The Great Job Reshuffling

Hiring has become easier than it was early last year. Yet everywhere I go, from farms to factories to ballparks, I still hear that labor is in short supply. And the numbers back this up: In February 2020, 61.1 percent of the population was employed. Today, that number is down 0.9 percentage points — equivalent to nearly 2.3 million fewer workers.

If good workers remain hard to find, wages could rise further, pressuring margins and prices in turn. So it's important to understand what's happening in the labor market, and where it may go from here.

From Labor Abundance to Shortage

The shrinkage in the number of employed workers relative to the country's population has occurred at a time when economic activity has been expanding: Real GDP has increased more than 6 percent since before the pandemic. That gap helps explain why labor feels so short. It is.

Demographics play a role. Some decline in labor supply was predictable due to natural aging of the baby-boom generation. But the rest of the gap is almost entirely attributable to lower participation rates for those at or near retirement age, perhaps supported by stronger 401(k) plans or the desire to help with child care for grandkids.

Demographers have forecast this reduction in the workforce for a while. For decades, our economy operated with a growing labor force. We benefited from the baby boom, women more fully entering the workforce, increased educational attainment better preparing workers, improved health leading to longer careers, and historically high levels of immigration. All of that was supplemented by access to ever-growing pools of offshore, low-cost labor.

These tailwinds look like they are becoming headwinds. The growth of the working-age population is relatively straightforward to forecast, and the predictions aren't good. Fertility rates are down. K-12 school enrollment is projected to decline by nearly 8 percent between 2019 and 2031. My generation is aging out of the workforce. Immigration policy looks unlikely to materially change soon. Offshoring has been complicated by increased awareness of the risk associated with dependence on foreign labor sources.

The Great Reshuffling

But it's more than the overall numbers that are discombobulating employers. It's not just the level of supply but its distribution.

Over time, employers had become comfortable with where their jobs rated versus those offered by others. Think of it as a job hierarchy. They knew the level of investment in wages, benefits, and working conditions they needed to make to hire and retain workers in what was a relatively stable marketplace.

But the pandemic era seems to have reshuffled that hierarchy considerably, making the job market less predictable and leaving a number of employers scrambling. Three things happened during COVID-19. The first was a shift in relative compensation. Firms didn't sit idly by as the pandemic created labor shortages. Growth sectors, like warehousing, filled their needs by offering high entry wages. Employers that found themselves short offered new perks or higher wages to convince workers to come. In leisure and hospitality, for example, wages have increased much faster than in the private sector overall. Segments that struggled to find the money to raise wages, such as state and local government, fell behind.

The second shift was that the COVID-19 experience made a number of jobs objectively less attractive. Whole sectors, like restaurants and theme parks, shut down for a time, sending a message that those sectors weren't as secure as they had seemed. Supply chain challenges increased stress on those in manufacturing. And for some workers, like teachers, nurses, and child care providers who had historically earned points for the revered roles they hold in our society, the pandemic also crystallized that they face higher health risks, at least during a crisis.