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Important new clues about the labor shortage

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Where did the workers go?

Many businesses are grappling with this question as they try to fill 11 million job openings, nearly the most ever. Companies say they’re raising pay and offering new perks, yet the workers still aren’t there. The percentage of working-age people who have a job or are looking for one plummeted when COVID arrived in early 2020, and it’s only about halfway back to pre-COVID levels.

There are some pat explanations for the missing workers: They’re living off government benefits in place of a paycheck, or sponging off family. Moms who want to work are stuck at home with kids whose schooling is a mess. Some people just retired early.

New research from economists at the Chicago Federal Reserve and the University of Texas offers a surprising insight: Much of the labor shortage comes from part-time workers and those accustomed to working on and off, who have checked out of the labor force more than any other group.

“These are transitory workers who don’t necessarily seek out work, but may take a job if an opportunity arises,” study author Jason Faberman, a senior economist at the Chicago Fed, tells Yahoo Finance. “They seem to reflect a variety of people who wouldn’t mind the additional income, but aren’t necessarily dependent on it. A lot of them left the labor force during the pandemic and it seems more permanent for them thus far.”

The researchers mined data from an annual Fed survey of consumers to figure out who wants to work and who doesn’t. By comparing responses after the COVID outbreak with pre-COVID data, they were able to isolate which groups are most responsible for what they characterized as “a notably large contraction in labor supply.” While the notion of occasional workers may bring to mind deadbeats getting by on government aid or other people’s money, that’s probably a misconception. There are many people who don’t need to work full-time, including students, retirees, the disabled, spouses whose job would represent a second income and people in the midst of retraining or another type of career switch. Each group may be relatively small, but combined they may explain a large portion of the labor shortfall.

[Did you drop out of the labor force during the last two years? We’d love to know why.]

The new research compared the amount of hours different groups said they want to work each week, before and after COVID struck. There was no change among full-time workers, which means COVID didn’t affect their propensity to work at all. The decline among unemployed workers was very small. That means people who don’t have a job but are looking for one—the technical definition of unemployed—were nearly as willing to work before COVID as they were after.

A ‘now hiring’ sign outside of a business on October 08, 2021 in Miami, Florida. (Photo by Joe Raedle/Getty Images)

There were sizable changes, however, among groups that typically get little attention from economists or policymakers. The biggest change came among part-time workers, who on average said they wanted to work 3.2 hours less per week in the post-COVID timeframe. Another big drop came among people the government characterizes as “out of the labor force”—working-age people who don’t have a job and aren’t looking for one aggressively enough to count as unemployed. Again, this includes many people who don’t need to work but might if they get the chance.

The biggest demographic difference before and after the pandemic has been between workers with a college degree and those without. The weekly work hours sought by college grads dropped by just 13 minutes post-COVID. For those without a college degree, it fell by 1.6 hours. There’s been a much smaller difference between male and female workers, with men seeking 44 minutes’ less work and women seeking 60 minutes less. Some data shows women have fallen out of the workforce at a much higher proportion than men, suggesting the burden of child or family care is ravaging women’s ability to work. If the survey data is right, that might be overstated or oversimplified, with other factors weighing on female workers much as they weigh on men.

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What might bring some of these transitory workers back? Higher pay might help. The study shows that desired pay rose more for those out of the labor force than it did for those working. That means people who aren’t working value their time more, consistent with the idea that COVID has driven many Americans to improve their work-life balance or place a higher value on quality of life versus material or financial well-being.

The decline of COVID as a major health threat should also help. Surveys already show that COVID fears were a major factor in withdrawals from the labor force in 2020, with a sharp decline since then. The Omicron variant that surfaced late in 2021 may have added a bit of new reluctance, but with Omicron in retreat, that barrier to work should diminish, as well.

One last thing that’s probably going on is a broad transformation of the entire labor force, as workers adjust to remote work, upheaval in certain industries and the reprioritization a pandemic can bring. This could take years to sort out, as workers train for new careers, relocate and better match their work choices to their life goals. More people will probably drift back to work in coming months, but it could take a while before all the mysteries are solved.

Rick Newman is a columnist and author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips.

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