Three Years After Pandemic: What Has Changed In US Labor Markets?
The Bureau of Labor Statistics has just released its jobs report for February 2023.
It shows that payroll growth was 311,000, which remains very strong. Hourly earnings grew by 4.7 percent over the past year, but only about 3 percent in the past two months. On the household side, the unemployment rate ticked up slightly to 3.6 percent, as labor force participation picked up a bit. Overall, the data are consistent with a job market that has cooled just slightly but remains very strong – and one that Jay Powell and the Fed are determined to cool even more through interest rate hikes to bring down inflation.
But we are now three full years from the pre-pandemic peak of the labor market in February 2020, so we can take a longer view. During the pandemic, we experienced a very sharp labor market downturn, followed by a surprisingly swift recovery (fueled by a great deal of fiscal and monetary stimulus). But what has changed more persistently the in the US job market in the last 3 years?
Available payroll jobs – combining those filled and vacant – have risen by a robust 6.6 million in that time, or over 2 million a year. But more than half of these additional jobs – about 3.6 million – are now vacant. Indeed, the largest job market change since February 2020 is the growing difficulty employers have had filling jobs. A job vacancy rate of 4.5 percent in 2020 has growth to 6.5 percent in 2023 – down a bit from its peak last year of over 7 percent, but still very high by any standard. And the vacancy rate remains almost twice as high as the unemployment rate in the US, now at 3.6 percent – a situation that has been unprecedented in my 40 years as a professional economist.
Why are so many jobs vacant? The primary reason is that, while jobs have grown briskly in number, the labor force has been fairly flat – rising by about only 1.8 million since February 2020, as population growth slows and the rate of labor force participation has declined. An aging population – caused by Baby Boomers moving into their retirement years – and declining immigration in the past several years help explain this trend.
But the rate of labor force activity within age groups has also declined – even among those in their prime working years (ages 25-54). A number of factors likely explain this – such as ongoing worker concerns about the pandemic, the persistence of long Covid, burnout among some essential workers, and others simply appreciating their time at home and wanting to stay there (rather than return to the workplace).
And those in the labor force have been somewhat choosier about their work than in the past. The phenomenon known as the “Great Resignation” – when the quit rate of workers out of jobs soared – has mostly settled down. But there seems to still be a greater reluctance of those in the labor force to seek or accept certain categories of jobs – especially low-wage jobs in leisure and hospitality or stressful jobs in education, health care or elder care. An absence of appropriately skilled workers to fill certain occupations – from technical jobs in IT or manufacturing to long-haul truckers – contributes to job vacancies. And, as the work generated by the federal infrastructure and chips bills begins to take off, vacancies in construction or technical manufacturing will likely rise as well.
The declining labor force participation of the last three years occurred on top of negative long-term trends already underway. Most notably, work effort among less-educated US men has been declining for decades – especially as good-paying blue-collar jobs have disappeared, and too few men have obtained the postsecondary education and training that would enable them to get better-paying jobs today. High rates of disability and incarceration constitute long-term barriers to work for many, especially Black men. And women’s labor force growth has flattened out, given how little public support we provide for child care expenses and paid family leave.
Does the recent rise in job vacancies constitute a “labor shortage”? Economists say “yes” when wages are rising rapidly in response to these high vacancy rates. That appears to have occurred for much of 2021 and 2022. Indeed, in the 3 years since the pandemic began, average hourly wages have risen by over 18 percent, or from $24 to over $28 per hour. Unfortunately for workers, inflation in the US has also been high – though “real wages” (i.e., adjusted for inflation using the Personal Consumption Expenditures deflator) have risen by nearly 5 percent since 2020.
The rise in wages among our least-educated and lowest-wage workers has exceeded that for college grads, giving them even higher earnings growth than this average rate. In many ways, this is a welcome development – the first time in many years that earnings inequality has actually declined.
One puzzling fact remains about the tight labor market: while the job vacancy rate has stayed very high, wage growth has fallen in the past several months. In fact, hour wage growth has averaged only about 3 percent (on an annualized basis) in the most recent 2-3 months. In periods of low inflation, this would still be regarded as a robust rate of earnings growth, which is needed – given the imbalances between jobs (labor demand) and workers (labor supply) in the market. In our current situation, with higher inflation, such wage growth looks less robust.
Why has wage growth declined while vacancies stay high? A declining quit rate over this same period (from about 3 to 2.5 percent each month) suggests that those in the labor force are perhaps now feeling a little less dissatisfaction with their jobs, or more pressure to accept and keep what they can get – as their pandemic savings (from low consumer spending and generous government relief programs) dissipate over time. And, though vacancies remain high, perhaps employers are learning to live with them, and are feeling less desperate to fill these jobs by raising worker compensation (maintaining their profits with higher prices as well as sales volume).
And one more question remains: will the tightness of the job market and high rate of vacancies persist? The Fed’s efforts to reduce consumer and labor demand to fight inflation will no doubt weaken job availability, and the further dwindling of pandemic savings may cause more workers to accept lower-wage jobs. But other trends – like the retirements of Baby Boomers and the withdrawal of less-skilled men from the workforce – will likely continue.
The bottom line: we will have fewer available workers to fill the many jobs employers are creating. We need to bring more people back to the labor force; and we especially need to produce more teachers, health aides, child care providers, skilled welders and IT workers. A number of strategies can help get us there – for one thing, better job training and workforce development (both at community colleges and other training providers or through work-based learning options like apprenticeship) should be a top priority; and more immigration, child care assistance for working parents, and wage subsidies for low-wage workers (like an expansion of the Earned Income Tax Credit) would all help. More assistance for those facing specific barriers to work – such as potential workers with criminal records or disabilities – are important too. Tight labor markets are making employers more open to hiring from these groups, once their concerns about work readiness can be met.
We should take advantage of tight labor markets while we have them, and make growing the labor force a top priority.
