The Shrinking Labor Force

The country is in a fragile state – burnt out from three years of pandemic; social upheaval; the war in Europe; and an economy that is cooling under the weight of high inflation, rising interest rates and the scarcity of labor.  The U.S. may have reached the point where its past is more appealing than its present.

So when good news comes along, you might as well seize it. This could apply to a recent announcement by the Bureau of Labor Statistics that the economy added a seasonally adjusted 372,000 jobs in June, well above the 250,000 economists expected.

But this sliver of good news must be set against the continuing cost of living crisis, or “Bidenflation,” as some call it, which is impoverishing working Americans.  The consumer price index rose 9.1 percent in June on a year over year basis, the worst inflation since December 1981.  It is unclear how the Federal Reserve will put the inflation genie back in the bottle without a creating a whole lot of pain.

Education and health services led job creation, followed by professional and business services, and leisure and hospitality. Meanwhile, the unemployment rate remained at 3.6 percent, a touch above the 50-year low reached before the pandemic hit in early 2020. Job growth continues, although fewer people are looking for work.

The Covid-19 pandemic turned the labor market upside down, and it is currently drum tight.  There were more than 11 million job openings at the end of June – up substantially from 9.3 million open jobs in April 2021 and seven million prior to the pandemic.

The pandemic led many people to reevaluate what they want from a job and from life, and it prompted a wave of early retirements.  Others left to start their own businesses.  Still others left to care for children, elders or themselves.  Some people simply threw in the towel and decided to stay at home, courtesy of the taxpayers.

The demand for workers far exceeds the number of unemployed people looking for work.  The labor participation rate – the share of adults working or looking for a job – was 62.2 percent in June, down from 63.4 percent before Covid.

Workers are taking advantage of the tight labor market by switching jobs for better pay, which represents a new source of inflation for many American companies.

Average hourly earning rose 5.1 percent over the last year.  Rising wages could make it harder for the Federal Reserve to tame inflation.  Nearly 79 percent of American workers are in the service sector, where higher labor costs are a large burden.

In addition to a shrinking labor force driving up wages, a steady decline in birth rates is expected in the U.S. and many advanced economies, which will sharply reduce the growth of the labor force.

For example, life expectancy in the U.S. has increased from 1980-2019 and improvements in morbidity and mortality rates will lead to a rapid increase in the number of people who are over 65 and retired.  As a result, dependency ratios – the ratio of the number of dependents to the total working age population – are set to rise sharply.

Put simply, deteriorating U.S. dependency ratios in the U.S. and globally means dependents who consume but do not produce will outweigh those who are working.  In effect, too few people carrying the load.

This translates to lower productivity per capita, an ever-intensifying war for talent and skills, and upward pressure on inflation.

As the supply of labor contracts, their bargaining power will increase and wages will continue to rise.  The growing leverage of labor may have beneficial effects on inequality, but it may manifest an increasing risk of structural inflation.

Print Friendly, PDF & Email