America's Job Shortage - Searching for 5 Million Employees Who Have Left the Workforce

The "wage-price spiral" threatens in the coming months.

America's job market numbers for November 2021 have just been released by the U.S. Bureau of Labor Statistics. They show a downturn in the job market. While the U.S. economy added 210,000 jobs, after adding 546,000 in October, that's half of what economists were expecting.

With 155 million payroll jobs in America today, there are still 3.9 million workers needed to get back to the level of early 2020, before the COVID-19 pandemic. The unemployment rate has nevertheless fallen by 0.4 percentage points to 4.2% of the labor force.

For the White House, which must already think of different levers to act on the extremely high inflation for several months, the picture is hardly satisfactory, especially since the threat of the Omicron variant now looms. Job creation remains modest, while consumer prices are high (between +5% and +6.2% over one year depending on the indicators considered).

The rise in average hourly earnings is dynamic (+4.8% year-on-year), which has some people fearing a deleterious chain of events: the famous “wage-price spiral”, which would see prices rise as a result of rising costs (particularly wages), and employees demanding wage increases to compensate for inflation.

5 million American workers have left the job market since the beginning of the crisis

In recent months, all economists have focused on the jobs lost during the crisis. Now they will focus on labor force participation. Indeed, if the participation rate increases, it will be a sign that the supply of labor is picking up and meeting demand. This will de facto limit wage inflation.

In November 2021, the labor force participation rate rose 0.2 percentage points to 61.8 percent, but it is still 1.5 percentage points lower than at the beginning of 2020 (63.3 percent), according to figures just released by the U.S. Bureau of Labor Statistics.

The big problem is the employees who completely exited the American labor market during the COVID-19 pandemic. They are no longer looking for work and are therefore not counted as unemployed. Economists believe that many of these workers could return to the workforce. This is necessary because 5 million people are out of the labor force.

Half of them could return quickly if wages are attractive and concerns about the virus are no longer as central. A study by the Federal Reserve Bank of Kansas City notes that part of the shortage of employees is related to retirees who, in 2020 and 2021, would normally have returned to work, but were deterred by the crisis.

Lost employees will return to the workforce, but no one can say how long it will take

For S&P Global Ratings, too, labor supply is expected to rebound:

“42 percent of the decline in the labor force participation rate is due to structural changes and 58 percent of the decline is due to reasons that stem more directly from the pandemic.”

For Ann Bovino, the financial agency's chief U.S. economist, the bulk of the labor pool will be found among women, who make up a majority of the prime-age (25-54) people exiting the workforce.

A recent Barclays note confirms this, explaining that those exiting the labor force were in dual-earner households, offering them more flexibility. While economists believe that all of these lost workers will eventually return to the labor market, they do not agree on how long it will take.

Indeed, most of the explanatory factors are likely to take some time to be resolved. I am thinking here of the risks of infection due to COVID, childcare, or excess savings. Barclays Bank expects the labor force participation rate to rise to 62.5% by the end of 2022.

In addition to these figures on the state of the US market at the end of November 2021, it will be interesting to analyze the inflation figure for November 2021, as well as the first feedback from scientific experts on the dangerousness of the Omicron variant and the possible obligation to adapt existing vaccines.

The Fed will rely on these indicators at its next open market committee meeting in mid-December 2021. Announcements could then be made on a possible update of its monetary policy announced for the coming months in mid-November 2021.

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