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This is when the labor shortage will end

The economy would be booming, if only businesses could find all the workers they need. Employers report 9.3 million unfilled jobs, the most on record. But millions of workers remain on the sidelines, holding back growth and delaying the return to a normal, pre-pandemic economy.

Republicans argue that generous jobless benefits are more appealing than a paycheck, and 25 states with Republican governors have cut off those payments ahead of schedule. But this argument is overblown and there are other important reasons some workers are hesitant to return. Understanding the factors slowing the return of jobs and workers helps determine when the mismatch is likely to end, and what comes next.

Oxford Economics identifies four factors keeping workers on the sidelines: lingering fear of the coronavirus, unusual child care obligations, early retirements and the Republican bugaboo, federal jobless benefits. The net result is a persistent drop in the portion of adult Americans working or looking for work, as the chart below shows. All of these forces will fade in coming months, but at different rates and for different reasons.

Source: Bureau of Labor Statistics, St. Louis Federal Reserve
Source: Bureau of Labor Statistics, St. Louis Federal Reserve

Americans are clearly getting more comfortable going out, but some are still concerned about getting sick. A recent Ipsos-Axios poll found 44% of Americans are still social distancing, which includes staying home. Census Bureau surveys suggest nearly 4 million adults aren’t working mainly because they’re still worried about the coronavirus. That’s roughly half of the jobs lost since the pandemic began.

There are 1.4 million fewer mothers working than before the pandemic. Much of that shortfall is likely due to disrupted schooling and the need to be home with kids. As for older workers, Oxford Economics estimates that 2.5 million have retired since the start of the pandemic, about twice the normal rate. Finally, those jobless benefits. It would be rational for some workers to choose jobless aid over a paycheck if it amounted to more. But a recent study by the Federal Reserve Bank of San Francisco found that only one worker out of seven is likely to turn down a job offer because of the current $300 per week federal benefit.

Once these anomalies subside, the labor shortage, to the extent there is one, should end. The easiest of these to predict is the federal jobless benefit, which expires during the first week of September and is not likely to be renewed. If that’s a disincentive for some people to work, it won’t last much longer.

Many schools will be back to normal in the fall, though some shutdowns could still happen if there are pockets of coronavirus resurgence. There could also be a shortage of child care providers for working parents, since some of those businesses have shut down. So it may take longer to resolve the child-care demands keeping some parents out of the labor force.

Most retirees will stay that way. The stock-market boom of the last 12 years, abetted by a stock-friendly Federal Reserve, has cushioned retirement accounts. Surging real-estate values have boosted home equity. Early retirees may see no reason to work again even when the coast is fully clear. The aging of the U.S. labor force is actually a semiserious problem that could exacerbate labor shortages indefinitely. The long-term trend in the portion of Americans participating in the labor force is a slow decline.

Safety concerns relating to the coronavirus depend entirely on the vaccination rate, which may never top 75%, given staunch vaccine resistance in some areas. While the vaccinated may return to normal routines by fall, coronavirus will continue to be a stealthy killer. An offsetting trend is improving productivity at many firms relying more heavily on technology and innovation to overcome labor difficulties. It’s notable that GDP is nearly back to pre-pandemic levels, even with 7.6 million fewer jobs. Producers are doing more with less.

The other thing that draws workers, of course, is higher pay. There’s clearly some adjustment taking place, with workers seeming to gain leverage now that companies are desperate to hire them. Record numbers of workers are quitting their jobs, not because they don’t want to work but most likely because other employers are poaching them with higher pay and better benefits. But pay gains aren’t exactly off-the-charts. The employment cost index, a leading measure of pay, rose 2.8% at the end of 2020 and 3% in the first quarter of 2021. The average gain in 2019 was 3%. The good news for workers is that wage gains seem to have more room to run.

Source: Bureau of Labor Statistics, St. Louis Federal Reserve
Source: Bureau of Labor Statistics, St. Louis Federal Reserve

Put it all together, and workers should be streaming off the sidelines by fall. Labor force participation probably won’t retouch pre-pandemic levels, because of the aging U.S. population, but it will likely reach a new, if lower, peak by the end of 2022. By the time of the midterm elections in November 2022, Republican gripes about federal work disincentives will probably be a distant memory. We're more likely to be talking about full employment.

Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.

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