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By Atul Bhatia, CFA

The U.S. had a record 10.9 million job openings at the beginning of August. Despite the large number of vacancies—and with total employment still 5.5 million below pre-pandemic levels—the economy added only 235,000 jobs last month, the slowest growth in seven months and lower than all estimates in a pre-release survey of economists conducted by Bloomberg.

One possible explanation for the disconnect between employment growth and job vacancies is the impact of federal unemployment benefits. These pandemic relief measures—which expired earlier this week—included extending benefits to roughly seven million individuals not covered under state programs and $300/week supplemental payments to an additional three million recipients of traditional unemployment.

Critics contend the federal benefits created disincentives to work, leading to upward wage pressure and extended job vacancies. As these payments expire, there is some hope that vacancies will be filled at a faster rate in the coming months.

Shifting imbalances: Labor market swings from job shortage to worker shortage
end of benefits en chart 1

Available jobs (millions, LHS)

Missing workers: difference between total monthly employment and pre-pandemic peak (millions, LHS)

Available jobs minus pre-pandemic peak employment (millions, RHS)

Source - RBC Wealth Management, Bloomberg; monthly data through 8/31/21

Our view is that this week’s expiration will likely have a positive impact on near-term hiring. At the same time, the move is unlikely to be a panacea for the labor market, particularly when accounting for the indirect impact of the programs’ termination. Supply chain issues, consumer decisions around drawing down savings, and pending fiscal and debt ceiling legislation are all likely to have a more significant impact on employment counts into year end.

Competitive pressure—particularly among the seven million individuals who no longer receive any government unemployment payments—is also likely to weigh on wages, potentially cutting wage-price inflation and consumer spending.

Data supports a hiring bump

Back in June, nearly 20 states chose to reject federal funds and cut payments to unemployed workers early, with the stated goal of increasing employment as workers looked to replace lost income with wages.

The data largely supports their thesis. One academic study concluded that states without federal payments saw 25.9 percent of benefit recipients find a job in the months following the reduction of payments, compared to 21.5 percent in states with higher payouts. Since the study relied on banking data from lower-income households, the job creation impact of the benefit reductions may be overstated, but it is unlikely to be zero or negative.

Extrapolating to this week’s policy expiration, we would expect approximately 500,000 additional positions to be filled in the coming months as a result of lost benefits.

Secondary impacts push against growth

Unfortunately, the rest of the math associated with the policy change is less helpful.

The same study that showed faster job creation in lower-benefit states also found an overall negative impact on household income and spending. For every eight individuals that lost benefits, only one found a job in the two months following the loss of benefits. The result was a $270 million increase in wages, but a $4 billion drop in consumer income—and a $2 billion drop in consumer spending—in the months following the change.

The nationwide loss of benefits is likely to see a similar dynamic at play. Even the more optimistic estimates on the Street see only an incremental gain of 1.5 million jobs between now and year end; any wage gains from that increase are likely to be more than offset, however, by the complete loss of income to seven million individuals. Based on the experience in the states that cut benefits early, these households may end up reducing spending by as much as $8 billion, a decline in demand that could impact corporate hiring plans in the future.

Timing for a reduction in household spending is not ideal; economists across Wall Street have recently been cutting estimates for Q3 2021 GDP growth on a combination of COVID-19 impacts and reduced consumption. Bloomberg Economics, for instance, now sees the economy growing by five percent this quarter, down from its prior estimate of seven percent.

Unfortunate timing: Declining consumer confidence and spending meet benefit drop-off
end of benefits en chart 2

University of Michigan Consumer Expectations Index (LHS)

PCE Consumer Spending Change, Nominal $, % change m/m (RHS)

Source - RBC Wealth Management, Bloomberg; monthly data through 8/31/21

Longer term

We believe there are other reasons to be cautious on the economy’s ability to absorb seven million workers in the near term. First, there are ongoing pandemic impacts, with the delta variant disrupting hospitality and travel in particular. Second, hiring managers face significant skills and geographic mismatches with the available labor pool. Finally, supply chain disruptions are leading to new layoffs, including the ongoing chip shortage that is causing major curtailments in auto production.

These challenges highlight the limited role that unemployment benefits play in the larger labor market. Consumer comfort with in-person shopping and having goods to sell are more important constraints, in our view, and the child care implications of schools reopening for in-person education are likely to provide a bigger near-term boost to worker availability.

Policy impacts

For the Fed, we believe the dip in hiring in August is unlikely to significantly delay the start of reducing its bond purchases, a process known as tapering; when COVID-19 case counts drop and assuming federal stimulus ramps up, the Fed is likely to see sufficient job gains to bring it to the tapering starting line. If job growth slows further, the central bank may delay, but one weak month is unlikely to shift the view of policymakers on the need to begin reducing bond purchases.

Instead, the Fed is more likely to be influenced by any drop in consumer spending and the anti-inflationary impact of containing wage growth. At the margin, the curtailment of unemployment benefits to millions of households should give the Fed more space to keep interest rates lower for an extended period, in our opinion. This would fit well with the central bank’s position of detaching tapering and rate movements.

For both investors and policymakers, the labor market remains critical and challenging. The expiration of federal benefits is likely to kick start millions of job seekers, with both positive and negative implications for the economy.


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