10 THE NAFCU JOURNAL March–April 2023 LABOR FORCE PARTICIPATION: WHERE HAVE ALL THE WORKERS GONE? By Curt Long, NAFCU Chief Economist and Vice President of Research THE BOTTOM LINE If you talk to any CEO about their organization’s biggest challenges, it will not take long before hiring and retention come up. A recent survey of small businesses found that labor quality and availability was their single biggest problem, outpacing sales and taxes.1 In a November 2022 speech, Federal Reserve Chair Jerome Powell observed that the outage in the labor force versus the pre-COVID forecast stood at 3.5 million.2 This note considers the reasons behind that outage as well as the outlook for future labor force growth. The lion’s share of the blame for the drop in the labor force falls on the surge in retirements. Figure 1 illustrates both the secular upward trend in the retiree share of the adult population as a result of societal aging, as well as the historic leap in retirements beginning in 2020. Even as COVID fears have abated somewhat, excess retirements have not meaningfully declined. A recent study from Federal Reserve researchers attributes essentially all of the one-percentage point decline in the labor force participation rate between 2019 and 2022 to retirees.3 On a more somber note, it may be that COVID-related deaths are reducing the labor force. To date, COVID-related deaths have been predominantly among older populations who generally have lower rates of labor force participation. However, Chair Powell’s November speech cited research estimating that 400,000 workers have died from COVID. It appears that a couple of developments that suppressed labor supply during the early parts of the pandemic are now in retreat. From 2015–19, the number of foreign-born individuals in the labor force increased by an average of 530,000 annually. COVID restrictions both domestically and abroad resulted in a drop of nearly 1.1 million in 2020. However, 2022 was a banner year for legal immigration as the number of foreign-born workers grew by 1.8 million. Similarly, many workers who were separated from their jobs in 2020 started their own businesses. Relative to pre-pandemic levels, the increase in the number of self-employed individuals Figure 1: Share of 16+ Pop. Not in Labor Force, Retired Pre-COVID Trend 20% 19% 18% 17% 16% 15% 2010 2012 2014 2016 2018 2020 2022 Source: NAFCU Research analysis of Current Population Survey (CPS) monthly files (IPUMS). Series is seasonally adjusted for population controls related to the 2020 Census in the CPS. Citation: Sarah Flood, Miriam King, Renae Rodgers, Steven Ruggles and J. Robert Warren. Integrated Public Use Microdata Series, Current Population Survey: Version 7.0 [dataset]. Minneapolis, MN: IPUMS, 2020. https://doi.org/10.18128/D030.V7.0
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