What's Causing the Shortage in the U.S. Labor Market?: Fall 2021 Edition

2021 seems like it would be a better year than 2020. In spite of a Delta variant, we have safe and effective vaccines that have helped COVID become more manageable. One would think that as we get closer to the end of the pandemic, the economy would be getting significantly better. On the one hand, the recession did not last long. According to the National Bureau of Economic Research (NBER), the COVID recession lasted less than a quarter. On the other hand, the pandemic has really thrown the economy into disarray. A couple of weeks ago, I analyzed the main causes of the supply chain crisis that we are experiencing. 

Today, I would like to talk about a different abnormality occurring in the economy: a shortage in the labor market. As of the end of August, the Bureau of Labor Statistics (BLS) found that there were 10.4 million job openings. During the same time, there were 7.4 million unemployed (BLS). The labor shortage is perplexing because there are about three million more job postings than there are workers in the labor market. With more job postings than ever, you would think people would get back to work. Yet there seems to be a fair amount of reluctance to reenter the labor force. So what gives? I plan on covering the main theories as to why people are not entering the labor market. 

The COVID-19 pandemic. I understand that the counterproductive and harmful lockdowns caused businesses to be shut down, thereby creating a labor shortage. I can even understand how in 2020, people were afraid to take a job or go back into the office for fear of COVID. After all, the media was peddling fear throughout this pandemic (Sacerdote et al., 2020). But along came the vaccines in a record time previously thought impossible. In spite of the vaccine effectiveness, many people are still reeling from the aftermath of so much COVID fear. Ironically enough, a AP-NORC September 2020 poll found that the vaccinated are on average more fearful of COVID than the unvaccinated. This fear is so potent that I wrote a piece earlier this month about how this pandemic will come to an end when we as a society reach a point when we surmount fear and learn to manage risk once more. While hard to quantify, I think this residual fear will be in the background of the labor markets in the upcoming months.

Unemployment Insurance (UI) Benefits and Other Welfare Benefits. Unemployment benefits normally have been given to temporarily help those who lost their job. My concern at the beginning of the pandemic was that if the benefits were so large that they were either comparable to or exceeded one's previous salary, it could provide a disincentive for people to return to work. Given that the UI benefits delayed economic recovery during the Great Recession, I was naturally worried. The Mercatus Center found that expanded UI benefits have discouraged unemployment (Farren and Kaiser, 2021). Analysts at Goldman Sachs measured the main causes for the labor shortage. What was at the top of the list? As we see below, the answer to that question is "Unemployment benefits."

There was certainly a fair amount of politicking when the federal UI benefits expired. But let's keep a few things in mind. One is that only the expansion that expired. The expiration did not apply to base UI benefits. Two, there has been the addition of the expanded child tax credit. Three, there are other welfare benefits that are available, including food stamps and TANF. Four, the economic stimulus payments received in 2020 gave households extra disposable income to save. This extra cushion in cash, whether it be used for savings, consumption, or to pay off debt, reduces the incentives to return to the workplace. 

Lack of Childcare. With the increase of remote work and childcare closures, parents had to deal with juggling their childcare duties and remote work duties. Intuitively, one would think that this lack of childcare would make it harder for parents (especially mothers) to reenter the workforce. However, economists from the Council of Economic Advisers found that parents generally did not lower their work-hours during the pandemic (Furman et al., 2021). That finding suggests that lack of childcare played a negligible role in the labor market shortage throughout the pandemic. With more schools opening up, the "lack of childcare" explanation becomes even less plausible. 

Low Immigration. One of the unfortunate remnants from the Trump administration was the low levels of immigration. In spite of Trump's fears, immigration has not shown to lower employment. If anything, higher immigration levels can increase employment. As the libertarian Cato Institute brings up, we can raise legal immigration by addressing the administrative processing delays and the low immigration caps. The Left-leaning Vox also provides an argument for increasing immigration to help deal with the labor shortage.   

Early Retirees. Retirees are becoming a larger portion of the U.S. population. After all, U.S. population is slowing in growth and the Baby Boomers (commonly defined as those who were born between 1946 and 1964) are opting not to work anymore. Some of this retirement was bound to happen, but much like we saw with remote working, the pandemic served to accelerate that trend. The Federal Reserve Bank at St. Louis brings up two main reasons for the acceleration of excess retirements in its research on the topic (Faria e Castro, 2021). 

The first has to do with danger to one's health. COVID-19 disproportionately affects those who are older, especially those in the sixty-plus crowd. It is understandable that in the worst pandemic in about a century, those who are close to retirement age (i.e., mid-to-late sixties) would rather avoid getting infected with COVID if they can help it. 

The Fed brings up a second reason: rising asset values made retirement more feasible. Although it is wise to diversify one's retirement account, it is also common practice that there is a large percentage invested in the stock market because of its high potential rate of return. This is where the monetary policy of quantitative easing (QE) comes in. QE keeps interest rates low and more money flowing through the economy. This expansionary monetary policy signals to the stock markets that the Fed is not afraid to continue to buy assets to keep interest rates low. Setting aside that QE can cause inflation or asset bubbles for a moment, one of its effects is increasing the value of the stock market. The fact that we are seeing historic highs in the stock market (e.g., NASDAQ, Dow Jones) gives those in their sixties more confidence to retire early. The silver lining is that the vast majority of those who are not of retirement age intend to look for work within the next twelve months (Goldman Sachs).

"The Great Resignation." Coined by psychologist Anthony Klotz, the "Great Resignation" refers to the phenomenon in which a multitude of employees are quitting their jobs. This "Great Resignation" is in part due to the burnout caused by the pandemic. Others are rethinking how work plays a role in their life, reassessing their career choices, and reevaluating their working conditions, whether it is compensation, benefits, work-life balance, promotional potential, or overall working environment. It seems have less tolerance for "sticking it out at my current job" than it did previously. As we see in labor data from the BLS, labor retention is becoming a greater problem that employers need to address if they want to keep their staff for the long-term.

Vaccine Mandates. One of my concerns behind Biden's vaccine mandate was that there would be a significant (or non-negligible) number of unvaccinated employees that would rather quit their jobs than be vaccinated. Preliminary survey data from the Kaiser Family Foundation suggests that 5 percent of the unvaccinated have quit their jobs rather than get vaccinated. While there is already anecdotal evidence of this trend taking place, it is too soon to tell what sort of impact the mandates will have on the labor market. 

Postscript

Before writing this piece, I would have guessed that the unemployment benefits were the primary cause. Looking at the Goldman Sachs analysis, it seems to be the number one cause. In that sense, I was correct. At the same time, there are other factors that play into this labor market shortage, such as declining birth rates, a skills mismatch, and the list of multiple factors that I made above. What I will conclude with is that there are some issues with the labor market that will get resolved as this pandemic comes to an end. Hopefully, the Biden administration can lower the backlog of immigrants so we can increase the labor force that way. Conversely, there are other trends that signal that some of the people who left the labor market did so on a permanent basis. In any case, we are looking at a tight labor market for the foreseeable future.