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Transcript

Tim Sablik: My guests today are Andy Bauer and John Bailey Jones. Andy is a vice president and regional executive for the Baltimore branch of the Richmond Fed and John is the vice president of microeconomic analysis for the Richmond Fed. Andy and John, welcome back to the show.

Andy Bauer: Hi, Tim. It's good to be back.

John Bailey Jones: Always a pleasure.

Sablik: On June 26, you both participated in a Richmond Fed District Dialogues panel in Baltimore, exploring national and local barriers to labor force participation. The other participants on that panel were the comptroller of Maryland, Brooke Lierman, and Melanie Styles, a senior program officer for workforce development at the Abell Foundation. We're going to continue that conversation on today's episode, picking up on some of the themes that emerged from that event.

To start, could you tell us why is the Richmond Fed interested in this topic, and why did you choose to make this the focus of a District Dialogues?

Bauer: It stems from our mandate from Congress with respect to monetary policy. The Fed's mandate from Congress is to conduct a monetary policy to achieve maximum employment, price stability, and moderate long-term interest rates. We believe if we get those first two parts correct — maximum employment and price stability — that third objective, moderate long-term interest rates, will follow.

Price stability is interpreted as low and stable inflation. To achieve this goal, the Fed has adopted a 2 percent inflation target. Now, maximum employment is a little trickier. There's no direct measurement of maximum employment, and there are changes over time that affect the structure and dynamics of the labor market. As such, there is no fixed goal for maximum employment.

Instead, the Fed is constantly assessing the labor market to minimize shortfalls in employment from its maximum level, recognizing that these assessments of the labor market will be uncertain. We look at a wide range of indicators to assess where the labor market is and how far we are from maximum employment. One of those key metrics is labor force participation, which is why we are discussing it today.

Sablik: Can you give us a picture of how national labor force participation has evolved over the last five to six years? What did it look like heading into the COVID pandemic, and how has it changed since then?

Bauer: The period just prior to COVID was interesting in that the labor force participation rate was edging higher. The labor force participation rate had peaked in 2000, near 67 percent, before dropping to below 63 percent in 2015. However, from 2015 through early 2019 it was largely flat. Then, it edged slightly higher [from] late 2019 to early 2020, which was somewhat unexpected. We had many discussions about this movement, this improvement in labor force participation rate, in the 2010s. One of our colleagues, Andreas Hornstein, wrote about this in 2019.

Then, of course, during COVID, a lot of people left the labor force due to a variety of reasons and were very slow to return. We have yet to see the labor force participation rate return to where it was prior to COVID.

Jones: The one thing I would add to what Andy has said is that there is going to be a general downward trend in the labor force participation rate because of the population aging. This might explain why the participation rate remained mostly flat during the recovery from the financial crisis.

Talking about the pandemic, at the national level, most but not all of the pandemic drop had been reversed. But now it looks like the labor force participation rate is declining slowly again, and perhaps that's the demographic trend starting to take over again.

Sablik: John, you've done a lot of research on aging and retirement, so can you talk a little bit more about how population aging in the U.S. is affecting labor force participation trends?

Jones: It is true [that] over the past few decades, people have been willing to extend their careers to work a little longer. But as people age, they're going to drop out of the labor force.

Another point that's a little subtler is that population aging will affect the mix of services that consumers demand, for example, the need for caregiving. This is going to feed back to labor markets in ways that are going to be hard to predict. I certainly don't feel comfortable predicting them right now. But it is worth noting that there will be a change in the mix of skills demanded just because there's going to be an older customer base.

Sablik: One of the points that I took away from the District Dialogues event is that, even accounting for population aging, there is still many other barriers that seem to be impeding labor force participation. In that conversation, John, you made a really nice distinction between demand-side factors, like employers demand for workers, and supply-side factors, different things that keep workers on the sidelines.

Starting with the demand side, how is automation and the adoption of AI impacting demand for workers, particularly entry-level workers?

Jones: There's a literature documenting that, over the years, technological change favored workers with cognitive and social skills over those with motor skills. It's not obvious to me, at least, that entry-level workers are particularly weak in these dimensions. But, to the extent that they are, they're going to have a harder time breaking in.

As for AI, I would say we should just wait and see. It appears that some jobs, such as entry-level coding, are already being replaced. What AI can do and how firms use it is evolving rapidly.

Bauer: Yeah, I'd have to agree with that. It's really difficult to see to what extent AI is impacting demand. It's still early.

I spend a lot of time meeting with businesses individually and in various forums, and there's a lot of discussion about the potential of AI. Firms are exploring how it can be implemented and, in some cases, there is some adoption. John mentioned coding. We also hear about back-office automation, things like machine learning that can be applied to production processes [and] marketing. Those are some examples and there's a few others.

However, most of the discussion about AI is really about how much is this going to help workers, versus the case where workers are going to be displaced. That is still an ongoing conversation.

Sablik: Another demand-side barrier that was mentioned is skills mismatch. This would be the jobs that employers are looking to fill [but] workers don't have the set of skills that they're looking for. How is that impacting overall labor demand?

Jones: Historical evidence says that whenever we have technological change, it creates new opportunities as well as closes old ones. So, the question is whether the skills embodied in the workforce are changing to keep up with the changes in what employers demand.

Claudia Goldin and Lawrence Katz document these trends over the 20th century in their book, "The Race Between Education and Technology." They argue in the first half of the 20th century, skills basically kept pace with technology. As the demands of employers changed, the skills that workers could bring to the table changed as well. But they argue that, more recently, skills may have fallen behind.

Bauer: There is this skills mismatch in certain sectors and in certain occupations. This is something we've been hearing for as long as we've been talking with firms. As a result, they've been facing a shortage of workers for some time. That is particularly in the skilled trades and in manufacturing.

This shortage was exacerbated during COVID by the surge in economic activity and the decline in labor force participation. The experience of being short workers and the difficulty of finding workers — the time and money involved — seems to have really shifted firms' thinking about labor. Many firms are investing in labor-saving equipment in order to reduce their headcount and minimize some of the challenges they face in maintaining a fully trained and productive workforce.

Sablik: John, from the economics literature, what are some of the supply-side factors that seem to be impeding labor force participation nationally?

Jones: There [are] several. These include the drug epidemic, the rise in incarceration and the prevalence of criminal records. And, a lot of people seem to be detaching from social institutions such as marriage. Associated with that is lower labor force participation.

Another potential culprit is greater access [to] and a greater generosity of disability insurance. It may be that when a person loses their current employment, they may find it preferable to go on DEI [disability earnings insurance] rather than search for a new job.

Sablik: In addition to the national picture, the District Dialogues event focused on the barriers to labor force participation that are unique to Maryland. But before we get into some of those, Andy, how does labor force participation in Maryland compare to the national picture?

Bauer: The picture for Maryland is very interesting. It stands out in contrast to what you're seeing nationally.

When COVID hit in 2020, the initial impact was a drop in labor force participation, and that was true nationally and across most jurisdictions. Since then, there has been a recovery, but that recovery has varied considerably across jurisdictions.

Maryland is one of those jurisdictions where there has been essentially no recovery at all. The current labor force participation rate is where it was at the end of 2020. It's four and a half percentage points lower than where it was in February 2020. Not the participation rate but if you take a look at the labor force, it's roughly four percentage points lower now than where it was prior to COVID. For comparison — nationally and in neighboring jurisdictions, the District of Columbia and Virginia — the labor force has grown by nearly four percentage points over that same time period.

Sablik: Yeah, that's really interesting. Like I said, it definitely stands out.

What are some of the barriers that you heard about on the panel or in your conversations around Maryland that seem to be particularly affecting labor force participation in Baltimore and in the state more broadly?

Bauer: We heard about a number of barriers. Child care was highlighted by the panel as an important barrier, particularly for women Comptroller Lierman noted that the depressed labor force participation rate in Maryland is more pronounced among women. She also noted that, coming out of the pandemic, Maryland saw greater declines and a slower recovery among prime-age working women.

The comptroller's office put out a report in late 2024 that looked at child care and the impact on labor force. In that report, they found that the number of licensed child care providers decreased 15.5 percent since February 2020 and the total licensed child care capacity in Maryland was down about 5.5 percent, or 12,000 slots. A key takeaway in their report, and something that the comptroller highlighted on the panel, is the lack of available and affordable child care has an impact on labor force participation for the state.

Melanie Styles cited criminal records as one of the greatest barriers preventing people from entering the workforce in Baltimore. She noted that formerly incarcerated people have a much more difficult time finding employment and getting into the mainstream economy.

Melanie also brought up transportation as a barrier. Not everyone owns a car or the cost of owning a car is prohibitive for some. In some cases, just getting a driver's license can be a barrier.

Sablik: Another unique challenge for Maryland that I think would fall on the demand side is the recent reductions in the federal workforce and federal spending. Do we have a sense of how these are impacting Maryland relative to the country as a whole?

Bauer: Maryland is one of those states that is at the greatest risk from federal job cuts and policy changes. There are about 550,000 federal civilian jobs in Maryland, the District of Columbia, and Virginia. About 161,000 of those jobs are located in Maryland. About 250,000 Maryland residents work in the District of Columbia. In the tax year 2023, about 252,000 Maryland households reported a total of nearly $27 billion in federal wages. That's just the federal workers. That doesn't include federal contractors, so it underestimates the importance of federal government on Maryland's economy.

We've already seen a significant decline in federal employment in Maryland, as well as private job loss from federal contractors whose contracts were canceled. There are expectations for additional cuts at universities and research centers, as well as in the nonprofit community. We've heard from consumer-facing firms in the region that consumer demand is softer as a result. So, all told, this will create challenges for the Maryland labor market that will take some time to work through.

Sablik: Andy, what are some of the solutions to these barriers that you heard about on the panel or in your conversations with communities around Maryland?

Bauer: Melanie talked about the role that not-for-profit organizations can play by helping workers become more employable [in] two ways: one, through programs and case management for the workers themselves, as well as by helping businesses identify workers that perhaps have a more difficult work or life history. She said these organizations can take some of the uncertainty out of the hiring process by saying, here's someone job ready. After they're hired, these organizations continue to work with individuals to make sure they have the support and wraparound services that they need to be successful.

She mentioned a number of other programs as well. She mentioned job training, specifically noting the SNAP E&T [Employment and Training] program from the USDA. She also cited summer youth employment programs and talked about how it's important to give opportunities to young people in the city. She also talked about helping people obtain their driver's license. Also, we returned back to the child care issue. She said subsidies for child care would be important.

Comptroller Lierman noted that there could be some regulatory changes that could help with the child care [issue] as well. For example, Maryland requires three infants per child care provider, where almost every other state in the nation is four infants per child care provider. That difference raises costs and impacts availability.

Sablik: John, what are some solutions that the economics literature points to?

Jones: It's tricky. For example, even if you bring in more jobs, the workers have to have the skills to be able to do the jobs. They have to be able to get to the jobs. They have to be able to afford to live in a place where they can get to the jobs.

To give one example, there's evidence that sectoral training programs are effective. These are programs that partner potential workers with firms. In addition to training workers for specific jobs, these sectoral training programs also help them with general job skills.

However, there's got to be a limit to how much these programs can scale up. Many of the interventions will have to have this degree of granularity, this degree of specificity. Andy's answer gave you a sense of that, especially since some of the things that Melanie was talking about were tailored to a particular clientele.

More generally, there are things that can be done to ease regulation, both in terms of helping businesses create jobs and also increasing the supply of housing in places where it's expensive. There may be places that have jobs, but if workers can't afford to live there, then those jobs may go unfilled.

Bauer: Adding on to what John said, at one point we talked about housing, which is something we hear about throughout our district as a key issue. Our more recent District Dialogues in Charlotte focused on housing. Both Melanie and the comptroller said that housing is a key issue here in Maryland in terms of attracting workers and making it easy for people to come into the labor market [and] live close to where they work.

Sablik: Another thing that came to mind from what you were saying, John, with the sectoral training programs teaching more general skills, I know another topic that came up at the event was the importance of soft-skill training. I don't know if that's something that either of you wanted to mention anything about.

Bauer: Melanie mentioned it, and it's something that we've heard about from other programs and as we've traveled the district, in particular in West Virginia. Coalfield Development has a workforce development program and it's very much focused on hard-skill development, but they devote a significant amount of the time to soft-skill development.

Jones: It's certainly been documented that soft skills are important. The economist David Deming has talked a bit about how important these social soft skills are in the modern economy. Now, in terms of conveying the soft skills, that is an interesting question.

Sablik: Well, thank you both for joining me today to continue the conversation on this important topic.

For listeners that may be interested in attending future District Dialogues, the next one will be held in West Virginia in September and the topic is going to be barriers to rural investment. You can visit our website, richmondfed.org, to learn more and sign up for that event when it becomes available.

John and Andy, thank you so much for your time today.