The Workers Won’t Be Coming Back, Covid or Not. Here Are Theories on Where They Went.
As the labor shortage grinds on, a business in Miami, like many across the country, advertises for help.
Joe Raedle/Getty Images
What is wrong with America’s labor market? Americans are quitting their jobs at a record pace while millions who left the workforce during the pandemic have yet to return. Many economists say Covid is the culprit, but there may be more going on than meets the eye.
To attribute slow hiring mainly to the pandemic presumes the labor shortage is temporary. But travel trends examined by Barron’s suggest the acute lack of workers owes to more than Covid infection rates, a revelation that raises questions about why workers are staying home and whether they will come back to the traditional labor market.
Policy makers, economists, and frustrated employers were all but sure the labor shortage would ease in September. Millions making more through weekly unemployment insurance than in minimum-wage jobs would have to return to work when the extra $300 a week expired, just as parents struggling with child care challenges would send their children back to school and themselves re-enter the workforce, the logic went. A mass return to work would let companies staff up, then supply chains would thaw, and inflation would cool.
New Business BoomThe pandemic has minted a record number of entrepreneursSource: Federal Reserve Bank of St. Louis
2012'15'20150,000200,000250,000300,000350,000400,000450,000500,000550,000600,000
That isn’t what happened, and it wasn’t even close. The 194,000 increase in nonfarm payrolls in September was only about a third of the gain Wall Street anticipated—and that expectation was half of what economists had, until recently, predicted for monthly hiring by now. It was the slowest pace of hiring all year, and it came alongside a surprise decline in labor-force participation and another rise in wages that further undermines the inflation-is-transitory argument.
“It remains a mystery,” says Torsten Sløk, Apollo Global Management ’s chief economist. “If we still have five million people who used to have a job and now don’t, why is it that wages continue to go up very, very quickly? Why is there a labor shortage?”
For September’s hiring flop in particular, economists across Wall Street largely blamed the fast-spreading Delta variant that seemed to have peaked around the Labor Department’s survey week. The spike in infections no doubt affected the job market.
But the pandemic has changed attitudes and priorities around work, shuffled where people choose to live, and unleashed trillions of dollars in fiscal support, meaning that using Covid to explain a labor shortage that is worsening isn’t sufficient and doesn’t fully square with expectations that the worker shortage will resolve itself.
Consider Google mobility data, which chart movement trends over time by geography and across different categories of places. Barron’s dug through state-by-state reports, and the data undermine the idea that Delta dashed a mass return to work in September and that temporary issues related to Covid explain the ongoing worker shortfall.
Mobility trends in states including Arkansas, Ohio, Oklahoma, and Maine show traffic is rising across all categories—except places of work. If it’s the fear of Covid preventing a broader return to work, why is public transportation traffic up in states where workplace traffic is down? It stands to reason that a person avoiding work to avoid infection would probably avoid mass transit. Traffic is down across all categories in many states, but often with much more pronounced declines in workplace traffic compared with transit, retail, and other places.
“If we still have five million people who used to have a job and now don’t, why is it that wages continue to go up very, very quickly? Why is there a labor shortage?”
— Torsten Sløk, Apollo Global Management’s chief economist
So what, then, explains the labor shortage mystery? We don’t know with certainty. But we have a few theories that may be underappreciated and, if they are right, suggest the labor market is far tighter than it looks, inflation has nowhere to go but up, and the Federal Reserve is even farther behind the curve than investors realize.
First is the fact that the pandemic prompted a record number of new businesses. The peak was in July 2020, when close to 600,000 new business applications were filed, up 100% from the year prior. Monthly applications have since fallen but remain about 50% higher than before the virus took hold. Economists say counting entrepreneurs is tricky and depends in part how a person answers the Labor Department’s household survey. There’s also the question of whether the government’s business birth-death model, used for the monthly establishment piece of the payrolls report, is accurately counting new businesses. It is possible that more people than appreciated are working for themselves, meaning the pool of available workers is smaller than assumed and the Fed is waiting in vain for a return to a prepandemic labor force.
Veronica Clark, economist at Citi, says that despite the labor market hole of about five million, household income is back to prepandemic levels. That suggests some two-income households have become one-income households because they can afford to, she says. It’s possible the 47% gain in the S&P 500 since its March 2020 low, coupled with a 25% rise in home prices since the pandemic started, has many households feeling flush. What if many of the two million parents—mainly mothers—who dropped out of the labor force last year don’t return? It’s time to ask that question given that the new school year has failed to bring back workers.
While the wealth effect via asset appreciation is benefiting lots of households and hastening some retirements, stimulus payments in response to the pandemic have helped many stash cash while a year of staying home has similarly made many workers more financially secure. Clark says savings are about 10% of gross domestic product, enough for some to continue to delay a return to work. That’s as some states, including New York and California, still have eviction moratoriums, making some potential job hunts less urgent.
Fiscal programs are meanwhile constraining labor supply, says Gad Levanon, economist at the Conference Board. He expects the September expiration of enhanced jobless benefits to bring some workers back into the labor market over the coming months, but notes that other programs, such as the child tax credit of up to $3,600 a year per child, give some parents room to stay home.
It is not a coincidence that individual trading accounts have exploded since early 2020 as the stock market has more than recovered from its plunge early in the pandemic. When it last reported quarterly earnings, Robinhood Markets (ticker: HOOD) said it had 22.5 million funded accounts—the vast majority of those considered “active”—up 130% from a year earlier. Assets under custody ballooned 205% to $102 billion during the same time frame.
It isn’t just stock trading. Crypto trading platform Coinbase Global (COIN) counts about 68 million users, $462 billion in quarterly volume, and $180 billion on its platform. OpenSea, the biggest marketplace for nonfungible tokens, or NFTs, has soaring stats. According to Dune Analytics, trading volume in September was $3 billion, up from $97 million in February, the earliest available data. How many workers are effectively participating in an alternative economy that traditional measures can’t begin to count?
There’s another explanation for the labor shortage. Levanon says vaccine mandates may be backfiring in some cases, spurring some people to quit and fewer to job hunt in order to avoid the shots. “Certainly there are people out of the labor force because of it,” he said. “Anecdotally it’s much higher than I expected and not a trivial amount. It’s everywhere.” That begs an obvious question: If healthcare workers, teachers and others are willing to quit instead of get vaccinated, can we really expect them to return soon?
Whatever the explanation for the worsening labor shortage, it goes beyond temporary factors associated with the pandemic. There are economic models and there is reality, and the latter is worth heeding. The prepandemic labor market is gone, and monetary policy is going to have to adjust to it.
As the labor shortage grinds on, a business in Miami, like many across the country, advertises for help.
Joe Raedle/Getty Images
What is wrong with America’s labor market? Americans are quitting their jobs at a record pace while millions who left the workforce during the pandemic have yet to return. Many economists say Covid is the culprit, but there may be more going on than meets the eye.
To attribute slow hiring mainly to the pandemic presumes the labor shortage is temporary. But travel trends examined by Barron’s suggest the acute lack of workers owes to more than Covid infection rates, a revelation that raises questions about why workers are staying home and whether they will come back to the traditional labor market.
Policy makers, economists, and frustrated employers were all but sure the labor shortage would ease in September. Millions making more through weekly unemployment insurance than in minimum-wage jobs would have to return to work when the extra $300 a week expired, just as parents struggling with child care challenges would send their children back to school and themselves re-enter the workforce, the logic went. A mass return to work would let companies staff up, then supply chains would thaw, and inflation would cool.
New Business BoomThe pandemic has minted a record number of entrepreneursSource: Federal Reserve Bank of St. Louis
2012'15'20150,000200,000250,000300,000350,000400,000450,000500,000550,000600,000
That isn’t what happened, and it wasn’t even close. The 194,000 increase in nonfarm payrolls in September was only about a third of the gain Wall Street anticipated—and that expectation was half of what economists had, until recently, predicted for monthly hiring by now. It was the slowest pace of hiring all year, and it came alongside a surprise decline in labor-force participation and another rise in wages that further undermines the inflation-is-transitory argument.
“It remains a mystery,” says Torsten Sløk, Apollo Global Management ’s chief economist. “If we still have five million people who used to have a job and now don’t, why is it that wages continue to go up very, very quickly? Why is there a labor shortage?”
For September’s hiring flop in particular, economists across Wall Street largely blamed the fast-spreading Delta variant that seemed to have peaked around the Labor Department’s survey week. The spike in infections no doubt affected the job market.
But the pandemic has changed attitudes and priorities around work, shuffled where people choose to live, and unleashed trillions of dollars in fiscal support, meaning that using Covid to explain a labor shortage that is worsening isn’t sufficient and doesn’t fully square with expectations that the worker shortage will resolve itself.
Consider Google mobility data, which chart movement trends over time by geography and across different categories of places. Barron’s dug through state-by-state reports, and the data undermine the idea that Delta dashed a mass return to work in September and that temporary issues related to Covid explain the ongoing worker shortfall.
Mobility trends in states including Arkansas, Ohio, Oklahoma, and Maine show traffic is rising across all categories—except places of work. If it’s the fear of Covid preventing a broader return to work, why is public transportation traffic up in states where workplace traffic is down? It stands to reason that a person avoiding work to avoid infection would probably avoid mass transit. Traffic is down across all categories in many states, but often with much more pronounced declines in workplace traffic compared with transit, retail, and other places.
“If we still have five million people who used to have a job and now don’t, why is it that wages continue to go up very, very quickly? Why is there a labor shortage?”
— Torsten Sløk, Apollo Global Management’s chief economist
So what, then, explains the labor shortage mystery? We don’t know with certainty. But we have a few theories that may be underappreciated and, if they are right, suggest the labor market is far tighter than it looks, inflation has nowhere to go but up, and the Federal Reserve is even farther behind the curve than investors realize.
First is the fact that the pandemic prompted a record number of new businesses. The peak was in July 2020, when close to 600,000 new business applications were filed, up 100% from the year prior. Monthly applications have since fallen but remain about 50% higher than before the virus took hold. Economists say counting entrepreneurs is tricky and depends in part how a person answers the Labor Department’s household survey. There’s also the question of whether the government’s business birth-death model, used for the monthly establishment piece of the payrolls report, is accurately counting new businesses. It is possible that more people than appreciated are working for themselves, meaning the pool of available workers is smaller than assumed and the Fed is waiting in vain for a return to a prepandemic labor force.
Veronica Clark, economist at Citi, says that despite the labor market hole of about five million, household income is back to prepandemic levels. That suggests some two-income households have become one-income households because they can afford to, she says. It’s possible the 47% gain in the S&P 500 since its March 2020 low, coupled with a 25% rise in home prices since the pandemic started, has many households feeling flush. What if many of the two million parents—mainly mothers—who dropped out of the labor force last year don’t return? It’s time to ask that question given that the new school year has failed to bring back workers.
While the wealth effect via asset appreciation is benefiting lots of households and hastening some retirements, stimulus payments in response to the pandemic have helped many stash cash while a year of staying home has similarly made many workers more financially secure. Clark says savings are about 10% of gross domestic product, enough for some to continue to delay a return to work. That’s as some states, including New York and California, still have eviction moratoriums, making some potential job hunts less urgent.
Fiscal programs are meanwhile constraining labor supply, says Gad Levanon, economist at the Conference Board. He expects the September expiration of enhanced jobless benefits to bring some workers back into the labor market over the coming months, but notes that other programs, such as the child tax credit of up to $3,600 a year per child, give some parents room to stay home.
It is not a coincidence that individual trading accounts have exploded since early 2020 as the stock market has more than recovered from its plunge early in the pandemic. When it last reported quarterly earnings, Robinhood Markets (ticker: HOOD) said it had 22.5 million funded accounts—the vast majority of those considered “active”—up 130% from a year earlier. Assets under custody ballooned 205% to $102 billion during the same time frame.
It isn’t just stock trading. Crypto trading platform Coinbase Global (COIN) counts about 68 million users, $462 billion in quarterly volume, and $180 billion on its platform. OpenSea, the biggest marketplace for nonfungible tokens, or NFTs, has soaring stats. According to Dune Analytics, trading volume in September was $3 billion, up from $97 million in February, the earliest available data. How many workers are effectively participating in an alternative economy that traditional measures can’t begin to count?
There’s another explanation for the labor shortage. Levanon says vaccine mandates may be backfiring in some cases, spurring some people to quit and fewer to job hunt in order to avoid the shots. “Certainly there are people out of the labor force because of it,” he said. “Anecdotally it’s much higher than I expected and not a trivial amount. It’s everywhere.” That begs an obvious question: If healthcare workers, teachers and others are willing to quit instead of get vaccinated, can we really expect them to return soon?
Whatever the explanation for the worsening labor shortage, it goes beyond temporary factors associated with the pandemic. There are economic models and there is reality, and the latter is worth heeding. The prepandemic labor market is gone, and monetary policy is going to have to adjust to it.
