Lots Of Explanations For Current Labor Shortage
The following is an excerpt from our?Morning Briefing?dated?October 18, 2022.
Melissa Tagg and Ed Yardeni
Sure, Covid caused many workers to leave the workforce owing to health concerns or for caregiving purposes. But it’s not the only reason for the depressed US labor-force participation rate. Now that the pandemic has abated, life has normalized, but labor-force participation hasn’t. In September, the participation rate was merely 62.3%, over a full percentage point below the level just before the pandemic, in February 2020, of 63.4% (Fig. 9).
One of the main reasons for the lack of a post-pandemic snapback in labor-force participation is that the long expected tsunami of Baby Boomer retirements is here (Boomers, born between 1946 and 1964, are now 58 to 76 years old). Accordingly, the number of people who are not working—and are not looking to—has increased even though job openings are plentiful. The historically low unemployment rate of 3.5% excludes these NILFs (i.e., not-in-the-labor-force) from its in-the-labor-force denominator. Job openings exceeded the number of unemployed workers in the US from the start of 2018 through the start of the pandemic, and since July 2021 (Fig. 10).
Here’s a deeper look at factors that have been driving up the ranks of NILFs and weighing down the labor-force participation rate:
(1) Age distribution. The age distribution of a population can profoundly influence its percentage of NILFs. The participation rate of the prime-working-age population, 25- to 54-year-olds, has recovered from its pandemic-depressed lows (Fig. 11). That’s not the case, however, for the over-65 cohort (Fig. 12). Many Boomers retired during the pandemic. Just as Boomers’ outsized impact has been skewing the overall population older, it’s been weighing on the overall labor-force participation rate.
(2) Pandemic retirements. About 2.5 million people retired earlier than normal during the pandemic, found the St. Louis Fed. Fear of Covid complications among older people was one big reason. Another reason was that rising asset prices during the pandemic provided many people with sufficient nest eggs to retire, many of them without even collecting Social Security benefits yet (delaying claims increases the benefit amount up until the maximum collection age of 70). Remarkably, Social Security claims remained flat amid this wave of retirements. This raises the possibility that some retirees will reenter the labor force as a result of this year’s negative wealth effect on their portfolios.
(3) Declining population. Nevertheless, continuing retirements are likely to put additional downward pressure on labor-force participation rates over the next decade. Low labor-force participation compounded by the low growth rate of the working-age population is contributing to labor shortages. The size of the labor force equals the size of the population age 16 and older multiplied by their labor-force participation rate. Kansas City Fed researchers decomposed changes in population size and changes in participation rates. They found that population growth helped offset declining labor-force participation in most states between December 2019 and December 2021. But lower birth rates and lower migration trends (as discussed below) also contribute to declining population growth rates and the declining labor force.
(4) NILF newbies. Prime-working-age women (aged 25 to 64) faced a slightly larger drop in the labor-force participation rate during 2020, a 1.7ppt decrease compared to a 1.6ppt decline for men (Fig. 13). As many children returned to in-person learning at the start of the 2021-22 school year, the female participation rate rebounded. The current prime-working-age female participation rate is 72.2%, 0.5ppt from its the February 2020 level of 72.7%. The rate for men is 0.4ppt below its pre-pandemic level of 84.9%.
What’s been keeping some pandemic-era NILF newbies out of the labor force still? Federal stimulus funds sent to households aimed at boosting economic recovery could have influenced many NILFs to drop out of the labor force. These transfers, the Richmond Fed found, are estimated to account for almost 20% of the shortfall in the labor-force participation rate between February 2020 and August 2021. But the labor-force participation rate is expected to increase as many spend down their stimulus funds.
Disability spurred by long-Covid could explain why some prime-working-age NILFs have remained out of the labor force. A July 2022 Census Bureau survey found that 16.3 million people (around 8%) of working-age Americans currently have long-Covid. Of those, 2-4 million are out of work due to long-Covid. Some of their ranks, however, may be offset by previous NILFs now able to rejoin the workforce thanks to the growing remote work trend.
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(5) Lower paying jobs seeing most labor shortages. Baby Boomers presumably are mostly retiring from higher paying jobs that require more experience. So many younger folks have had the opportunity to hop into those higher paying positions, leaving a shortage of lower paid labor. Foreign-born workers, discussed below, typically would fill such a gap, but they also have been in short supply. The shortage has been felt especially by employers in lower paying, immigrant-reliant industries such as construction, hospitality, and other services.
(6) Shortage of teachers is notable too. Interestingly, educators retired in large numbers during the pandemic. The teaching workforce is now suffering from an incredible labor shortage. According to the U.S. Bureau of Labor Statistics, there were approximately 10.6 million educators working in public education in January 2020. As of February 2022, there were 10.0 million, a net loss of around 600,000, according to the National Education Association.
Some educators were motivated to retire by early retirement packages and others by fear of working in schools during the pandemic. The teacher shortage soon could get worse, as more than half of teachers are over 40. To address the shortage, some state governments are making it easier for retired school staff to return to work, according to edsource.org.
(7) Inflation may drive some out of retirement. Determining who is retired versus out of work can be tricky. A May article in the Washington Post noted that an estimated 1.5 million retirees have reentered the labor market over the past year, according to an Indeed economist. That means the economy has made up much of the excess loss of retirees since February 2020.
Some returning workers cite difficulty dealing with rising costs on a fixed income as the reason. Some are going back to work until they’re eligible for Medicare due to the high cost of private healthcare premiums. A survey from the Nationwide Retirement Institute found that some 13% of Gen Xers and Baby Boomers say they have postponed or considered delaying plans to leave the workforce due to soaring costs.
Vanguard research observes: “Except for pensioners, those who retired earlier than expected would have had to amass financial assets equal to as much as 10 times their annual income to confidently meet living expenses through at least age 84.” That suggests that some retirees may be returning to the workforce for one reason or another. But even if that were the case for many, the trend wouldn’t halt the inevitable Boomer-induced labor-force drain, just delay it.
(8) Immigration problem could be labor-force solution. “If retiring baby boomers are creating a labor shortage—immigration could be the solution” was the title of a September article in Fast Company. A July 2021 Peter G. Peterson blog noted that foreign born workers made up nearly one-fifth of the US labor force.
Tighter immigration policies and travel restrictions stemming from the Covid-19 pandemic reduced net international immigration to the US from 2016 to 2021, found the Kansas City Fed in a study. As of June, there were about 1.7 million fewer working-age immigrants living in the US than there would have been had immigration continued at its pre-2020 pace, according to an economist quoted in an October Bloomberg article.
More temporary workers are coming to the US, according to a Pew Research Center analysis cited in the article. But the number of workers still doesn’t match the level prior to the pandemic. Moody’s Analytics has shown that for every 1% increase in the population made of immigrants, GDP rises 1.15%, the article observed.
(9) Age wave and inflation. By the way, the formerly accepted notion that elderly populations tend to drive inflation down may be challenged in the coming years (Fig. 14). Recent research from the International Monetary Fund found that when there are high concentrations of dependent populations relative to the working-age cohort, there is a tendency toward consumption, which inflates inflation. BCA Research also recently highlighted how Baby Boomers control more than half of US household wealth and increasingly will have an outsized influence on consumption over output. That’s all according to a September article in Forbes.