Why is the labor market so tight right now?
Friday’s report on the March job numbers was good news and Laura Clawson and Kerry Eleveld gave nice summaries of the report. I have a background in economics and have been asked by the local media where I live to talk about issues such as the labor market, supply chain problems, and inflation. While I’m not formally a macroeconomist, I have done some research into these areas and wanted to share with this community what I’ve found, starting with what’s happening in the labor market.
Impact of COVID-19
The chart below shows monthly change in employment from 2006 to the present. Each bar represents one month of job growth (or job loss if negative). The pandemic began affecting the economy seriously in March 2020. That’s when sports leagues suspended or cancelled their seasons, other events were cancelled, and states began issuing stay-at-home orders, starting with California on March 19. The labor market lost 1.5 million jobs that month, but that was dwarfed by the 20.5 million jobs lost in April 2020 as the lockdowns took hold. I took the chart back to 2006 to compare this with the “Great Recession,” which is represented by those now small-looking negative bars in 2008 — 2009. It was serious at the time and 8.7 million jobs were lost during the Great Recession, but that was less than half of the 22 million jobs lost to the COVID recession.
But whereas the Great Recession was the longest recession since World War II, lasting 18 months, the COVID recession was over in two months. By May 2020, the job loss was over and employment began increasing again. With Friday’s report, 20.4 million of the jobs lost have been regained, and the unemployment rate has fallen from a pandemic high of 14.7 percent in April 2020 to 3.6 percent in March.
One criticism that I’ve heard on Fox is that we still have fewer people employed than before the pandemic. Some of the comments from this community on the Clawson and Eleveld stories mentioned that too. It turns out that the labor force has shrunk and it may be like pulling teeth to get those jobs back.
The Incredible Shrinking Labor Force
The reason that it may be difficult to get back to where the overall level of employment was prior to the pandemic is that millions of people have left the labor force and may never return. This is due to the following:
COVID-19
We are approaching one million deaths in this country from COVID. Most of those deaths have been of elderly people. But according to the CDC, almost 250,000 of those deaths have been of people who are working age:
18 — 29: 6,088
30 — 39: 17,712
40 — 49: 42,190
50 — 64: 183,607
Total: 249,597
Now many of those may have had co-morbidities that kept them out of the workforce even before they died. But it would probably be reasonable to assume that about 100,000 workers have died of the disease.
But the big impact of COVID on the labor force has been the COVID “long haulers.” These are the people who did not die of the disease but are so disabled from it that they have difficulty working. As reported by the Washington Post, an estimated 750,000 — 1.3 million people fell into this category in late 2021. It is uncertain how many of those will ever be able to return to the labor market.
The Great Reassessment
You’ve probably heard of “The Great Resignation,” where workers are quitting their jobs in record numbers. But before that (and probably a cause of it) was a lesser known phenomenon that some have dubbed “The Great Reassessment.” This involved people, particularly older workers, taking stock of their lives and deciding to retire early. They saw the spread of the disease and that people were dying, and decided that they would enjoy their lives while they had a chance. The chart below from the Federal Reserve Bank of Kansas City shows that the percentage of the population that is retired spiked during the pandemic:
They estimate that, if the rate of retirement had remained the same as during 2010 — 2020, 1.5 million workers would have retired. Instead, 3.6 actually did, or 2.1 million retirements more than expected. Similarly, the Federal Reserve Bank of St. Louis estimated an extra 2.4 million retirements during COVID:
Some of those who retired early may eventually decide to return to the labor market due to financial shortfalls or to take advantage of new employment opportunities. But an examination of the labor force participation rate for those over 65 with no disabilities shows that, while it is off its low, it is not signaling that early retirees are returning in droves to the labor market.
Women
The COVID recession was initially called a “she-cession” because women were more adversely impacted than men by the downturn. One reason was that women were more likely to work and/or own businesses in industries that were particularly hard hit by the shutdowns. These were primarily service-oriented industries such as retail, restaurants, and personal services (haircutting, nail salons, yoga studios, etc.). For example, 48.6 percent of the jobs in the leisure and hospitality sector were lost between February and April 2020. But the other thing impacting women was the fact that they still had the primary responsibility for childcare. With schools going to remote learning and childcare centers shutting down due to COVID, many women had to leave the workforce to care for their children. This can be seen if you compare the labor force participation rate (LFPR) of women to that of men. Women have a lower LFPR than men even before the pandemic, so the chart below uses the LFPR as a proportion of the February 2020 LFPR for each group, with that month being the last month before the shutdowns began.
The chart shows that the already lower participation rate of women fell by a greater proportion than that of men. With schools going back to in-person learning and childcare centers coming back, many women will be able to re-enter the workforce. But there are anecdotal accounts of some families deciding that they can do with one income earner and thus having one member (usually the woman) stay at home to care for the children.
The Great Resignation
Between COVID deaths and disability, more people retiring, and women out of the workforce, the U.S. workforce probably shrank by more than four million workers at some point. That created job openings through the labor market and led to The Great Resignation, or what I call the Take This Job and Shove It Effect. Workers quit their jobs at record numbers to go to jobs with better pay and better working conditions. As seen below, more than 4.5 million workers quit their jobs in November 2021 and the number of quits has topped four million a month for the last nine months.
Not surprisingly, the industries with the highest quit rates are Accommodation and Food Services (6.0 percent quit rate in February 2022) and Retail Trade (4.9 percent). Those are low paying sectors with customer interaction and a history of poor working conditions, such as last minute scheduling, harassment, and wage theft. Is it really a surprise to businesses that if they treat their workers like crap that the workers will show no loyalty and take the first better opportunity that comes along?
Labor Market Outlook
To sum things up, the pandemic caused millions of workers to leave the workforce, either voluntarily or involuntarily. Some of these workers will eventually return to the labor market, but many won’t. That created labor shortages throughout the economy. Businesses are scrambling to find workers and they have to offer better pay and better working conditions. Therefore, now is a great time to be a worker. That likely will continue for a while as it will take time to replace those workers who left the workforce, particularly in the wake of slowing population growth. The only thing that could upset this is increased automation, which businesses may seek to deal with the labor shortage.
The labor shortages and the higher wages they lead to will have an impact on other aspects of the economy, such as supply chains and inflation. I hope to tackle those issues in future posts
