Digging into the U.S. Labor Shortage

The June jobs report showed that total nonfarm payroll employment increased 850,000 after rising 583,000 in May. [1] Yet the unemployment rate increased slightly to 5.9% from 5.8% in May. Further, a labor shortage continues and wages are rising.

While some economists and the Fed says it is due to transitory factors such as Covid-19 fears, childcare constraints and enhanced unemployment benefits, others see more significant and longer-term factors: limited international migration, increased number of people retiring early, and mismatches in the labor market.

All this means investors will have to watch for continued wage pressures and increased inflation.

There is a 7.5 million shortfall in employment from pre-pandemic levels and 3.5 million people have left the labor force entirely. [2] In contrast, there is a bounty of jobs across sectors, not just the leisure and hospitality sector, and companies are having trouble filling open positions. Some economists including Fed Chair Jerome Powell say it is just a matter of time. They say as headwind factors diminish, shortages and pay pressures will ease back.

Short-Term Factors:

The highly contagious Delta variant has made Asia and Europe walk back on reopening plans and cases are increasing in the U.S., but a poll by Civiqs on July 4th shows that only 9% of the U.S. population is “extremely concerned” about a coronavirus outbreak in their local area and only 20% are “moderately concerned”. [3] COVID-19 cases dropped to a seven-day average of about 12,000 during the last week of March, the lowest since March 2020. [4] Forty-seven percent of the U.S. population has been fully vaccinated. And most states have lifted all pandemic-related restrictions. [5]

Children learning remotely has of course been a challenge for working parents, but the participation rate data suggest that has not translated into a big negative impact on the labor market. [6] And hopefully schools’ plans to open with all students returning to campuses in the fall will come to fruition, which will help working parents get back to work or increase their hours.

Another event in the fall will be the end of the enhanced unemployment benefits on September 4th. About half the states have said they will stop the enhanced unemployment benefits before then, and many started doing so in June. The result thus far is mixed. Goldman Sachs noted that ongoing jobless claims dropped more rapidly in those states last month. Yet Homebase, which provides employee scheduling software, said employment actually grew 1.7% more slowly in those states. [7]

Persistent Factors:

While these stumbling blocks may have an end in sight, there are more vexing, longer-lasting factors linked to Covid-19 that help explain the labor gap. Regular international migration has slowed, a shortfall of perhaps half a million in 2020. [8] Employers in tourist areas that usually rely on temporary workers from abroad during the surge in seasonal demand say travel restrictions, closed consulates and a limited pool of H-2B seasonal visas are making it even harder to resume operations. [9] With travel restrictions still in place in many parts of the world, we can expect fewer international workers in the U.S. this year and perhaps next.

More significant has been the sharp increase in retirements during the pandemic, which accounts for 2.0 million of the 3.5 million of the labor force reduction. Retiree data tracked by the Dallas Fed show that, following a big initial surge in the early stages of the pandemic, retirements have settled on a new, higher trend. Relative to the pre-pandemic trend, retirees account for an additional 0.6% of the population. [10]

The reduction in the size of the labor force suggests many people aren't coming back. This trend not only reduces the labor force, it also impacts the broader economic recovery because retirees typically tend to limit their spending, especially certain populations.

A study by the Pew Research Center found that the share of Americans born between 1946 and 1964 with just a high school diploma who are retired rose two percentage points from the prior February, double the proportion among those with a college degree. Further, the share of the Hispanic population in this age group who are retired jumped four percentage points, compared with one-point increases for white and Black boomers. [11]

Finally, experts suspect there is a skills mismatch in terms of matching applicants to open positions, which could take months, if not years, to work through. In the early stages of the recovery, most job growth came from rehiring temporarily laid off workers, but most of the remaining unemployed are those that were permanently laid off. According to a McKinsey report, the pandemic has accelerated trends in remote work, e-commerce and automation, with up to 25% more workers estimated to potentially needing to switch occupations. More than half of displaced low-wage workers may need to shift to occupations in higher wage brackets and require different skills to remain employed. [12]

With shortages likely to occur into 2022, experts predict sustained upward pressure on wages, with wage growth accelerating from 3% to well above 3.5% soon. That is one reason why they expect core inflation to remain at 2.5% or higher in 2022 and 2023, even as many of the transitory pressures pushing up inflation in recent months fade. [13]

The labor shortages do not mean that the pandemic will have a long-lasting impact on the labor market. As was the case after the 2008 crisis, unemployment rates will eventually fall back below 4% and participation rates will recover. Most importantly, the Fed appears to have that same view. Even if wage and price inflation are stronger than they are currently forecasting, slower progress on employment could convince the Fed to keep it monetary policy loose, with rates beginning to rise gradually in 2023. Many economists and investors are expecting the Fed to announce at the annual Jackson Hole symposium in August its plans to taper its $120 billion in monthly asset purchases.

We will see. If the resumption of school and the end to enhanced unemployment benefits don’t bring workers back, it will become clear that structural issues are at play and wage inflation is more persistent.

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[1] USA Today. “Economy added 850k jobs in June,” July 2, 2021.

[2] Capital Economics. “US Economics Focus, Labour shortages will last well into 2022,” June 29, 2021.

[3] Civiqs. “Coronavirus: Outbreak concern,” July 4, 2021. https://civiqs.com/results/coronavirus_concern

[4] Centers for Disease Control and Prevention. https://www.cdc.gov/coronavirus/2019-ncov/covid-data/covidview/index.html

[5] USA Today. “Economy added 850k jobs in June”.

[6] Capital Economics.

[7] USA Today. “Economy added 850k jobs in June”.

[8] Capital Economics. “US Economics Focus, Labour shortages will last well into 2022,” June 29, 2021.

[9] Politicio. “Businesses banking on a summer boom face foreign worker shortage,” July 4, 2021.

[10] Capital Economics.

[11] Pew Research Center. “The pace of Boomer retirements has accelerated in the past year,” Nov. 9, 2020.

[12] McKinsey Global Institute. “The future of work after COVID-19,” February 18, 2021.

[13] Capital Economics.

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