Around half of the four million decline in the labour force over the past year reflects a wave of early retirements which is likely to be irreversible. The smaller 2.3 million drop in prime-age participation is almost entirely due to pandemic-related restrictions, however, and should eventually be reversed. But their eventual return to the labour force might not prevent an acceleration in wage and price pressures.
- Around half of the four million decline in the labour force over the past year reflects a wave of early retirements which is likely to be irreversible. The smaller 2.3 million drop in prime-age participation is almost entirely due to pandemic-related restrictions, however, and should eventually be reversed. But their eventual return to the labour force might not prevent an acceleration in wage and price pressures.
- A unique feature of the pandemic has been the flood of people dropping out of the labour force entirely. When the participation rate declined in the aftermath of the financial crisis, the labour force continued to expand, it just didn’t keep pace with population growth. Whether the recent dropouts re-enter workforce – as they eventually did post-GFC – is key to how much slack remains in the labour market.
- The household survey shows that the 1.3 million rise in the adult population and the 7.8 million drop in employment in the fourth quarter of 2020 from a year ago has translated into roughly a 50/50 split of higher unemployment (+4.8 million) and lower labour force (-4.2 million). (The drop in employment is smaller than the 10 million shortfall in non-farm payrolls, in part because the household survey incorrectly records some furloughed workers as employed, but on temporary layoff.)
- The breakdown shows that around half of those who dropped out of the labour force simply retired. (See Table 1.) With the wave of Baby Boomers reaching retirement age, that is not a huge surprise, but the 2.4 million retirements in 2020 far outstrips the 0.8 million retirees in 2019. It seems unlikely that those early retirees will be tempted back into the labour force as employment growth heats up.
- Focusing instead on the prime-age population, aged between 25 and 54, reveals a much smaller 2.3 million decline in the labour force. Most of that drop is more obviously linked to pandemic-related restrictions. 1.4 million of those report that they want a job but have not been actively searching for employment, so are not classified as unemployed. We cannot know for sure, but most of the increase is likely to be among those who previously worked in sectors crushed by the pandemic with little prospect of re-employment until restrictions are lifted. There has also been a 700,000 uptick in the number out of the labour force because they are looking after family – probably reflecting school closures. An additional 300,000 cited some “other” reason. That could reflect many factors, including those who are vulnerable and choose not to work because of the health risks.
- The upshot is most of the decline in prime-age participation should be reversible. There are few signs of permanent scarring. Notably, there has not (yet) been a rise in those out of work due to disability or illness – which was a big factor in the post-GFC shortfall in participation, linked to the opioid crisis. The far bigger uncertainty to our mind is whether the pandemic and policy response has disrupted the link between labour market slack and wage growth. (See Chart 1.) If wage growth picks up before the labour market is back to full health, the Fed would be forced to choose which of its goals to prioritise.
Table 1: Labour Force Status
Chart 1: Prime Age Employment-Pop. Ratio & Wages
Sources: Refinitiv, Atlanta Fed
Michael Pearce, Senior US Economist, +1 646 583 3163, firstname.lastname@example.org