The Unforgiving Math of the U.S. Labor Market

Two new reports on the condition of the U.S. labor market point out just how big a challenge America has in keeping its economy staffed. The first, by Emsi labor market economist Ron Hetrick along with Cassondra Martinez and Hannah Grieser, focuses attention on the underlying building blocks of the labor market: demographic pressures, a pandemic-fueled rush to retirement, and collapsing immigration rates as our chief challenges. The second, a paper by Harvard economists Alex Domash and Larry Summers, precisely quantifies the sources of the labor shortage and connects it to rising inflation. The full picture suggests that concerns about a wage-price inflation spiral are well justified.

Emsi’s new analysis builds on its 2021 report, The Demographic Drought: how the approaching sansdemic will transform the labor market for the rest of our lives. That report, which I wrote about here, was an economic retelling of how declining fertility is colliding with accelerating retirements to make labor shortages a permanent feature of American economic life. Emsi’s new report narrows this analysis and applies it to immediate post-COVID-19 conditions. While our working age population is still growing, it isn’t growing nearly fast enough to keep pace with general population growth or labor market demand. The authors chalk up the gap to COVID-related work hesitancy, early retirements, childcare shortages, too-generous public subsidies for non-work, and a precipitous drop in immigration levels. To return us to pre-pandemic employment levels, we need 875,000 more workers right now. To get us to a steady-state workforce that catches up with the demands of a growing population and economy, we need around 3.2 million more workers, a figure that will continue to grow over time.

The largest chunk of “missing” workers—those who were in the workforce before COVID-19 and arguably should be now—is accounted for by 2.6 million early retirements in the over-55 demographic. Lower immigration levels are another significant factor. Legal immigration reached a recent peak of just more than1 million in 2015 before falling to just over 200,000 in 2021. Counterintuitively, anti-immigration sentiment spiked precisely as immigration was collapsing . A recent Gallup poll found that 35 percent of Americans want less immigration (compared to 19 percent in 2021) while the number of Americans who support more immigration fell from 15 percent to 9 percent. This suggests that trying to solve the labor shortage by welcoming more workers from abroad—one of the fastest ways to grow the labor pool—continues to face significant political hurdles.

The Domash and Summers analysis is useful for understanding how demographics and labor flows are affecting wages and inflation. They begin by saying the standard unemployment measures are less helpful in understanding labor market tightness than “firm-side” vacancy and quit-rate measures. Our nominal unemployment rate as of January was 4 percent, indicating modest slack in the labor force. Firm-side data tells a different story. Using historically high levels of openings and job quits, Domash and Summers say the functional unemployment rate is below 2 percent. While varying in degrees of importance, they attribute labor market tightness to many (but not all) the same factors as Hetrick, spreading it relatively evenly across excess retirements, COVID health concerns, immigration, and demographics.

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