The Missing Workers, Redux

Eakinomics: The Missing Workers, Redux A Bloomberg headline reads, “Americans Are Working Less Than They Were Before the Pandemic” and the piece begins “Americans are spending less time working than they did before the pandemic. That’s good for many of them, but it’s not necessarily great for the inflation-fighting Federal Reserve.” Other things being the same, fewer workers and/or fewer hours per worker translates into a tighter labor market. The Federal Reserve has highlighted labor costs as the primary input to services in the economy, so a tight labor market and wage inflation serve to keep services-price inflation (the primary inflation problem at the moment) elevated. So where is the missing labor supply? “Explaining” the missing workers is a cottage industry among labor economists. The dual puzzles are that labor force participation and hours of work remain below pre-pandemic levels. In February 2020, the labor force participation rate stood at 63.3 percent; in the same month in 2023, it remained at 62.5 percent. At the same time, average weekly hours have declined from 37.5 to 36.9. The most recent attempt to disentangle the sources of these declines is “Where Are the Missing Workers?” by Katherine Abraham and Lea Rendell. The basic conclusion is that about 40 percent (roughly 1 million workers) of the decline in labor force participation is simply a continuation of pre-pandemic trends. As the labor force ages, more people are retiring. Yet at every age, the population is becoming more educated and more educated people are more likely to be working. As for the remaining 60 percent (1.4 million workers), the authors rule out cash payments to households in 2020 and 2021 and fear of catching COVID as significant contributors to the decline. There is some suggestion that long-COVID symptoms that might contribute, although the magnitude is hard to nail down. (COVID mortality, excess all-cause mortality, reduced birth rates, and lower levels of immigration have reduced the size of the population but are not a source of reduced willingness to supply labor.) Practically by process of elimination, the authors are left with: “A reevaluation of the balance between work and other activities also may be part of the explanation.” This is consistent with the decline in hours, which otherwise defies explanation. One of the interesting aspects of the paper is that the authors did not even consider child care challenges as an explanation of the reduced labor supply. This is because a consistent finding in the recent research is there is no relationship between the labor supply decline – even among women – and access to child care. Despite this, one hears repeated calls for large-scale government intervention in child care to alleviate the labor shortage. From the perspective of the Federal Reserve, the basic lesson is that there will be no quick policy fix to the reduced labor supply. Instead, the Fed will have to calibrate its anti-inflation policies to the new labor market realities.