The Labor Market: Things Are Booming, But Risks of a Slowdown Are Rising

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Apr 30, 2021
This article is part of a series called COVID-19 Coverage.

Employers added 916,000 jobs in March, pushing unemployment down to 6%. The gains in the labor market are broad-based — hiring increased in every state except Alaska, with California, Texas, and New York adding the most jobs. 

The biggest gains were in the leisure and hospitality industry as states loosened restrictions. The industry added 280,000 jobs; however, it’s still down 3.1 million jobs since February 2020. 

Further evidence of strength in the labor market can be seen in declining numbers of initial unemployment claims, which fell to 576,000 (by nearly 200,000 from the previous week ago). Meanwhile, the total number of people receiving unemployment assistance also fell, to 16.9 million from 18.2 million a week earlier. 

What’s more, forecasts predict continued growth in the jobs numbers with employers adding 7.1 million jobs by year-end and unemployment decreasing to 5.1% about a year from now.

A Slowdown Looms

Among all the good news there are signs that the party may not be as big an event as many expect. It may also end early. 

The first of these is the labor-force participation rate that remains at 61.5%, down from 63.3% at the start of the pandemic. The participation rate for the prime-age (ages 25 – 54) labor force was 81.3% in March, down from 82.9% over the same period. This represents a loss of almost 2 million workers. 

The consequences of this are already being felt by employers that are paradoxically facing a shortage of workers at a time when several million people are available and interested in finding a job. For instance, the labor force lost over 2 million women since the start of the pandemic, mainly because they left to care for children while schools were closed. Schools are now reopening, but a lack of childcare will limit the number that can return. 

Indeed, parents of school-age children are limited in their options, with many childcare providers having closed permanently and more likely to do so. Childcare was already expensive — about $10,000 per year for a single child, and the shortage will increase costs because the supply is constrained, further limiting the number of people who can return to work. 

Continued shortages of childcare will further stunt the opportunities for career growth and advancement of this segment of the labor force, as they become part of the long-term unemployed. Currently there are 4.2 million workers who have not worked for at least 27 weeks. As any recruiter knows, skills start to atrophy the longer a person is unemployed, which reduces their likelihood of returning to the type of jobs they previously held.

At the same time, fear of the virus is a major reason many people are not looking for work. A survey by the Census Bureau found that over 4 million people remain unemployed because they are afraid of contracting Covid. That may change as more people get vaccinated and a growing share of people plan to, but 15% of people are still saying they will definitely not get vaccinated and another 15% are uncertain. 

Fear of the virus has also accelerated retirements. About 2.4 million workers have left the labor force due to retirement since the pandemic started. That is more than double the number that did so in 2019. 

Additionally, expanded unemployment benefits in the most recent stimulus bill are also keeping many people home, since they can make as much and in many cases more by collecting unemployment than by working. Research shows that generous unemployment benefits are a disincentive for people to seek work. With job creation ramping up but workers’ desire to find jobs trending down, shortages are inevitable.

The Impact on Employers

These labor shortages are happening at a time when inflation is surging. This combination will put sustained upward pressure on wages, since neither factor is likely to improve this year. 

And there’s no quick solution that will increase labor supply. The infrastructure bill — the American Jobs Plan — includes $100 billion to upgrade the skills of unemployed workers. Assuming it passes, it would take years for the spending to show any results. Inflation, largely stemming from the huge amounts of stimulus spending that has already occurred, may get worse as more money is pumped into an economy that is short on workers needed to increase supply of goods and services. 

The bill also includes funding to upgrade childcare facilities, but again, this will not happen anytime soon. Childcare is regulated by states, and it will be a year or longer by the time the bill becomes law and the funding is dispersed to states.

So what about those rosy forecasts mentioned at the start of this post? They should be taken with a large pinch of salt. They are wrong more often than right, and often disastrously wrong. They should be considered directional at best, and at present the direction seems to be for the better. Yes, economic growth is surging and will impact the labor market for the better, but the impact is never 1:1. How much of a drag the lack of childcare, retirements, and the rest will have is ultimately anybody’s guess.

This article is part of a series called COVID-19 Coverage.