America Is Still Missing 2.5 Million Workers—Most Won’t Return To Work This Year

Topline

Despite red-hot labor demand, a majority of the roughly 2.5 million Americans who dropped out of the labor force during the pandemic and still aren’t looking for jobs won’t return to work this year, according to economists at Goldman Sachs which warns the historically tight job market could spell more bad news for the recent surge in consumer prices.

About 1 million Americans who dropped out of the labor force during the pandemic are 16-to-54-year … [+] olds who don’t want a job right now—largely because they’re still concerned about Covid-related health risks or they’ve tapped into personal savings to pay bills.

Getty Images

Key Facts

Though job openings have skyrocketed to record highs, labor supply remains “substantially depressed,” a team of Goldman economists led by Jan Hatzius wrote in a Sunday note to clients, pointing out last month’s labor force participation rate of 62.2% remains well below pre-pandemic levels of 63.4%.

Goldman estimates there are roughly 2.5 million “missing” American workers who dropped out of the labor force during the pandemic and still aren’t looking for work, including about 800,000 people who retired early (thanks largely to rising home and equity prices) and are therefore unlikely to ever return to the labor force.

Of the remaining 1.7 million people who are more likely to look for work again, the economists say roughly 1 million are 16-to-54-year olds who are staying home because they’re still concerned about Covid-related health risks or they’ve tapped into personal savings that have lowered the pressure of going back to work.

“Of course, these financial cushions [and Covid concerns] will not last forever,” the analysts say, estimating about 1 million Americans will return to the labor force by year’s end as infections wane, Covid antiviral pills come to market and pent-up savings run out—enough to lift the participation rate to 62.6% but keeping the supply of available workers at 45-year lows.

With the labor force still short about 1.5 million American workers by year-end, employers should continue to increase wages to help attract talent, Goldman notes, adding that higher labor costs may persuade the Federal Reserve to hike interest rates if annual wage growth remains at current levels of about 6% (given that higher labor costs are often passed on to consumers).

Key Background

The pandemic ushered in a so-called Great Resignation in the U.S. as millions of workers left the labor force due to health concerns and tough work conditions, while millions more took advantage of the tight labor market to quit their jobs for higher-paying opportunities. A record 4.5 million Americans quit their jobs in November, and the latest data released earlier this month showed little improvement, with 4.3 million people quitting jobs in December.

Crucial Quote

“While Fed officials might downplay spikes in the prices of items like used cars, they cannot ignore unsustainably fast wage growth,” Goldman said Sunday. “If wage growth continues running closer to 6% than to 4%, it would eventually raise the risk of an even more aggressive Fed response.”

Tangent

The S&P posted its worst January performance since 2009 after the Fed revealed it could move more aggressively to remove pandemic-era stimulus measures and hike interest rates early last month. “While higher interest rates increase borrowing costs for all businesses, they also make firms’ projected profits worth less in investors’ valuation models,” Nigel Green, CEO of $12 billion wealth advisory DeVere Group, said in an email to Forbes last week. “This is exacerbated for tech and other growth stocks whose peak earnings are not expected for years to come.” Hatzius expects the central bank will actually hike interest rates four—or even five—times this year, given the Fed’s “greater sense of urgency” around inflation in recent months.

Topline

Key Facts

Key Background

Crucial Quote

Tangent

Further Reading