Economic Report

When will the labor force’s ‘missing millions’ return? A lot is riding on the answer

The speed of the U.S. recovery depends on millions of people going back to work

How long will it take for millions of Americans to rejoin the labor force? The answer will tell us how fast the U.S. economy recovers. Here a woman works from home.

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Millions of people missing from the U.S. labor force are expected to go back to work later this year as the pandemic recedes and schools reopen, but what if many of them don’t?

Federal Reserve leaders and most private economists have contended that most of the “missing millions” will re-enter the work force later this year and ease the labor crunch.

Yet a new study by Fed economists suggests it could take several years or even longer for the percentage of people in the labor force to return to normal. After the Great Recession of 2007-2009, for instance, it took almost a decade for that to happen.

The study’s authors contend the slow recovery in the labor force after 2009 “did not reflect any unusual features of this recession and instead was in line with the typical business cycle patterns.”

The people who took the longest to return to the labor force after 2009, the study said, were “men, younger workers, less-educated workers, and Black workers.”

The speed of the labor market’s recuperation has big implications.

The faster people return to work, the quicker the U.S. will make a full recovery. But if it takes years for the labor market to heal, a period of slower economic growth could set in just like it did after the Great Recession.

Businesses have complained for months about a shortage of labor and said it’s holding back the economy. Many firms have raised wages, offered bonuses, and in some cases cut back production because they can’t find enough people to fill a record number of open jobs.

These complaints have erupted even though the government found that 9.5 million people were still unemployed as of June. And that doesn’t include people who are no longer counted in the jobless rate because they are no longer looking for work.

The number of unemployed was much lower before the pandemic.

The rate of participation in the labor market, meanwhile, was just 61.6% as of June — almost two percentage points below the pre-pandemic peak. People are considered part of the labor force if they have a job or are actively seeking one.

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Surveys of the unemployed point to a handful of reasons why they are still at home.

Most are caring for children or aging relatives because of school closures and limited nursing-home options. Others are still scared of the coronavirus, especially those with health problems. And almost 2 million say they can get by on generous unemployment benefits.

All of these issues are supposed to start clearing up soon. Schools are expected to reopen in the fall, freeing parents to return to work. Extra federal unemployment benefits are slated to expire in early September. And the pandemic is expected to fade as more people get vaccinated.

“Myriad factors are tempering labor supply at the moment — the need to care for children, fear of Covid, generous unemployment benefits,” San Francisco Fed President Mary Daly wrote in a blog post on Tuesday. “But there is no reason to expect those to be permanent or even high persistent features of the labor market.”

In the long run, Daly is probably right based on past business cycles. But the short term presents a problem, starting with a resurgence in the pandemic due to the delta variant of the coronavirus. It could lead to some schools not reopening on time and keep people from looking for work.

The new Fed study also suggests many people who leave the labor force make a conscious choice that they are unlikely to change on the spur of the moment. Perhaps they chose to go to college, to stay at home for awhile to care for family members, or to outright retire.

“Those transitions may not respond quickly to changes in labor market conditions, since these activities may take time to enter or exit,” the Fed study said.

Some economists argue the nature of the recession and recovery tied to the pandemic means past patterns in the labor market might not apply. They say people are more likely to return to work soon because hiring is much stronger now than it was after the Great Recession.

“The lesson is simple,” Daly wrote. “Americans want to work and it would be a mistake to assume otherwise.”

The July employment report to be issued on Friday by the Labor Department might offer some clues. Economists polled by The Wall Street Journal predict the U.S. created 845,000 new jobs.

At that pace, the economy could recover all the jobs lost during the pandemic within a year. But it would still be awhile before the so-called labor force participation rate catches up to pre-pandemic levels, particularly since the population is larger now.

Then there’s the delta variant’s course to consider. The recovery could take even longer if Covid cases resulting from the variant continue to mount.