Covid Isn't to Blame for the Worker Shortage

The Covid crisis has had a major impact on the U.S. job market. In the early days of the pandemic, millions of people lost their jobs, causing the unemployment rate to jump from 3.5% in February 2020 to 14.7% two months later. However, jobs have since started to come back. Not all workers have returned to their jobs, though. A number of factors – including fears of contracting and spreading Covid, lingering symptoms, financial assistance from the government, and lost access to child care – have kept people from returning to work.‍

January 27, 2023

6 minutes

minute read

Some customer service agents have moved on to more lucrative pastures during the pandemic, but a lot of America's "missing workers" might never be coming back. The shift could leave businesses struggling to find workers in the years ahead, and ultimately slow the pace at which the economy can grow.

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The Covid crisis has had a major impact on the U.S. job market. In the early days of the pandemic, millions of people lost their jobs, causing the unemployment rate to jump from 3.5% in February 2020 to 14.7% two months later. However, jobs have since started to come back. Not all workers have returned to their jobs, though. A number of factors – including fears of contracting and spreading Covid, lingering symptoms, financial assistance from the government, and lost access to child care – have kept people from returning to work.

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Even now, with economists warning that the country is on the brink of recession, America seems to have a shortage of workers. The Labor Department recorded 10.5 million job openings at the end of November, which is 1.7 unfilled jobs for each person counted as unemployed. The highest that ratio got in the 20 years of available data before the pandemic was 1.2.

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There are still plenty of people waiting on the sidelines. According to the Labor Department, the labor-force participation rate was a seasonally adjusted 62.3% in December. That compared with 63.3% in February 2020. If the participation rate was back at the prepandemic level, with the unemployment rate remaining at December’s 3.5%, there would be over 2.5 million additional people counted as employed.

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However, economists Ayşegül Şahin and Bart Hobijn argue that such calculations ignore the long-term trend of declining labor-force participation since 2000. They estimate that, considering the expected trend lower in participation, the economy was just 810,000 jobs short of where it might have been absent the pandemic as of October. Given the employment gains in the months since then, the figure would be smaller now.

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One important factor that is causing the trend of lower participation rates is that more baby boomers are reaching retirement age. With the median Boomer turning 66 last year, they are now in an age bracket where there is a significant drop in participation, as pointed out by Dr. Şahin. Indeed, in December the participation rate among 66-year-olds was about 38%. This is compared with 64-year-olds, who, despite being just two years younger, had a participation rate of about 46%.

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There has been a decline in participation among younger men with less education, even before the pandemic struck. Washington University in St. Louis economists Dain Lee, Jinhyeok Park and Yongseok Shin calculate that the largest contributor to the overall drop in participation since the prepandemic period has been young men without a four-year college degree.

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Economists have been trying to figure out why the workforce is shrinking for a while. One theory, which precedes pandemic, was that videogaming was cutting into young men’s willingness to work. More recent research suggests that status might be a factor, with a widening wage gap between people with and without four-year college degrees leading some less-educated men to be less willing to join the workforce.

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The absence of young people from the workforce could pose a protracted problem because people who don't work when they are young often don't work as they become older. "That is a challenge not only for the individual, but society," Washington University's Dr. Shin says.

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If fewer people enter the workforce, the job market won't be able to grow quickly without driving the unemployment rate down even further. This could lead to higher wages and inflation. Without more immigration or an increase in worker productivity, the economy's ability to grow could be limited, resulting in a less prosperous future.
Even so, demographics don't always dictate the labor market. Japan is a prime example of an aging country, with median age hitting 49 last year, according to United Nations projections. In contrast, the median age in the United States is 38. Yet, Japan's labor-force participation rate has been climbing over the past decade and hit its highest level since 1999 last year. This is due to increasing female workplace participation.

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It is possible that something similar could happen in the United States, where the female labor-force participation rate among women aged 25 to 54 is now below Japan's. University of Michigan economist Betsey Stevenson points out that in the United States, participation among prime-age college-educated women was on an upswing prior to the pandemic. Perhaps that was the beginning of a new trend that could help improve overall participation in the years ahead. Meanwhile, the recent increase in wage growth for lower-paid workers relative to higher-paid ones might over time help draw more young men without college degrees into the workforce.

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We will only know if the economy keeps growing if we see no recession this year. If a recession does come, one of its most unwelcome effects could be sending even more workers into the ranks of the unemployed.