What explains these confounding tensions? To unpack them, consider the legacies of the economists John Maynard Keynes and Friedrich Hayek.
In his day, Keynes argued for boosting aggregate demand during a recession to keep workers afloat — a prescription that has clearly shaped the ultra-stimulative fiscal and monetary policies from both the Trump and the Biden administrations. His influence also resonates in the recent jobs reports: The coming rebound in the consumption of services — restaurant meals, entertainment and travel — will lift demand above its pre-pandemic level, and reopening and abundant consumer cash, bolstered by policy, will increase the demand for workers. While Keynes may have lit the path to recovery after last spring’s cataclysmic job loss, he offers little to guide us through the coming labour-supply crunch. If policy actively disincentivises the unemployed from returning to the fold, as recent reports suggest, there will be no one in place to meet the coming surge in demand, imperilling our economic rehabilitation.
To preserve the still-shaky recovery, we must now turn to Hayek, the godfather of free-market thinking. He argued that policy should allow workers to adjust to changes in the economy. Looking ahead, policymakers must consider curbing elevated unemployment benefits and a focus on old, pre-pandemic jobs in order to let workers and the economy adjust to new activities and new jobs that are more promising in the post-pandemic world.
We don’t want unemployed workers to find the post-pandemic economy has passed them by. As demand revives, supply will need to keep pace. Those in some industries, like carmakers, can simply sell off excess inventories, something that is already happening. Tool and machinery makers can increase imports to keep up. But eventually, demand must be met by higher domestic production from workers. Once businesses are freed from pandemic restrictions, we can expect to see some improvements in supply. But holding back a faster improvement in employment and output are the very challenges Hayek identifies, including slowing down the process of matching dislocated workers to new, post-pandemic jobs. That is to say, demand growth with supply constraints won’t produce the sustainable jobs recovery we need.
While employment is likely to rise quickly as the pandemic fades and extra unemployment insurance benefits fall away, unemployment rates are still likely to remain high relative to pre-pandemic levels for another year.
If we look ahead, wage gains should be robust for those employed, particularly for lower-skilled service-sector workers — especially if some employees delay returning to work. Those higher real wages are good news for recipients. A less welcome wild card would be inflationary pressures, fuelled by demand outstripping supply. Those pressures could be a brief blip in an adjusting economy. Or they could suggest a reduction in purchasing power from higher inflation for an extended period. Higher recent inflation readings in consumer prices are a cause for concern. The latest jobs report, then, favours a more Hayekian solution — with a nudge: Policy should support returning to work and matching workers to jobs by supporting re-employment and training for new skills, not just boosting demand. That shift offers the best chance for a sustained lift in jobs as well as demand as the pandemic recedes. In the matter Keynes v. Hayek, then: Let Hayek now prevail.