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Lack of childcare leads to workforce shortage in Montana

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Robert Sonora

Robert Sonora

Like the rest of the country, the pandemic hit Montana hard. The unemployment rate increased 7 percentage points in one month and initial unemployment insurance claims skyrocketed 26,000 percent in two weeks as non-essential businesses were closed down.

Economic activity came to a near standstill. Real gross state product fell almost 9% in the second quarter of 2020, about the same as the country as a whole. The U.S. fell into a recession, the deepest since the Great Depression in 1929.

The global flow of goods and services declined, leading to production shortages. The Dow Jones Industrial average fell over 50% in six weeks. The last barrel of oil traded at $37 on April 20, 2020.

Two months later, the U.S. and state economies were already showing a sharp return to some form of normalcy. Swift stimulus policy by the Federal Reserve, which reduced target interest rates to zero, and the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March of 2020 blunted the effects of the self-imposed shutdown.

By June of 2020, the unemployment rate in Montana had already fallen by 4.5 percentage points and the number of initial unemployment claims had almost returned to pre-pandemic levels. A remarkable turnaround.

Now as we look back one year later, the news continues to be positive. Most economic projections made during 2020 have lost their currency. Forecasts for Montana’s economy have improved since mid-2020. Forecasted employment levels in 2022 are higher by 15,000 jobs using updated data compared to forecasts made a year ago. Similarly real state output in 2022 is forecasted to be $2 billion higher today than last year’s estimates, or about 4% higher.

But the recovery has not been uniform. As with the rest of the country, in terms of employment, the hospitality, education, and mining and logging sectors continue to lag. These sectors have yet to return to pre-pandemic levels of employment. Some of this can be explained by longer run structural changes in these sectors — for example, education delivery is undergoing some technological innovation in the post-pandemic world and state logging and wood manufacturing is facing challenges associated with market dynamics and production innovation.

Over the shorter term, the leisure and hospitality sectors suffered from a lack of demand. The food service sector has fully recovered to early 2020 levels, but the accommodation sector is stubbornly stuck below pre-Covid employment.

Bright spots include manufacturing which has not only returned to pre-pandemic employment levels but has also returned to the pre-pandemic trend. Construction has been similarly unaffected. Professional services and health sectors are also back to “normal.”

But there are still a number of headwinds to a universal recovery. First, though Montana’s unemployment rate is less than in February 2020, some of this can be explained by a smaller labor force. The headline unemployment rate only accounts for people actively seeking employment as a percent of people in the labor force, and the labor force is smaller than it was in early 2020. The unemployment rate which includes all types of unemployment remains about 8%.

Labor markets are likely to remain soft for a couple of reasons. First, is, let’s call it, the “Johnny Paycheck” effect. Over the course of the pandemic workers had a chance to re-find life without work, to spend more time with their families and leisure. Usually this kind of event happens within a specific sector which is undergoing a unique set of conditions. The more universal nature of the pandemic meant that more sectors were impacted simultaneously.

Compared to most developed countries, Americans work more hours per year, about 1,750. Germans, on the other hand, work about 1,300 hours per year. True, Germans have less annual income, but not that much less. Americans work 33% more hours per year and earn 25% more. What we may be seeing is a shift away from work towards other activities people like to do.

Secondly, some have been unable to return to work because of other obligations, in particular child and parental care. The results of the impacts of two childcare surveys in Montana were published in 2020, one surveyed parents and the other employers. Both studies found that inadequate child care in Montana has a considerable effect on the state economy.

From a labor supply perspective, the survey conducted by the Bureau of Business and Economic Research (BBER) found that for Montanans who struggle to find childcare, 22% turned down a job offer, 15% went from full-time to part-time and 12% quit their jobs. Licensed child care can only meet roughly 45% of demand.

Couple this with an aging population — Montana is the oldest state in the West — and there has been an 8 percentage point decline in the labor force participation rate since 2020. It's now about 62%, about the same as the national average.

Global supply chain issues persist. According to a survey conducted for World Trade Center Montana by the BBER, the most frequently cited impact of the COVID-19 pandemic on responding firms was delayed or prevented incoming transport of components or supplies. And the 2021 BBER survey of manufacturing firms in Montana finds employment and supply chain issues were the two primary concerns for the state’s manufacturers. The causes of bottlenecks in the global supply chain are well-documented and can be distilled down to Covid-related production cuts and transportation shortages. The cost of a shipping container has risen 2-3 fold since the end of 2020.

What is fueling that, at least in the short run, is inflation. Some policy pundits attributed inflation to the monetary and fiscal stimulus as the potential primary source, but now the focus is on supply side issues. And like everything else, the reasons behind inflation are not uniform. First, the overall increase in inflation has been driven by a relatively small number of goods and services, such as used cars and travel. Second, the way inflation is calculated, particularly when using the consumer price index, can lead to exaggerated data. It's best to consider the trend of inflation rather than the absolute number. Market-based expectations do not foresee inflation above 2.2% for the foreseeable future.

Montana’s recovery from the Covid recession has been remarkable. Economists are having a difficult time reconciling the short-run severity of the recession with the rapid recovery. Is it due to the considerable stimulus? Misleading data? A public health crisis? Probably all of the above plus others. But as short as this crisis was will likely have lasting short- and long-run impacts.

In the short run, support is ending for unemployed workers and those struggling to pay their rent and mortgages. New Covid variants could disrupt the recovery. Over the longer term, the nature of work is likely to change, some sectors will become moribund while others will restructure; how we provide health care and childcare and economic certainty will also be part of the conversation.

Robert Sonora is the associate director at the Bureau of Business and Economic Research at the University of Montana. He is also a senior research professor at the university's College of Business.

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