Where have all the workers gone?
Almost 5m fewer people are employed in the US compared to the start of the pandemic. Most simply left the jobs market. Policymakers now have to work out whether they intend to return.
In 2021, as economic growth returned to the US, Eurozone and rest of the global economy, businesses and governments the world over began to make plans for “business as usual”. But in the US, and even with economic growth and productivity levels now above pre-pandemic highs, one question still looms large: where have all the workers gone?
In February 2020, the US labour force participation rate – the proportion of the working population either in work or seeking work – stood at 63.3 per cent. Over 18 months later, in October 2021, it sat at 61.6 per cent, and is yet to recover. Where those workers have gone, and whether they will return, has important implications for companies and, in particular, for policymakers and central bankers as they interpret and respond to the lower numbers.
“It all comes down to what decision the Federal Reserve should take,” says Simon Penn, UBS Knowledge Network. “If it decides that the labour market is much tighter than previously thought, and raises rates when it doesn’t need to, that’s a mistake.” However, Penn, who moderated a panel entitled “Where have all the workers gone?” at the recent UBS European Conference, adds, “But if it does nothing and inflation continues to move higher, that raises its own credibility issues.”
Arend Kapteyn, Global Head of Economics and Strategy Research at UBS, points out that one factor potentially complicating matters for the Fed is that strong US demand for goods and relatively weaker demand for services has not produced the expected results. “You would think that higher demand for goods would lead to more jobs in manufacturing than before but, instead, we’ve seen a decline in employment relative to the pre-pandemic trend,” he observes.
With US equity markets at or near record highs, and the US government handing out stimulus cheques in response to the pandemic, one theory is that many former workers have decided that they can afford to retire. This is partly supported by the data, which shows that retirement rates last year tripled compared with 2019. “There are certainly some people over the age of 60 who have savings, some shares and a stimulus cheque in their pocket, and they’ve said, ‘That’s it, I’m all done’,” says Penn. “But that really only applies to those higher up the income ladder.”
Europe, by contrast, has seen a much smoother return to work than the US – a fact that Kapteyn attributes in part to the region’s heavier reliance on furlough schemes, rather than cash hand-outs. “Europe's reliance on furlough has been an incredible success because it’s had much lower friction costs, and much lower reabsorption costs than having to rehire people,” he says. “Europe is now ahead of the US in reversing its pandemic employment losses”.
Jonathan Pingle, UBS’s Chief US Economist, argues that at least three factors point to people in the US gradually rejoining the ranks of those either in employment or looking for work – a trend that would take pressure off wages and, by extension, inflation.
First, surveys indicate that many remain hesitant to rejoin the jobs market owing to the virus. As the pandemic abates, that should ease concerns among some about re-integrating into the workforce. Further, right now, a higher share of people among the labour force say they actually do want a job than did just before Covid-19.
A significant percentage of those who exited the jobs market are women (and some men) with children, who may be disproportionately affected by Covid-19 because of the closure of schools and the relative lack of childcare alternatives in the US compared with Europe. As things gradually return to normal, so the argument goes, more parents will feel able to rejoin the world of work.
Third and, perhaps, most important, is the fact that nearly two-thirds of those who exited the jobs market during the pandemic are aged between 20 and 54. Combined with the end of stimulus checks and other pandemic-related benefits, that implies that retirement is unlikely to be a viable choice for the great majority. Pingle, who sat on the “Where have all the workers gone?” panel at the 2021 UBS European Conference, observes: “You’ve got abundant job openings across almost all sectors, so it’s very difficult to think that this set of people in prime working age is just going to stay out of the labour force permanently”.
This likely repair of the US jobs market over the next six to 12 months faces several risks, such as the sudden appearance of another variant of the coronavirus, which could disrupt economic recovery and send people back into self-isolation. There is also a possibility that the effect of benefits payments, including the continuation of child tax credit and the expansion of earned income tax credit, could be deeper than expected.
Pingle even argues that the Covid-19 downturn may have masked structural changes, such as technology leading to a shift in demand for skill sets. “It’s not impossible that some of the workers who moved out of the labour force are just not needed any more,” he says.
Yet Simon Penn says that previous downturns have typically been followed by a normalisation in the jobs participation rate, and that this time is unlikely to be any different. “This is exactly what happened after the 2008 financial crisis,” he says. “As the economy recovers, as time passes and as people regain their confidence, the historical evidence shows that people do gradually return to work.”
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