This year, we’ve seen that shortages in labor supply can constrain economic growth. As lockdowns lifted, consumer demand picked up quickly. Job openings hit all-time records. But employers in many sectors were unable to staff to meet demand. Shockingly, that meant amid this strong recovery, we saw firms cutting hours and turning down business.
This scenario might seem unique to the pandemic. After all, labor market frictions should ease once the virus is behind us, schools and child care stably reopen, the impact of pandemic benefits ceases and excess savings wane. But we may find labor shortages lasting far beyond this pandemic. As our workforce ages and birthrates decline, we could find workforce availability limiting our economic growth.
To avoid that scenario, we need to grow our workforce. Fertility and immigration could help. But we also need to do a better job connecting individuals on the sidelines with employment. This challenge predated COVID-19 and will likely persist long after. I want to focus my remarks today on who is on the sidelines, why they aren’t working and how to get them into the workforce. Before I dive in, I should note that the views I express are my own and not necessarily those of my colleagues on the Federal Open Market Committee (FOMC) or in the Federal Reserve System.
So, first: Who is on the sidelines?
We have nearly 262 million people ages 16 or older in the United States.1 Almost 60 percent — roughly 154 million people — are employed. That leaves us nearly 108 million on the sidelines. Of those, approximately 8 million are unemployed, defined as actively seeking employment. This translates to an unemployment rate of 4.8 percent. In South Carolina, that number looks better, at 4.2 percent.2
But, as evident in this recovery, the unemployment rate tells only a part of the story. It misses the roughly 100 million individuals (about 1.8 million in South Carolina) who aren’t working and haven’t recently looked for work. Disproportionately, those out of the labor force are women and those without a college degree. They are in smaller towns and rural areas. The pandemic exacerbated disparities, but it did not create them.
Nearly 52 percent of those out of the labor force are retired; last year, retirees grew by over 2 million more than what was expected.3 Nearly 13 percent have a disability. Another 15 percent identify as caregivers, and 14 percent are students.4
Opting out of work is the right decision for many. Those in school are better preparing themselves in the workforce. Some prefer being home with their kids or their parents. Others are enjoying a well-earned retirement. But it is easy to imagine many could be open to working. In fact, almost 6 million of those out of the labor force say they want a job but just aren’t looking. If we remove barriers to participation, we may help more people come off the sidelines. If about 16 percent returned to the workforce, the United States would be back at its peak employment-to-population ratio — 64.7 percent in 2000 (it is 58.7 today).
The questions are then, what is keeping folks from working, and what can be done? In my conversations, I hear four key barriers to employment: mismatches, family care, health and incentives. All these issues existed before the pandemic, but it’s fair to say they have intensified in the last 18 months.
Let’s look at mismatches first. There are several types that come up.
There’s a skills mismatch. Even prior to the pandemic, we had a shortage of workers with the training and skills necessary to staff trucking fleets, manufacturing operations, nursing shifts, technology companies and construction crews. But now these shortages are ever more acute as demand for these sectors booms.
There’s a location mismatch. Jobs are concentrated in cities. But it may not make sense to leave a small town to move to a high-cost city. Transportation challenges may keep those already in cities from accessing good jobs. The pandemic has made big cities less attractive and challenged urban transportation.
And expectations are becoming an issue, too. Increasingly, we are seeing misalignment between the jobs available and the jobs workers want. Reservation wages for lower-wage and lower-educated workers are up significantly post-pandemic. Potential employees expect higher compensation, benefits or workplace flexibility. At the same time, the pandemic emphasized the downsides of jobs with low pay, poor benefits, unpredictable schedules, unattractive work environments, in-person work and instability.
How do we address these mismatches?
We need to fully leverage the skill building capacity of our economy. One natural path is community colleges, and their partnerships with local employers. Yet, during the pandemic, we saw enrollment decline. That’s unusual in a recession because workers usually are looking to reskill. Perhaps remote school and child care responsibilities held students back. In response, we are seeing communities invest in whole life support. For example, in Manassas, Virginia, local leaders used CARES Act funding to offer eligible city residents up to $5,000 for program costs and wraparound services to help them secure retraining.
We also need to refocus on K-12. We are now in our third school year impacted by COVID-19. Those most disrupted were children in marginalized communities. Inequities in education feed through to unequal participation in the workplace. We simply have to keep schools safe and open and invest in whatever it takes to reduce the learning loss.
We need to fully leverage the funding now given to broadband. If the worker can’t get to the job, remote work lets the job come to the worker. But it is difficult to get government funds deployed, and local communities need help. I’ve been intrigued by a program I saw in West Virginia providing navigation support for local leaders.
Employers can also open the door to a wider talent pool. We are hearing employers revising policies like drug testing, providing more in-house training, and reviewing hiring criteria to ensure relevant prior experience, when appropriate, can be recognized in place of a degree. We are also seeing employers reassess their offerings to tackle the job expectations mismatch. We’ve seen strong wage increases for entry-level positions, broadened education and child care benefits and more and improved flexible working conditions.
So then let me turn to the second barrier: family care.
Caretaking has been front and center throughout the pandemic. School closures forced some parents to stay home. Nursing home outbreaks shifted the focus for those with aging parents. And all of this came in the middle of child care affordability and availability challenges that predated the pandemic and only worsened with lockdowns.
As I outlined earlier, we’ve seen some institutions make adjustments in response. Institutions invested in on-site proctoring programs to enable parents to work. Employers are implementing new benefits like emergency child care. We are also seeing conversations open up about the longer-run challenges in the child care industry, such as labor shortages and slim margins despite prices many families can’t afford.
We can take some inspiration from abroad. While our labor force participation has declined over the last 20 years, Canada’s has increased, particularly for women. Research from the San Francisco Fed points to parental leave policies in the two countries as a key differentiator. The same research highlights flexible work arrangements as a driver of increased women’s participation in other industrialized countries.
A third barrier — one that’s been front and center throughout the pandemic — is health. More than 1 in 5 prime-age individuals out of the labor force — those between 25 and 54 — report a disability.5 And more than one-third of nonworking, nonelderly Medicaid recipients report living with multiple chronic conditions.
Of course, the pandemic exacerbated health challenges. Fear of getting the virus may have kept some from taking on a part-time service-sector job. Those over 65 were told they were at highest risk and should avoid personal interactions. They may also have found remote technology a challenge. And it didn’t help that the services sector and part-time work offer less access to health insurance than the economy as a whole. Getting the virus under control will be a big part of tackling the health barrier in the near term.
Health is a particularly important barrier given our aging demographics. Identifying ways to keep Americans healthier longer, or to accommodate older Americans with health concerns in workplaces, is a key opportunity area that will grow over time.
We again can look abroad for ways to tackle this barrier. Japan has grown the number of people working as its working-age population has shrunk; increased participation among older workers plays a central role. Between 2000 and 2019, the employment-to-population ratio for Japanese adults ages 60 to 64 increased 19.3 percentage points to 70.3 percent. For context, the U.S. ratio is 56 percent. Japan has funded subsidies for employing older workers and mandated later retirement ages. It has fielded training programs for employers on how to make jobs friendlier for older workers. I should acknowledge that Japan has a healthier population. Public health is of course a broader challenge for the United States.
The final barrier has also received much attention lately: the potential unintended incentives within our benefits system. Our benefits can provide critical support for people in need. But it can also make formal participation in the workforce a costly choice. A small boost in earned income can cause an individual to lose meaningful benefits. That’s referred to as a “benefits cliff,” and it can push individuals out of the workforce or toward the shadow economy.
We see this with health insurance, as people consider jobs that put their kids’ CHIP benefits at risk. We see it with disability insurance, which makes individuals forfeit lifelong benefits to engage in the workforce. And we see it in the tax code. We tax the first dollar earned by the second earner at the same rate as the last dollar earned by the primary earner. Combined with the cost of child care and other work-related expenses, a family’s monthly take-home pay may actually be higher without a second labor market participant.
I won’t prescribe specific policy changes — that’s for legislatures — but at the Richmond Fed, we have invested in distributing a tool that helps organizations understand the dynamics of the cliff in their geography. We hope it will help nonprofits and employers better understand how benefits impact families’ financial calculus.
Overall, this is a math problem. Over time, we can’t grow without more workers. The best source of more workers is those on the sidelines. And those on the sidelines won’t come back to the labor market unless the math makes better sense to them, whether it be child care, benefits, compensation, transportation or investment in education. It’s a challenge to improve the real and perceived benefits versus the costs of employment, but it is doable, as other countries have shown. That’s the task ahead for us, as employers and community leaders.
Tom Barkin is president of the Federal Reserve Bank of Richmond. This article comes from remarks to the South Carolina Chamber Annual Workforce Development Symposium held October 19, 2021, in Greenville, South Carolina.