The Corner

Economy & Business

Workers Aren’t Coming Back

A waiter wearing a protective face mask clearing away glasses before pubs close ahead of the lockdown in Soho, London, England, November 4, 2020. (Henry Nicholls/Reuters)

One of the two most significant statistics from this morning’s jobs report: Workers aren’t coming back.

Data released by the Labor Department this morning show that last month, 61.6 percent of the working-age population were active in the labor force, either working in jobs or looking for them. That is essentially unchanged from the summer of 2020.

The second most significant statistic is that wages are soaring. In May, average wages grew at a 6.1 percent annual rate. In April, they grew at an 8.7 percent annual rate.

Combined, these two statistics tell much of the story of the economy this spring: Employers are boosting wage offers in order to attract and retain workers, who are increasingly difficult to attract and retain. This is a situation you’d expect with employers’ demand for workers growing much faster than workers are returning to the labor market. Labor demand is booming, and labor supply is not keeping up.

The process of fully reopening the economy was always going to be herky-jerky, and this imbalance between labor supply and labor demand will not last indefinitely. Factors keeping workers on the sidelines mostly seem temporary, lasting at most through the summer.

The $300 federal weekly supplement to standard, state-provided unemployment benefits is playing a role in the stagnant workforce participation rate. That policy expires in September, and around half of the states will opt out sooner than that. Struggles finding adequate childcare are likely playing a role to some extent, as well. This should resolve itself as schools and childcare centers reopen. In addition, it simply takes some time for workers to search for jobs and for employers to hire them.

Even if workers return at faster rates in the fall, the potential of significant wage pressures growing over the summer is concerning because it could boost consumer prices. If upcoming inflation data show consumer prices growing above 4 percent, many will be alarmed.

The Fed needs to adjust its communication strategy to make it clear to markets that it understands these risks. And policymakers should be looking for ways to relax constraints on people returning to work. Republican governors are doing that by opting out of the $300 unemployment benefit supplement, but more can be done.

Long spells out of the labor force are bad for workers. In slack labor markets, employers are reluctant to hire workers who have been out of work for long periods of time. Long-term nonemployed workers see their professional networks weaken and their skills deteriorate. There is good evidence that workers’ health outcomes suffer during long periods of unemployment. It would be better for the economy if workers were returning, yes — and it would also be much better for workers themselves to avoid long spells of nonemployment.

Workers sitting on the sidelines is a serious issue. More is at stake than a bumpy economic ride.

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