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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  • Very good article on a topic that affects all of us. A couple thoughts to add as a parent of young adults.
    Make local zoning changes to encourage the supply of modestly sized apartments and houses. Fully employed young people who have to stay at home or rent with roommates because of the high cost of housing (West Coast here) are not able to start their own families.
    If you are a business, do not outsource your hiring process completely to a computer program and then complain no one is applying when good workers have been rejected or discriminated against by a faulty program.
    Make it easier for necessary workers to immigrate legally, or even have a legal guest worker program, so that everyone is protected and the work supply is increased. We are currently supporting illegal immigration indirectly (who picked the lettuce in your salad?) right now. The question is not if you support immigration, but which type is wiser to encourage?
    Shorten hours or days of stores as necessary. This may not be a choice at some point.
    Give workers a set, reliable schedule. This is a quality of life issue.
    More independent living with only customized assistance as necessary for the elderly, which is less expensive and more pleasant. More in-home care for the same reason. Not everyone ends up bedridden, but most will need some kind of assistance even if it's only being driven to the doctor.
    Expect fewer goods and services at a higher price.
    Treat service workers with patience and kindness as the increasingly precious and understaffed commodity they are.

    1. I agree with your comment so much!

  • Enjoyed the read, thanks Brent. Here's hoping King Manchin can keep the Democrats from trying to shovel more money into the economy and claiming that it will help fight inflation.

  • My concern is there are less and less middle class and middle professional jobs and careers... and this already is a growing problem

  • I agree that short term labor could be a problem. Though it is nice to see the balance move more towards labor and less towards capital returns.

    But the shortage of labor will drive efficiency gains.

    Moreover, there seems to be a consensus that the coming automation wave will start to make more and more labor not cost effective. So this will probably turn out to be a boon.

  • Of all of the major factors listed, immigration is the one that we can control.

    It's also worth exploring the *kinds* of jobs we are missing--what sectors are really feeling the labor pinch. Based on news reports and even some of my own anecdotal evidence, the labor shortage seems to be showing up most acutely in manual labor trades like construction and agriculture (especially meat packing). These areas are characterized by heavy concentrations of newly arrived immigrants.

    The number I read somewhere said we're missing about 2 million immigrant workers based on reduced immigration since 2018. Combined with the specific industry areas affected, that sure seems like it would go pretty far to explain a lot of the labor shortage we're seeing that's actually driving inflation.

  • If this isn't a recipe for offshoring manufacturing or other jobs for laptop jockeys, I don't know what is. In the near term, companies are going to look towards automation and other ways to improve productivity and lower costs. Yes, the supply chain issue is real, for now. Long term it will improve. Can the same be said for the US labor market?

    1. I think off shoring efforts have been in play for a couple decades with some limited success. I remember first hearing about this with proposals to send engineering tasks to India for overnight work then pick up interim product in North America the next day. I never saw that really happen. My son is an accountant and there are some functions they send to India for cost coding etc. This is viewed as of limited value in most of his organization but helpful to some degree.

      I think most of us are familiar with having some IT support from Asia. I have to say that the people in the Phillipines that I dealt with at the end of my career were good. I would still always rather have someone in my office to help but I think those days are long gone for most of us.

      1. I hear you. But I would argue that offshoring has been an enormous success for many manufacturing companies. As someone who actually sources, builds product, and employs people in the US, it is terrifying to think that the costs to engage a factory overseas, put product on a boat for a month and then ship it across the US is still competitive with what we can do here.

        1. Yep I was commenting based on experience with services rather than goods. The offshore government of goods production has been happening a lot longer and significantly changed our economy and society. It looked like some of the goods production was coming back to North America with increasing standard of living in Asia raising costs. However, the trends we are discussing here look to work against that return to some degree.

          1. Don't know why Android threw the word government in the above. Stupid automation....