercial real estate (e.g. empty storefronts, vacated office suites, shuttered restaurants, unpaid rent) and state and local government finances, construction may be among the last segments of the economy to fully recover. That may open the door for many construction workers to find jobs in more rapidly recovering industries – that is if they choose to remain in the labor market in the first place.
Copyright © 2020 by the Construction Financial Management Association (CFMA). All rights reserved. This article first appeared in Sept. 2020 Talking Trades newsletter.