The writer is a senior fellow at Harvard Kennedy School and Chief Economist at Kroll
As the US economy reopened, the jobs came back — but the workers have not. At the end of last year there were almost 11mn unfilled openings, yet the unemployment rate is just 3.9 per cent. With labour scarce, wages are rising their fastest in decades.
The disappearing worker is a big factor in the Federal Reserve’s turn to tightening. As officials debate how much and how quickly to restrain credit, I would urge caution. There’s no mystery to the labour shortfall and many of the missing will return. The Fed must calibrate policy to a workforce largely in cyclical, not structural, change.
The labour force participation rate is 1.5 percentage points below its pre-pandemic level: a shortfall of roughly 3.5mn workers. The robust wage increases of the past year have been insufficient to pull these workers off the sidelines and back into the “pool of available labour”.
The biggest reason is Covid. Between December 29 and January 10, the Census Bureau reported a record 8.8mn people weren’t working because they were caring for someone with Covid or had symptoms themselves. Caretaking responsibilities have disproportionately fallen on women and with schools closed and employment in day care, nursing and residential care facilities down at least 10 per cent since early 2020, this is likely to continue. But in the long term, care responsibilities should abate and many should return to the labour force.
Participation should also improve as households’ financial cushions wear thin. Fiscal stimulus injected roughly $2.5tn of excess savings into the economy, but the personal savings rate is now lower than before the pandemic. According to research from the JPMorgan Institute, the lowest-income households benefited most from stimulus measures, but also burnt through them fastest. Many voluntarily absent workers will soon seek a pay cheque.
There has also been a sharp rise in retirements during the pandemic. The economy’s reopening should have pulled some back to work but that hasn’t happened yet, perhaps because of Covid fears and bigger nest eggs thanks to soaring equity and housing markets. As the virus abates, many of these people are young enough to return to work.
Mental health issues are also keeping workers on the sidelines. According to Mind Share Partners, 50 per cent of respondents said they’ve left roles for mental health reasons, up from 34 per cent in 2019. As the stress of the pandemic eases some should be able to come back.
Of course, once the pandemic has subsided, long Covid will still be a problem. The Brookings Institution estimates there are roughly 1mn Americans not working at all due to long Covid, and around 2mn more who have reduced their hours. This amounts to over 1.5mn full-time equivalent workers, nearly 15 per cent of the country’s unfilled jobs. We don’t know how many will recover and go back to work, or be permanently lost to the labour force.
Aside from Covid, a drop in immigration to the US has limited the number of available workers. There are 2mn fewer working-age immigrants in the US relative to the pre-pandemic trend. This has been driven mostly by increased restrictions on immigration put in place by Donald Trump’s administration. That is expected to change under Joe Biden.
Finally, the cure for high wages is high wages. As incomes rise, particularly for lower-paid jobs, that should in turn attract more people into the labour force. Yet the Fed should take care in how much and how quickly it raises interest rates. Normally, higher rates would result in a rise in unemployment, as cooling demand leads companies to shed workers. That is not what the post-Covid economy needs. Workers will come back, and that should ease wage inflation pressures.