Trendspotting: Will the Great Resignation Last?

NewsWire: 11/1/21

• More than a year and a half into the pandemic, the U.S. is still missing 4.3 million workers. Labor force participation has dropped across all demographic groups, especially among women and those without a college degree. (The Wall Street Journal)
• NH: Recently, we’ve written several pieces on the reasons behind our persistently low LFP numbers. (See “Why Wealthy Nations Can’t Find Workers” and “Is Labor Force Participation Down for Good?”) And as the months stretch on, it’s becoming clear that the labor shortage isn’t a momentary trend. It reflects a fundamentally altered labor market.
• As of September, the labor force participation rate stood at 61.6%. That’s -1.7%, or around 4.3 million workers, down from the February 2020 figure of 63.3%. By now, you’ve surely seen this decline referred to as the “Great Resignation.” But what’s so remarkable about it?
• First of all, we're probably underestimating the decline. The LFP figure includes people who are working or looking for work. When the labor market is cold and unemployment is high, many people stop looking for work (so-called "discouraged workers") because they figure there's no point. That means we typically need to mentally adjust LFP upwards to include those people. But when the labor market is hot, we adjust LFP downwards.
• The standard indicator of a hot or cold labor market is the unemployment rate. Today's unemployment rate (4.8%) is pretty low. It's as low as it was six years after the Great Recession ended--and well below the post-war average (5.8%). So we should adjust LFP downwards.
• But here's the next problem: The unemployment rate itself is probably overstated. When we think about unemployment, we typically have in mind the involuntarily unemployed--those who are laid off (or have never had a job) and can't find employment. We don't have in mind the voluntarily unemployed--those who quit their jobs in hopes of finding something better. Well, it turns out that the voluntary unemployment rate as measured by the "quit rate" is currently at 2.9%. That's an all-time high since the BLS first started to measure job turnover data 20 years ago.
• Bottom line: The labor market is now running very hot indeed. Employers are eager to hire for more than 10 million job openings and are raising wages and throwing in perks to match. Yet this has had no effect on bringing up LFP. Given the labor-market indicators, in other words, we should be seeing a higher LFP than in 2019--not a large decline.
• Of course, the past year and a half has been anything but normal. it’s not hard to fathom why workers, particularly those in in-person, low-wage industries, would quit during a pandemic. But the Great Resignation has spanned every industry and generation. There are clearly multiple factors at work here, some of which are transitory and others that could be lasting.
• Let’s consider the transitory factors first. Many workers have additional savings, both due to pandemic aid and to an inability to consume, which is allowing them to be more selective about their opportunities. While most of the emergency pandemic assistance has been discontinued, some state governments are still using the funds they received to distribute payments locally. And student loan payments remain suspended through January 2022. 
• Covid-19 also remains a major factor keeping LFP down. Between mid-June and mid-September (during the delta surge), the number of Americans who said they couldn’t work because they were sick with Covid or were caring for someone who had it rose by 2.5 million to 4.2 million. Meanwhile, the number of Americans who said it was because they were worried about catching Covid ticked up to 3.1 million. 

• These pandemic-induced drivers are expected to continue to decline. But then there's Long Covid (see “The Long Shadow of Long Covid”), which may not be as transitory. For nearly 4 in 10 Covid-19 patients, symptoms could persist for months or even years.
• What's more, the pandemic has also sparked deeper attitudinal changes that will outlast the virus. Across multiple surveys, we’re seeing signs of declining work-centricity and shifting work priorities.
• People say they want to work less and spend more time with their families. Virtual schooling and lack of childcare forced many workers, particularly women, out of the workforce--some of whom, as we’ve discussed, have decided to stay out. (See “Is Homeschooling Holding Down the Labor Supply?” and “Are Mothers Leaving the Workforce?”) They’re retiring earlier. They say they're frustrated with long hours and little flexibility, or burned out from poor pay and stressful working conditions. Nearly 40% of the employees who quit in August worked in restaurants and hotels.
• Some might want to work, but aren’t currently looking because they’re not finding jobs that line up with their priorities (increasingly, flexible hours and the ability to work remotely). Those who are no longer in the workforce--often, it appears, the partner of a still-working spouse--say that they are willing to cut expenses and rearrange their lives to get by without a job.
• Does this mean that scarce labor is the new normal? Of 52 economists the WSJ surveyed, just 22 predicted that LFP would never return to its pre-pandemic level. The skeptics are betting that the transitory factors--most importantly, excess savings--will outweigh the attitudinal ones and that employers will eventually regain the upper hand.
• I'm with the 22. Why? Long before the pandemic hit, we were already seeing a long-term secular decline in LFP. See the chart below.

• You'll notice that LFP reached its all-time high right around 2001. But after the Great Recession, LFP fell steadily for many years before rising again only slightly before the pandemic hit in 2020. Since the mid-1990s, LFP has steadily declined among working-age men. And since the early 2000s, it's also declined among working-age women, particularly married women with an employed spouse.
• So clearly, it's not just the pandemic that's behind the labor shortage. Americans have been leaving the workforce in increasing numbers for decades now. Covid-19 essentially pushed fast-forward on a shift that was already in motion. People are turning away from the market economy and deciding that they can do without (or handle themselves) some of the services and products they'd otherwise be working to pay for, whether it's childcare, meals, education, or personal care. Many are making their savings go further by pooling resources or otherwise moving away from standard models of middle-class consumption.
• If households only decided to work less but did not change their level of consumption, this shift would be unsustainable. But the fact that so many seem willing to reduce both how much they work and consume turns this into a headwind for real GDP growth.
• In turning our routines upside down, the pandemic forced all working-age Americans to reconsider how they are living their lives. What we're seeing now, and will likely keep seeing in 2022 and beyond, are the results.