Labor market investigation: A missing persons case

Summary

Among the many unique aspects of the pandemic economy is the gaping difference between the demand for workers and the availability of labor. The labor force participation rate has been range-bound for more than a year despite expectations for an improvement this fall as enhanced unemployment benefits ended, schools reopened and herd immunity for COVID neared. In this note, we look at the distribution of "missing" workers to better understand whether temporary factors keeping workers away are merely lasting a little longer, or whether exits are likely to be long-lasting.

Every major group we look at has seen a drop in labor force participation since the pandemic hit more than a year and a half ago, illustrating the complexity of reasons workers remain on the sidelines. However, two groups stand out in their outsized contributions to exits: seniors (ages 65+) and women in their prime working years (ages 25-54).

Seniors account for nearly one-quarter of missing workers, despite comprising just 7% of the workforce in 2019. While workers can "un-retire," the probability of retirees transitioning back to employment has historically been only about one-fifth as large as workers out of the labor force for other reasons. The swath of seniors exiting the labor force since COVID is therefore likely to remain a major impediment to hiring efforts beyond the course of the pandemic, although it remains to be seen if COVID will leave a lasting mark on the timing of future retirements.

A better bet for employers currently struggling to find workers could be prime-age women. Women ages 25-54 make up the largest group of missing workers. The solid rise in participation among this group prior to COVID and higher transition rates to employment than retirees offer ground for optimism that prime-age women are still likely to be a key source of a rebound in the labor supply. However, childcare challenges are likely to persist through the winter months, and likely longer for mothers with very young children as daycare centers struggle to hire.

We expect workers of all ages to step back into the labor force in the months ahead as policy support diminishes, excess savings are spent down and the sirens of higher pay call. However, an unwinding of the forces keeping workers out of the labor force will not occur overnight, and with a sizable chunk of exits concentrated among retirees, the jobs market is set to remain tight. As employers continue to have difficulty hiring, wage pressures are likely to remain elevated and full employment is nearer insight.

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