The Big Idea
Welcome back, workers
Stephen Stanley | April 8, 2022
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The labor market has been grossly out of balance for at least a year, with demand far outstripping supply. But businesses over the last month or two have reported somewhat better success hiring and retaining workers. This coincides with a surge in labor force participation, according to BLS data. It appears people sidelined due to pandemic have been returning to the job market in large numbers since Omicron faded. While this may temper the trend somewhat, labor markets are still tightening and are likely to continue to do so for the foreseeable future.
Prime-age labor force participation
The labor force participation rate is calculated from the BLS monthly household survey. Respondents are classified as employed, unemployed—not working but actively looking for a job in the past month—or out of the labor force. The labor force participation rate captures the ranks of the employed and unemployed as a percentage of the working-age population.
One of the difficulties with the labor force participation rate is that the working-age population is defined as 16 and over. It consequently includes everyone over 65. As our population is growing older and a greater proportion of the public is in their retirement years, the aggregate labor force participation rate will naturally decline. This has been going on for over a decade. In the late 2000s, the 65-and-over cohort represented about 16% of the working-age population. The figure is now more than 21%.
An age-adjusted labor force participation rate can be calculated by holding population weights constant—that is, running a counterfactual where the age composition of the adult population never changes. This alternative series has rebounded from depressed levels just after the pandemic and is within less than a percentage point of the pre-pandemic level, which was the highest since 2001.
A slightly less comprehensive but more straightforward way to control for the aging of the population is to focus on what economists call the prime-age labor force participation rate, which includes those ages 25 to 54. These are the cohorts with consistently high labor force participation rates.
The prime-age labor force participation rate has surged in recent months. It was at 83.0% just before the pandemic began and dropped by about 3 percentage points in March and April of 2020. It quickly retraced half of that drop by June 2020. However, after that, progress was limited, as generous fiscal support, health concerns, and childcare difficulties dissuaded some from working. The prime-age labor force participation rate actually fell in the second half of 2020 by half a percentage point to 81.0% by December, then clawed back eight tenths of a percentage point through all of 2021. However, in the first three months of 2022, the measure has surged by seven tenths of a percentage point, rising to 82.5% in March. This brought it to within half a point of the February 2020 high and in line with the 2019 average (Exhibit 1).
Exhibit 1: Labor force participation rate ages 25 to 54
To put numbers to the percentages, based on the March 2022 population level for ages 25 to 54, moving from March’s 82.5% reading up to the pre-pandemic high of 83.0% would entail another 635,000 people entering the job search. At the pace of payroll growth seen in recent months, that magnitude of new job candidates would be snapped up in a month or two. In short, labor force participation is almost back to normal for prime-age workers, which means that, going forward, the prospect of millions of workers returning to alleviate the tightness of the labor market is highly unlikely—in fact, it has mostly already happened.
Looking at the more detailed breakdown in labor force participation by age offers two additional insights on the post-Covid dynamics of the labor market. First, adults of child-bearing age represent the bulk of the recent surge in labor force participation. For the 25-34 and 35-44 age cohorts, labor force participation rates have jumped by 1.3 and 1.5 percentage points, respectively, over the past six months, roughly double the rise in the overall labor force participation rate.
In particular, for the 35 to 44 age cohort, school policies appear to have governed labor force participation to a significant degree. The participation rate jumped in the summer of 2020 and in the summer of 2021—when seasonal adjustments likely already accounted for some parents staying home to care for their kids—and dipped in September of each year, when remote or hybrid school schedules required parents to be home (Exhibit 2). However, the participation rate has broken out higher over the past several months.
Exhibit 2: Labor force participation rate ages 35 to 44
Evidently, parents have finally within the past 3 to 6 months been able to return to work, as schools are almost entirely in person and widely expected to remain so. This dynamic appears to represent a major part of the recent jump in labor force participation.
In contrast, there is another group that is not coming back, at least not yet. The labor force participation rate for those 65 and over dropped noticeably early in the pandemic and, unlike for other age cohorts, has failed to bounce (Exhibit 3).
Exhibit 3: Labor force participation rate ages 65 and over
Economic researchers have shown that there were 2 to 3 million excess retirements in 2020, as people who were close to retirement age and were furloughed during the lockdowns chose not to come back. Given the disproportionate health impact of Covid on older people, it is understandable that they would be more cautious about exposing themselves to the public by returning to work.
Nonetheless, even as vaccinations became widely available—almost 90% of seniors are fully vaccinated and two-thirds of them also received a booster—and the health risks of Covid have receded, these retirees have chosen by and large to stay retired. Historically, the re-entry rate for retirees tends to be low, but the fact that the labor force participation rate for this age cohort is about the same as it was in April 2020 is striking. One factor that likely helps to explain this development is the steep improvement in asset prices. The increase in home and equity values over the past two years would have greatly padded recent retirees’ nest eggs, making it easier for them to kick back and enjoy their golden years.