Focus

January 08, 2021 | 14:03

Where Have All the Workers Gone?

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Michael Gregory , CFA

Deputy Chief Economist, Head of U.S. Economics and Managing Director
Economics

Michael Gregory is Deputy Chief Economist and Head of U.S. Economics for BMO Capital Markets. He manages the tea... (Read more)

Benjamin Reitzes

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing regional economic, fiscal... (Read more)

Art Woo

Senior Economist and Director
Economics

Art joined the Bank of Montreal in 2014. His primary responsibility is analyzing global economic, financial and ... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Michael Gregory , CFA

Deputy Chief Economist, Head of U.S. Economics and Managing Director
Economics

Michael Gregory is Deputy Chief Economist and Head of U.S. Economics for BMO Capital Markets. He manages the tea... (Read more)

Benjamin Reitzes

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing regional economic, fiscal... (Read more)

Art Woo

Senior Economist and Director
Economics

Art joined the Bank of Montreal in 2014. His primary responsibility is analyzing global economic, financial and ... (Read more)

Feature

Where Have All the Workers Gone?

Sal Guatieri, Senior Economist

Nearly 4 million Americans have left the labour force since the pandemic began. Though recovering some of its initial record plunge, the participation rate—the percentage of adults working or seeking work—has stalled at almost 2 ppts below February’s level and near four-decade lows (Chart 1). The decline spans all age cohorts and education levels and is similar for women and men. Curiously, the U.S. stands alone among major countries with its rate still well below pre-virus levels (Chart 2). That has implications for economic growth, inflation and interest rates.

By greasing the jobless rate’s slide from postwar highs in April, the decline in the participation rate overstates the progress in labour markets. Had it not fallen, the labour force would be more than 3% larger than it currently is, and the unemployment rate would be nearly 3 ppts higher at 9.5% instead of the current 6.7%. This implies more inflation-dampening economic slack than suggested by the still-high jobless rate. Put another way, the available supply of workers is up 68% since February—a 7.3 million surplus that could take years to absorb (Chart 3). This large pool of potential workers, which is comparable to the early phase of the recovery from the Great Recession, should keep a lid on inflation and interest rates for some time. It will also limit the economy’s potential to grow at a time when many companies are still having trouble finding qualified help. The job openings rate is no lower today than before the pandemic.

The participation rate’s outlook depends on the reasons for its decline. Since February, the number of persons not in the labour force swelled by 5.8 million (n.s.a.). This marked an 11-fold increase on the average 10-month change in the previous five years. Persons age 65 years and older accounted for over a third of the increase (2.1 million), rising more than two times faster than the prior trend, suggesting the virus sped up retirement plans. Persons age 25 to 54 years (i.e., your prime-age worker) accounted for nearly half of the increase (2.5 million), reversing an earlier downtrend. This group stands a much better chance than seniors of returning to the workforce, depending on the course of the pandemic and economy. The number of marginally attached workers—persons who recently stopped looking for work but want a job—rose by 703,000 since February. Of this number, 240,000 more persons halted their job search due to discouragement over finding work. With job growth slowing, this number has stopped falling and could remain high until job prospects improve (Chart 4). In addition, 390,000 more persons stopped looking for “other reasons”, largely childcare duties and transportation issues. Although this figure is down since May, it could rise amid renewed restrictions on in-school learning and daycare centres. Fear of contracting the virus has also kept some front-line workers out of the workforce, though they should return as vaccines are rolled out to the general population.

In December, 4.6 million persons not in the labour force were prevented from looking for work by the pandemic. Nearly half still want to work, but whether they can is another issue. Permanent job losses rose by 2.1 million during the pandemic, many in lower-paying industries, which explains the larger decline in participation among less educated workers. After retirees, this is the least likely group to reenter the workforce. While some unemployed persons will be drawn back to restaurants, hotels, and the travel industry when demand returns, there will be fewer businesses to return to, forcing many job-seekers to retrain for positions in other sectors. Increased telework may open the door for some to reenter the workforce, but opportunities are more limited for those with less education. Moreover, the prospect of permanently fewer office workers due to remote work will prevent a full recovery in the services sector of big cities. Another concern is that extended unemployment insurance programs have likely kept some people in the labour force who are bound to leave if they can’t find work before the programs expire in the spring.

Alongside the mostly temporary factors depressing the participation rate due to the pandemic is one major structural force: demographics. In the next five years, the number of Americans age 65 years and older will grow about four times faster than the working-age population, raising their share by 2½ ppts to 23.5%. We estimate that aging will reduce the participation rate by about one-quarter percentage point per annum through 2025, slowing labour force growth by 0.4 ppts per year. (This is derived by holding the participation rate constant for major age groups and using the Census Bureau’s forecast of the age distribution of the population).

Bottom Line: Many discouraged workers and/or those with childcare duties will return to the workforce once the pandemic eases and job prospects improve. However, most recent retirees won’t return and many less-skilled workers who need to retrain will be slow to come back. Coupled with the drag from an aging population, the U.S. participation rate could take many years to return to pre-virus levels. This may be good for those seeking work or a better job, but it will hamper the economic recovery and widen income disparities. In addition, with the population growing the slowest in the postwar era (0.4% in 2020), potential growth (around 1.8% says the Fed) will likely be driven much more by productivity than people in the coming decade, barring a major shift in immigration.