Editor's note: Tatiana Bailey is director of the University of Colorado at Colorado Springs Economic Forum. This is the first in a two-part series.
Virtually all the questions I have been asked in presentations and meetings over the past year relate to the labor market.
In particular, why is there such an acute labor shortage and when is it going to get better? Many (grumpy) individuals tell me that we need a recession and that will lure those lazy workers back into the labor force. If only it were that simple.
Economists including myself have been talking about labor challenges well before the pandemic, as we know that the U.S. is facing significant labor-related headwinds and that things will only get worse in coming years. There is a host of rather complicated reasons for this, but a primary and relatively simple one is demographics. In fact, economists and demographers agree that many shifts in humanity can be reverse-engineered to demographics, or how the population changes in its size, age, racial/ethnic composition and educational status (among other factors).
This is intuitive to me because what happens in society is often a result of how the people within that society are changing. In the case of most developed economies, the demographics have been changing for a while. In Europe, those demographic changes with fewer children and more retirees have translated into low-growth economies.
For decades, the population in the U.S. continued to grow and as such so did our economy. But that is no longer the case. Let’s start with where we are now.
The recent employment report from the Bureau of Labor Statistics had some sorely needed and welcomed good news that the U.S. added 431,000 jobs in March and added another 95,000 jobs in its revisions for the prior two months. The unemployment rate now stands at 3.6%, well below the “natural” rate of unemployment, which most economists consider to be around 4.0%.
This is good news all around, and yet employers in every survey are still saying they are starved for labor. Consumers have also come to expect delays, particularly in the service industry, because just about every business is short staffed. Yet, with over half a million more people employed in the past few months, we have started to chip away at the acute labor shortages that are occurring in just about every industry.
However, if we do some simple math, we can get a true picture of where we are in the calculus of maximum employment.
The most recent data from the end of February shows the U.S. still has a record 11.3 million job openings. Two weeks later, in mid-March, the report from the BLS showed the U.S. had 6 million unemployed people. That means that we have 5.3 million more jobs than we have unemployed people. That’s a significant number of open positions with little to no prospect of getting filled. But we all know and hear about all the workers on the sidelines who have “excess” savings and who have chosen not to work. The theory is that if we could just lure those workers back and increase our nation’s labor participation rate, all would be well.
Let’s look at labor participation rates. In March, that rate was at 62.4% compared to pre-pandemic, in March of 2019, when the rate was 63.0%. That doesn’t sound like a big difference, but it is, as David Kelly from JPMorgan states in a recent post. This decline in the participation rate represents 1.6 million workers.
What if all those workers came back into the labor force? Even if we added all those workers to the 5.3 million more jobs than we have people, we would still be short 4.4 million workers. This is exacerbated by the fact that the quit rate is so high, with 787,000 people who left their jobs in March. Turnover is costly and our labor bucket is leaky.
It is also important to remember that the labor participation rate includes all workers ages 16 and up, which means that the rate includes even 80- and 90-year old’s, most of who are not working (unless they are Warren Buffet). That means that retirees are included, and the U.S. currently has 1 in 7 Americans who are ages 65+; that will increase to 1 in 5 Americans by 2030. So the aging of our population is the main reason the labor participation rate is so much lower than it was even in 2007 (at roughly 66%).
If we look at labor participation rates for only ages 16 to 64, which I consider to be true working-age people, the rate has not changed at all from March of 2019 to March of this year (at 76.3%). My main takeaway is that the labor challenges we are experiencing are not due to young, working-aged people who are choosing not to work.
Another important demographic consideration is that in the 1970s, the fertility rates in the U.S. went way down, and it continues to fall similar to what has already happened in Europe and Japan. The result is that we now have fewer children under 18 than we had 10 years ago. So the future pipeline of workers isn’t improving either.
Our inflow of immigrants has also dramatically declined. We used to have about 1 million immigrants coming into our country per year a decade ago. We are now down to about 360,000 per year due to immigration restrictions that started in 2017. The pandemic further restricted in-migration.
Immigrants typically take the highest- and lowest-skilled jobs in our country and are both sorely needed and an integral part of our economy’s historical success. Increasing our international in-migration to, say, 2 million legal workers per year could make a real dent in the 11.3 million job openings we have and could perhaps begin to close the gap of roughly 5 million workers that the U.S. currently has.
As an aside, this makes me think about the current Ukrainian crisis and how major global relief organizations are saying that Europe is again being inundated with refugees. Also, that resources are now being shifted to the Ukrainian crisis and away from other global crises. On the other side of the Atlantic, U.S. economic growth is constrained by the lack of workers. Lawful refugee and immigrant placement is not my expertise and is surely complicated both legally and logistically, but does policy for immigration of refugees and other immigrants represent an opportunity to both do the right thing and help our economy?
So, while I am chipper on the mornings that the jobs reports are strong, I do the math and remember that labor shortages will be with us for a while. And that plays into my own calculus around the probability of the “R” word — recession, which I’ll talk more about in the next article.