Finger Pointing

April 18, 2021

by Steve Stofka

Some restaurant employers complain that they can’t find workers and blame the stimulus payment and the extension of unemployment benefits. Workers complain that businesses are not willing to pay for the additional health risk of close contact with the public. Child-care remains an ongoing obstacle for many. Pick your target – the bums in Washington and their relief programs, cheap business owners, belligerent customers, or unmotivated employees. Oops, almost forgot one other culprit – the Covid virus. Finger pointing does not build solutions. Finger touching does.

In its March survey, the National Federation of Independent Business reported (2021) that 42% of owners reported that they could not fill a job opening, yet only 28% reported offering higher wages. Some expressed their concern that unemployment benefits were too generous, reducing the demand for jobs.

In a recent study, Gabriel Chodorow-Reich and his colleagues at Harvard (2018) found that an extension of unemployment benefits had only a small macroeconomic effect on unemployment, employment, job vacancies, and wages. However, they noted that some studies focusing on particular industries and workers have found greater effects from more generous unemployment benefits.

In macroeconomic models benefits for employed or unemployed workers does affect the unemployment rate. Benefits for the employed raise the input cost of labor and causes an increase in the price of a product. An increase in price leads to a reduction in demand. Employers respond to that demand reduction by laying off employees or not adding to their workforce. Unemployment benefits reduce incentives for workers to find work. States charge employers a fee for additional benefits, further driving up labor costs. However, in the aggregate, a change in benefits has only a small effect on wages and unemployment.

In a crisis, providing relief to specific populations and business sectors is difficult. When the CARES act was passed at the start of the pandemic, the paycheck protection aspect was designed to help small businesses. Big corporations took advantage of loopholes in the law’s language and exhausted that targeted relief for small businesses. Big business got big by being voracious, leaving little for the competition. A government that enacts broad relief measures are criticized for giving relief to those who don’t need it. We would rather blame each other than blame a virus.

Inflation

Inflation expectations have an effect on wages. If workers expect higher prices in the near future, we want higher wages to cover our living costs. We see the price of gas go up from $2 per gallon to $2.80 per gallon in the past six months and reason that a lot of prices will be going up. We listen to the news in our car and hear inflation is up such and such a percent. We check the price of hamburger or some other grocery item. For the sake of simplicity, some economic models assume that consumers are knowledgeable about setting inflation expectations. We don’t have the time to be experts, so we guess at it and correct our expectations as we get new information.

In a recent paper, Ehsan Ebrahimy (2020) and fellow economists at the International Monetary Fund studied the effects that pandemics and wars had on inflation. Pandemics generated uneven swings in prices during the pandemic, but the recovery period brought an offsetting of those price swings. They found no net inflation effects from pandemics like the Spanish flu.

Expectations contribute to inflation. The price of residential toilet paper during the Covid crisis is a small example of this phenomenon. Different production plants make commercial and residential toilet paper because consumers are willing to pay more for a softer product. In the first months of the pandemic, panic buying and hoarding caused a shortage of toilet paper and a rise in price. Manufacturers like Kimberly-Clark built more production of residential toilet paper and store shelves were restocked in recent months. Responding to the increased inventory, people started using the toilet paper they hoarded. Now there is a surplus of toilet paper and prices have dropped below pre-pandemic levels.

Unlike pandemics, war involves the destruction of  physical capital, factories and offices. In the recovery periods following war, the IMF researchers found a persistent inflation in developed economies because some of the productive capacity had been destroyed. When there was less supply to meet demand, prices went up. Even a country not directly damaged in a war, like the U.S. in the past two world wars, suffered lasting inflationary effects in the post-war recovery periods. During WW2, the U.S. used up a lot of raw materials and production to make weapons. Following the war, inflation shot up over 10% in the U.S., five times the current rate. Following that inflation spike, the economy fell into recession, which caused a price plunge, followed by another spike in inflation to over 7%. The inflationary shock waves following the war took seven years to dissipate.

The researchers concluded that there was little evidence to support a belief in a sustained inflationary trend during the recovery from this pandemic. That does not rule out the possibility of uneven short-lived price rises. As shown above, expectations have an effect on prices.

We are more comfortable when we humanize the causes of inflation, pointing the finger at “those people.” We prefer to live in a world of intent, not random chance. Attacks on Asian-Americans have increased as if someone born and raised in America had something to do with the Covid virus. Employers blame Congress or unmotivated job applicants, who blame heartless employers. As Rodney King said, “Can’t we all just get along?” (Sastry & Bates, 2017). We can use our fingers to connect, not blame.

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Photo by Humberto Arellano on Unsplash

Chodorow-Reich, G., Coglianese, J., & Karabarbounis, L. (2018). The macro effects of unemployment benefit extensions: A measurement error approach*. The Quarterly Journal of Economics, 134(1), 227-279. doi:10.1093/qje/qjy018. Retrieved from https://scholar.harvard.edu/files/chodorow-reich/files/ui_macro.pdf

Ebrahimy, E., Igan, D., & Peria1, S. M. (September 10, 2020). The Impact of COVID-19 on Inflation: Potential Drivers and Dynamics. International Monetary Fund Research. Retrieved from https://www.imf.org/~/media/Files/Publications/covid19-special-notes/en-special-series-on-covid-19-the-impact-of-covid-19-on-inflation-potential-drivers-and-dynamics.ashx

NFIB. (2021, April 13). Small business owners struggle to find qualified workers. Retrieved April 17, 2021, from https://www.nfib.com/content/press-release/economy/small-business-owners-struggle-to-find-qualified-workers/

Sastry, A., & Bates, K. (2017, April 26). When L.A. erupted in anger: A look back at the Rodney King riots. Retrieved April 17, 2021, from https://www.npr.org/2017/04/26/524744989/when-la-erupted-in-anger-a-look-back-at-the-rodney-king-riots

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