Human Capital Losses

from Maudlin Economics,
We are in an odd situation where it’s unclear if labor is scarce or abundant. Many employers can’t seem to find enough qualified workers, but the August jobs report said 8.4 million are unemployed and millions more underemployed. The unemployment rate dropped to 5.2%. Many employers are looking for workers but they only made 235,000 net new hires last month. The consensus estimate was 733,000, so a huge miss. Congress added extra unemployment benefits. It also expanded eligibility to previously uncovered workers like the self-employed. These extra benefits later expired for a few months, then were renewed, renewed again, and now expire again this month. For many workers the added benefits were actually more than they made when working, creating a potential disincentive to work. Here’s a US Chamber of Commerce chart with a different view of the employment picture. Using government data, they divided the number of job openings by the number of unemployed (“available”) workers to get a “Worker Availability Ratio.” The chart shows the worker availability ratio steadily falling since the last recession when, not coincidentally, unemployment was at its peak. But notice it was actually lower in the couple of years before the pandemic than now. Think back to 2018/2019. Employers, and particularly small businesses, were desperate for qualified workers. The monthly NFIB surveys routinely listed it as one of the top challenges and now show it as a new record. This “labor shortage” we attribute to COVID has been brewing for many years. The virus certainly made it much worse. It created new health concerns and gave people other reasons to change careers or stay out of the labor force. But none of this is new. What we’re seeing now is better viewed as a resumption of the previous trend. So the real question is what caused that trend? Where have the workers gone? And has COVID made the trend even worse going into the future? 1. You’ll notice that worker availability chart shown above peaked in 2009–2010. That also happens to be when the Baby Boom generation began reaching age 65. Not all are choosing to retire—indeed, many (like me) are not—but the demographic winds changed about that point. Working age population growth slowed and, after about 2018, actually began falling. 2. The “Labor Force Participation Rate” measures the percentage of adults who either have a job or want a job. Some don’t because they are retired, full-time students, etc. So with Boomers retiring it has been on the decline, but even so, tried to stabilize in the 2016–2020 period. The pandemic ended that trend. 3. Prior to COVID, more older Americans (those 65 and older) were staying in the labor force. That trend has clearly changed. Almost 1 million Americans aged 65+ dropped out of the labor force between February 2020 and July 2021. 4. We find that something like 3.5 million Americans of all ages who were in the labor force pre-COVID decided to leave it and haven’t come back. We know many decided to change careers and are now reeducating themselves. 5. Men Without Work. I reviewed Nicholas Eberstadt’s then-new book of that same title, which explored the puzzling number of prime-age men who had simply disappeared from the workforce. We can point to many causes: poor education, opioid drug abuse, job outsourcing overseas, family breakdowns, and more, all of which play a role. A single variable—having a criminal record—is a key missing piece in explaining why work rates and LFPRs have collapsed. 6.  It’s potentially disastrous. An economy that has too few workers to grow at a robust pace isn’t just slower-growing. It is an economy forever teetering on the edge of recession. It limits access to credit. It is an economy that fails to engender the optimism to invest in training and productivity enhancements to build social wealth—and as we are seeing globally, slow-growing economies undermine confidence in capitalism, trade and free societies. 7. This is more than just a jobs problem. The Fed is looking for the economy to reach some mythical level of “maximum employment” before it starts normalizing policy. The expectation they will start tapering by year-end made sense two months ago. Now? Not so much. They will use the weak jobs data as an excuse. And that, in turn, leads to a variety of other challenges. If the Federal Reserve looks at this lower unemployment data while not taking potential workforce shrinkage into account, they can justify (to themselves, at least) keeping monetary policy softer for longer than it should be, risking more extended inflation. Actually, it’s worse than that. They are risking stagflation. I noted early in this pandemic era that, like the Great Depression, it would bring unforeseeable long-term changes. They are starting to show themselves, but only as fuzzy outlines. We know something big is coming. Exactly what it is, only time will tell. More From Maudlin Economics:

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