Christopher D. Burns, CFA®, CPA, CFP®

Vice President, Investment Strategist, Senior Fixed Income Analyst

The Long & Short of the Labor Shortage

There has been no shortage of explanations offered for the United States’ current labor shortage. In this article, we will play judge and jury on several of the common narratives about the labor market. Are people staying home due to more generous government support programs? Are previously-working moms staying home due to childcare disruptions? Are retirements upending the labor market? The public discourse on these issues is tinged with partisanship. We will do our best to give these questions a neutral hearing and render verdicts consistent with the available evidence.

Claim #1: The United States has a labor shortage

Before we begin, we should start with the premise. Is there actually a labor shortage? Shortages occur when demand outstrips supply. We gain a sense of labor demand through the Job Opening and Labor Turnover Survey (JOLTS). We can examine labor supply by reviewing the labor force data in the Household Survey. Both surveys are done by the Bureau of Labor Statistics.

The evidence:

We’ve constructed the ratio of Job Openings (demand) to Unemployed Persons (supply). It shows that as of August (the latest available data), there were 10.4 million job openings and 8.4 million unemployed, a ratio of 1.25 jobs per unemployed person. This ranks in the 99th percentile over the past 20 years and is 2.3 standard deviations away from the mean of 0.6 job openings per unemployed person.

The verdict:

Guilty. There certainly appears to be evidence of labor shortages.

Claim #2: Workers aren’t returning to the labor market because of new government support

Federal & state governments expanded the duration & quantity of unemployment benefits and relaxed the qualification requirements during the pandemic. Initially, the additional Federal benefit was $600 per week from April to July 2020, then was reinstituted in September 2020 at $300 per week. The $300 supplement expired after Labor Day, September 6, 2021. Economists estimated that around 70% of workers receiving the $600 supplement received more than the level of compensation they made while working, so the benefits may have served as a disincentive to rejoining the labor force and sacrificing income.

The evidence:

We got a natural experiment in June and July, 2021 when 26 states opted to end their participation in expanded unemployment benefits early. For the other 25 states and D.C., expanded benefits expired September 6.

The verdict:

Hung jury. We find evidence on both sides of this argument but consider it too early to render a verdict. The states that ended benefits early have done marginally better at reducing the number of unemployed people and increasing employment and the labor force since June, but there is not a dramatic difference in these measures from before-and-after expanded benefits ceased. There are also important differences in employment across these groups of states which may offer more robust explanations for the differences. One other complicating factor may be accumulated savings from pandemic benefit programs that allow workers to stay out of the labor force longer, thus creating a lag in labor market impacts.

Claim #3: Women are disproportionately not working because of childcare disruptions

The 2020-2021 school year was an exceptionally difficult period for working families. Many schools converted to hybrid learning models and reduced their in-person courses. In addition, childcare facilities were impacted by COVID regulations. As a result, it has been argued that a portion of the labor shortage is attributable to mothers leaving the workforce to handle childcare duties resulting from the pandemic.

The evidence:

Schools are back in session this year, but we still observe that the largest decline in employment from February 2020 – September 2021 has been among women aged 25-34, precisely the group you would expect to have the most significant childcare responsibilities. On a percentage basis, employment among men aged 20-24 has fallen the most, followed by women aged 20-24 and women aged 25-34.

 

The verdict:

Guilty. A preponderance of the evidence, both in the employment numbers and in qualitative data like the Federal Reserve Beige Book, show that childcare responsibilities do seem to be holding back employment among women.

Claim #4: Retirements are the cause of the shortages

Part of the labor market issue may not be reflected in the unemployment rate, which has fallen from 14.8% in April 2020 to 4.8% as of September 2021, but in the labor force participation rate. The unemployment rate only reflects people actively seeking work. The labor force participation rate captures the number of people working or seeking work as a percentage of the working-age population. The labor force participation rate fell from 63.3% in February 2020 to a low of 60.2% in April 2020 and has been slow to recover, registering just 61.1% as of September 2021. It has been argued that part of this decline, and the resulting labor shortages, has been caused by people leaving the labor force to retire.

The evidence:

The Philadelphia Fed produces quarterly reports on the reasons for nonparticipation in the labor market. The data shows that 76% of the increase in nonparticipation is the result of retirements. The remainder is made up of people who want a job but aren’t actively looking. People out of the labor market due to disability or due to being in school have fallen since before the pandemic.

The verdict:

Guilty. This is a worrisome piece of evidence. Unlike people who have left the labor force to go to school, or who just haven’t looked for a job recently, retirees have a much lower propensity to rejoin the labor market. This means that at least a portion of our labor market shortages are unlikely to abate anytime soon. Taken together with unemployment, retirements appear to account for roughly 48% of the overall reduction in employment levels since February 2020.

Conclusion

It appears to us that there are elements of truth to several of the common narratives, but that no single explanation sufficiently explains the current labor shortages. The good news is that labor demand remains strong.  Supplemental unemployment programs have expired and schools and childcare facilities are largely reopened, so we may see an additional rebound in labor supply. However, with the high level of retirements, we expect for labor market tightness to continue and for a full employment recovery to be many years away, if ever. This will have important implications for earnings, economic growth and inflation and we will adjust our investment strategies as needed. Please feel free to contact a dedicated member of your client centric team if you would like to discuss these ideas in greater detail.

Sources:

Bureau of Labor Statistics

Ganong, Noel, and Vavra (2020)

Fujita, Philadelphia Fed