America’s “Labor Shortage” Is Not What It Seems
Blame Robust Labor Demand and Falling Population Growth, Not Lazy Workers
America’s labor markets have been transforming in myriad ways since the onset of the pandemic. Just about every important labor metric is out of whack: job quits, new hires, and job openings are all at record levels, while the number of jobless workers available to fill open positions is at historic lows. It all adds up to a frustrating shortage of workers for U.S. employers.
In the first part of a two-part article, I explain what’s causing the labor shortage and why it’s unlikely to ease anytime soon. In the next article, I look at how the shortage is shifting the balance of power from employers to workers, and what it means for wages and working conditions.
Author’s note: The second installment of this two-part article can be read in Dialogue & Discourse here.
Despite a dramatic employment recovery, the U.S. economy is suffering from its greatest labor shortage since World War II. Employers just cannot find enough workers. The business press has been quick to blame workers dropping out of the workforce, with many analysts condemning overly generous Covid relief programs. But careful analysis of recent labor market trends — and comparison with the recovery phase after other recent recessions — shows the shortage has more to do with unusually robust labor demand, along with declining population growth.
Let’s start with the basics: Our economy is well on its way back to pre-pandemic employment levels. Following a profound and abrupt downturn at the beginning of the pandemic prompting the loss of almost 15% of all jobs in just two months — over 22 million positions in all — the economy quickly began to rebuild as the nation reopened. With the addition of 200,000 jobs in December, we have now regained 84% of the jobs initially lost in the recession. Nonfarm payroll jobs now are just 3.6 million short of their prior peak (Fig. 1).
Sounds good. The problem is, we’re having trouble getting over the finish line because firms large and small can’t find the workers they need to run their businesses. More than 10.5 million available positions were unfilled at the end of November, according to the Bureau of Labor Statistics (BLS). Though down slightly from October, job openings over the past six months have been at their highest level in the 20 years the government has tracked this data (Fig. 2).
To be sure, some level of open positions is an essential feature of a growing economy, but the scale is harmful and suggests something deeper is wrong. About 6.7% of payroll positions are unfilled now compared to an average of 4.5% in 2019 before the pandemic. Were firms able to magically hire enough workers to reduce the job openings rate back to its 2019 level, that would put another four million people back to work — more than enough to restore the employment to its pre-recession peak.
Whither the Workers
Why all the unfilled jobs? Reason #1 is that most workers laid off during the pandemic are already back at work, thanks to the unusually fast economic bounce-back after the national shutdown in early 2020. As measured by GDP — the broadest measure of the nation’s economic activity — output topped its prior peak only one year after plunging 10% during the two-month recession. In turn, the job recovery also has been unusually rapid. Relative to other recent recessions, unemployment in the aftermath of the pandemic recession started much higher but fell much quicker. By year-end 2021, the unemployment rate was back below 4%. That compares with the long-term average of 6.2% over the past five decades. In other words, there are not many idle workers available for hire.
As of November, there were one-third fewer people considered unemployed (6.8 million) than there were open positions (10.6 million). That is, there are many more jobs open than people available to fill them (Fig. 4). This trend is quite unusual coming out of a recession. Witness how many more unemployed workers there were compared to the number of job openings in the years following the Dot-com recession (ending in late 2001) and especially after the Global Financial Crisis (GFC, ending in mid-2009).
This comparison of jobless workers to job openings is distorted by a key definitional issue — but only partly. BLS counts jobless people as “unemployed” only if they actively look for work. Otherwise, they’re considered to be out of the labor force, whether permanently (such as due to disability or retirement) or temporarily. Some people left the workforce during the pandemic to care for their children because they could not get childcare, while other former workers were just afraid to return to the workplace. And some have been physically sidelined by Covid. A new Brookings analysis estimates that “long Covid could account for 15% of the nation’s. . . unfilled jobs.”
But despite media stories to the contrary, the number of workers who left the force during the pandemic has not been usually high for this stage of the economic cycle, less than two years after the end of a recession. The size of the workforce typically dips during a recession, mainly because many laid-off workers become discouraged when they can’t find work, but the decline is only temporary and disappears when work prospects become more plentiful.
The Covid recession did see an unusually severe decline in labor force participation during the lockdown, but that drop was brief, and the labor force is now almost back to its former size. Former workers have rejoined the workforce while new workers have entered for the first time to replace those that left permanently. The number of people now in the labor force — that is, either working or looking for work — is down just 0.3% from its former peak (Fig 5). That’s the same drop as at an equivalent point in the last recession (19 months after the GFC ended), though the recovery was greater after the Dot-com recession.
Instead, the much bigger contrast between the pandemic recession and other recent recessions is the recovery in labor demand, which includes both filled and open positions. The economy usually takes several years after a recession to get back to the previous level of labor demand, but we’re already essentially back to the prior peak, only 19 months after the pandemic recession officially ended. At this point after the last two recessions, labor demand was down 3.1% and 6.3%, respectively.
The reason is clear: Driven by robust consumer spending — which accounts for more than two-thirds of the economy — GDP is already back above pre-recession levels, far faster than in other recent recessions. For that we can thank the massive spending funded by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and other Covid relief bills, which showered unprecedented funds onto households and businesses.
Thus, it is more the extreme labor demand, rather than a depleted workforce, causing the aggregate imbalance between job openings and available labor. And even if we include the remaining labor force dropouts in the equation, there would still be a historically large shortage of workers relative to the number of job openings.
A Nation of Quitters — and Job Seekers
There’s another big reason for the rising in job openings: Firms are losing their employees almost as fast as they can hire them. It’s being called the “Great Resignation” or the “Big Quit.” Tens of millions of Americans are leaving their jobs. Four and a half million workers quit their jobs in November alone, bringing the 2021 total to over 43 million — close to a third of all jobs that existed at the end of 2020.
To put that in context, the number of job quitters last month was 25% higher than at any point in the 20 years the government has been tracking this data (Fig. 6). Those jobs quitters amounted to over 3% of all workers, also a record; the prior high in any one month had been 2.4%, reached during 2019 and previously in 2000. So, very elevated levels.
But though these quits obviously bump up the number of job openings, most are transitory. The vast majority of job quitters — are going right back into new jobs. Which begs the question: Why are so many workers quitting their jobs? Because with labor demand so robust, they can seek out better opportunities, a topic I’ll explore further in the next article.
In fact, the number of new hires every month is likewise at all-time highs, excluding the extraordinary period immediately following the national shutdown last spring when firms were quickly rehiring their furloughed workers (the green line in Fig. 7). Indeed, the number of new hires far outpaces the number of people quitting jobs. But that’s always the case. Firms hire new workers to replace not only those who quit but also workers they fire, as well as workers who leave jobs due to retirement, disability, or death. Of course, firms also hire new workers when they are growing. So aggregate hires always far exceed the number of quits.
Over the three months through November 2021 (most recent data available), there have been 1.5 hires for every job quit (the blue line in Fig. 8). That amounts to an average of 2.2 million more workers hired each month than jobs quit. Seems like a lot, but the margin of hires over quits has been shrinking over time. The ratio of hires to quits peaked early in the GFC (mid-2009) and has been falling ever since, again except for the aberration immediately following the 2020 lockdown.
Why is the ratio declining? Different causes at different times, but a common factor both now and in 2018–19 preceding the pandemic is the shortage of workers available to hire when unemployment is so low (the orange line in Fig. 8). Elevated resignations only compound the difficulty firms face in recruiting and retaining the workers they need to run their businesses. Little wonder then that job growth has slowed over the past 18 months (Fig. 9).
Population Growth is Falling . . . and Reducing the Potential Workforce
One final factor is amplifying the labor shortage: falling population growth. The size of the labor force depends on two factors: the size of the population and the “labor force participation rate” — that is, the share of Americans either working or looking for work. Though edging up, the labor force participation rate remains slightly below pre-recession levels. But that’s pretty normal less than two years after a recession.
Declining population growth is a much more decisive factor. The U.S. population grew by just 0.35% for the year through July 2020, the lowest rate in the nation’s history thanks to historically low natural growth through childbirths as well as falling international immigration. Population growth is anticipated to remain minimal again this year, continuing a long-term decline that constrains the workforce’s size far more than the relatively modest declines in labor force participation.
To summarize: Consumer demand and GDP, fueled by extraordinary government spending, are back at record levels, while the labor force is not keeping up, primarily due to falling population growth. Meanwhile, workers are quitting their jobs at historical rates to take better and better-paying jobs. All of this adds up to unprecedented job shortages and a record number of open positions.
Employers Forced to Pay Up
What does this mean for employers desperate to hire more workers? Increasingly higher labor costs — and continued labor shortages. Wages are rising at their fastest pace in at least 20 years as employers bid up compensation to attract workers from other firms or back into the labor force. But as shown in the following graph, the higher compensation levels are doing little, if anything, to shrink the worker shortages (Fig. 10). Nor has the end of the augmented unemployment benefits funded through the CARES Act this summer. And yet job openings keep rising.
The implication is clear: Rising wages alone have not been enough to bring the labor force back to its prior level. Elevated labor shortages are likely to endure absent greater population growth, whether through greater immigration or higher fertility rates, or until labor demand eases.
In the next article, I do a deeper dive into this dynamic and the implications for workers and employers. Worker shortages are much higher in some sectors and occupations than in others. Spoiler alert: For the first time in a very long time, labor market conditions are especially favorable for workers with the lowest wages and the least-desirable working conditions.
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