How are labour markets affecting central banks?

From the factory days of the US in the 1970s that Bruce Springsteen often describes in his music, to the pandemic-accelerated home-working days of today, the way we work has changed dramatically in just a few decades. 

The shift has been undoubtedly expedited by the pandemic. As we emerge from government restrictions, most advanced economies have either regained, or are close to regaining, their lost output. Labour markets, however, continue to bear scars.

Having initially soared to almost 15 per cent, the unemployment rate in the US has since fallen back to 4 per cent, yet the total employment pool is still 1.7mn people short of the pre-pandemic level.

These formerly employed people have gone either into the unemployment pool (0.8mn) or have left the labour force pool altogether (0.9mn) – that is, not employed nor looking for work. 

The process of labour market adjustment is often a slow one, and the rate at which data is published, based on household surveys, is even more so. How the labour market adjusts from this shock is uncertain, and will have important ramifications for wages, inflation and policy settings.  

Why the labour shortfall?

In any recession, labour market gyrations and flows from unemployment to employment are expected, but it is the current shortfall in the labour force from the pre-pandemic level, and its persistence, which is surprising in the aftermath of the current recession. What are the drivers behind this labour shortfall? We have identified five factors that could be responsible. 

Faced with greater health risks, it is unlikely that this segment of the workforce will be lured back to their previous roles.

Firstly, data shows that women appear to be disproportionately represented among those who are leaving the labour force.

The chart below shows the breakdown of the current labour force shortfall by age and sex; women in their prime working age (defined as those aged between 25-54) represent more than 40 per cent of total exits, according to data from the Bureau of Labour Statistics for January 2022.

This may well be the unintended consequence of school closures, the reduction in available childcare and the disproportionate share of child-caring responsibilities that women often bear.

The other striking feature that is apparent in the chart is that those over the age of 55 represent another 40 per cent of those who have left the workforce.

Many may well have taken the opportunity to accelerate their retirement plans.

Faced with greater health risks, and perhaps having also benefited from rising asset prices, it is unlikely that this segment of the workforce will be lured back to their previous roles.