Recent employment reports from the US Bureau of Labor Statistics suggest that joblessness remains near its 50-year low, at 3.6 percent. Predictably, the tight labor market has raised alarms over inflation, and the Federal Reserve has responded by raising interest rates to soften wage growth and dampen inflation. But the government should instead be doing what it can to extend rather than halt this history-in-the-making opportunity for workers. Not only are tight labor markets an enormous boon for workers, especially those on the low-wage margins of the economy, but low unemployment also reduces spending in government benefit programs.
Our analysis of the US Census Bureau’s Survey of Income and Program Participation, or SIPP, shows how powerfully tight labor markets decrease the utilization of public benefits. SIPP follows a representative sample of the population — 4.5 million Americans participated in this survey between 2013 and 2019.
In states where unemployment stays at or below 3.6 percent over a two-year period, enrollment drops sharply in all major means-tested benefits programs: Supplemental Nutrition Assistance Program (food stamps), Supplemental Security Income (a benefit for people with disabilities), Temporary Assistance to Needy Families, Medicaid, and free school meals. Even when unemployment falls from 5.5 percent to 4.5 percent, Medicaid enrollment drops by 2.7 percent, SNAP shrinks by 1.6 percent, and housing assistance shrinks by 1.3 percent.
Conversely, rising joblessness significantly increases uptake for all these programs. If the unemployment rate rose from today’s 3.6 percent to 5.5 percent, we would see 3.1 million more Medicaid enrollees, 5.8 million more SNAP recipients, and 1 million more people join the SSI rolls. This is by design, as these programs are meant to provide subsistence support for the unemployed and for those holding down low-wage jobs. But the costs driven by weakening labor markets are significant. An increase in unemployment from 3.6 percent to 5.5 percent would translate into a $25 billion increase in Medicaid benefits, $16 billion in SNAP spending, and $671 million in SSI outlays.
How durable are the benefit savings? Tight labor markets ensure that more workers have consistent employment histories, which help to buffer them from layoffs and increase the probability they will find new positions if need be. The longer people are able to work, the more consistent the savings, and the more likely it is that they will be able to manage without these programs.
To be sure, not every tight labor market produces these dynamics. Most are too short in duration, or insufficiently robust. Unemployment that goes down a point and lasts for six months isn’t enough of a shot in the arm to make a difference. But the kind of economic conditions we are seeing now, when joblessness has been below 4 percent for more than a year, does produce these benefits.
We acknowledge that inflation remains a serious problem. Indeed, rising prices take a sharp bite out of incomes for the most disadvantaged households. From 2021 to 2022, wages were up 5 percent across the nation, but fuel costs skyrocketed by 40 percent and rents escalated by 15 percent. But boosting interest rates is a blunt tool for fighting inflation, and it does the working poor no good to lose their jobs as a consequence. We have other policy levers: controlling energy costs, easing supply chain bottlenecks, and curtailing firms’ ability to gouge customers well beyond the increased costs they face to produce goods. When we move against inflation by boosting unemployment, we interrupt the upward mobility of the most disadvantaged workers and virtually ensure that benefit programs — rather than earned income — will swell.
Safety nets are critical for enabling Americans to withstand economic downturns. We should not dismantle them — indeed, we believe that a strong safety net is a complement to tight labor markets because bolstering economic security can help turbo-charge labor market mobility. But we also know that society benefits most when people can create their own safety nets. Consistent employment that turns into wage increases enables workers to build financial assets that can underwrite opportunities for generations to come. When the labor market generates higher incomes, fewer families need public aid to meet their basic needs. Those savings accrue to all of us.
Katherine S. Newman is the provost of the University of California system and a distinguished professor of sociology and public policy at UC Berkeley. Elisabeth S. Jacobs is a senior fellow at the Center for Labor, Human Services, and Population and Deputy Director of WorkRise at the Urban Institute. Together they are the authors of “Moving the Needle: What Tight Labor Markets Do for the Poor.”