Recession fears have mounted in recent weeks as inflation continues to weigh on household budgets and the US Federal Reserve looks set to hike interest rates and further slow the economy.
However, as if unaware of bliss, the labor market has developed. Hiring over the past month exceeded expectations and defied downturn warnings.
But the good jobs news could ultimately jeopardize the economy. Wages rose a staggering 5.1% year-on-year last month, bringing welcome relief for workers but also sobering news for Fed officials worried about runaway inflation fueled by earnings gains.
A lesser-known data point, on the other hand, has attracted disproportionate attention: the proportion of the adult population not working or actively looking for work. When labor is plentiful, it creates some slack in the labor market and limits wage growth. However, labor force participation was 62.1% last month, well below the pre-pandemic level of 63.4%.
A father plays with small children in the living room. (Photo illustration by Ute Grabowsky/Getty Images)
Photo illustration by Ute Grabowsky/Getty Images
Tight labor supply is keeping the job market tight and contributing to rising wages that could exacerbate inflation and push the economy into a recession, economists told ABC News.
Americans “should be concerned about this,” Stephanie Roth, a senior market economist at JP Morgan Private Bank, told ABC News. The company forecasts a recession as the most likely outcome for the economy, she said, adding that “persistently tight labor markets and high wage inflation would be a key reason.”
The alarm raises a key question at the heart of the economy: How can millions of missing workers stay on the fringes and afford to pay their bills?
Here’s how the unemployed have maintained their lives and why it matters:
retirement rates increased
The main explanation for why so many people have stayed out of the workforce is people who have retired during the pandemic, economists said.
In the past three months, there were 3.6 million more Americans who had left the workforce and said they no longer wanted a job, compared to the same period in 2019, Aaron Sojourner, an economist at the Upjohn Institute, told ABC News. Of those 3.6 million people, about 90% were people aged 55 and over, he added.
A stock market slump during the pandemic sent some older Americans’ fortunes skyrocketing, leaving them without an income. Meanwhile, the increased risk of serious illness that older Americans have faced during the COVID outbreak has left them fearful of workplace exposure, Sojourner said.
“They had their finances in a position that allowed them to make the choice to stay out,” he said.
But a stock market downturn this year has rocked this financial stronghold for retirees, JP Morgan’s Roth said. Still, the reluctance of many older Americans to re-enter the labor market is due to the persistence of their pandemic-era savings and the difficulty of returning to a past lifestyle.
“Now they’re settled into their retirement lives and are less likely to return to the workforce,” Roth said.
savings strengthened
Another financial lifeline for unemployed Americans is the stash of savings many have built up during the pandemic, economists said.
The COVID era boosted household savings as government stimulus and soaring asset prices combined with a lockdown lifestyle that eliminated expenses like travel and eating out.
US households have accumulated about $2.3 trillion in savings in 2020 and 2021, a Federal Reserve study showed last month. Additionally, households in the bottom half of the income distribution still had $350 billion in excess savings as of the middle of this year, the study found.
Those savings gave workers the flexibility to make major changes, such as quitting their jobs and cutting expenses to afford the lost income, Jesse Wheeler, an economics analyst at research firm Morning Consult, told ABC News.
“The lifestyle choices that people have made during the pandemic to move somewhere else, work a little less and enjoy family time — those choices are difficult,” Wheeler said.
Recently, however, savings have dwindled for many, Wheeler said.
Last month, the personal savings rate fell to 2.3%, the lowest rate in nearly two decades, according to data from the Commerce Department.
A “We Are Hiring” sign hangs outside a restaurant in Los Angeles.
FREDERIC J. BROWN/AFP via Getty Images
With inflation lingering near a 40-year high, shoppers have turned to savings to maintain steady levels of consumption while weathering elevated prices, he added.
“This is clearly not going to be sustainable over the long term,” Wheeler said. “People will eventually have to cut back on spending or get back into the workforce to increase their earnings.”
Informal work and self-employment
Data reporting a shrunken workforce is likely to overlook some Americans who have continued to work, particularly in self-managed businesses or informal jobs, economists said.
During the pandemic, new business applications skyrocketed and remained above pre-pandemic levels, Census Bureau data showed. The Bureau reported nearly 433,000 new business applications in October, a significant increase from 313,000 in December 2019. In July 2020, new business applications even reached 552,000.
The government survey, which calculates monthly US hiring, may omit some self-employed workers, Roth said.
Some people who have gig jobs describe themselves as employed, while others don’t, Morning Consult’s Wheeler said.
Typically, when asked, people who hold formal gig jobs in delivery or driving describe themselves as employed. However, people who depend on jobs like babysitting, housekeeping or dog walking often don’t call themselves employed, Wheeler said.
The increase in gig work across the economy likely accounts for some of the workforce shortages, Sojourner said.
“There are a little more people who see informal work as an opportunity to sell some of their time and skills,” he said.
Relying on a spouse or other family for support
The savings boom and increase in remote work during the pandemic caused some married households to decline from two to one income and pushed some workers to move in with family members so previously employed people could live on the support of loved ones, economists said.
While this shift likely accounts for a small fraction of those outside the labor force and data remains limited, the phenomenon highlights a lifestyle change being enjoyed by some who have prioritized childcare or other activities over work, they said.
“People have changed their lifestyles, maybe moved to the suburbs or consolidated households, maybe switched from one income to two,” Wheeler said. “They realized that they like this lifestyle better and they don’t want to go back.”
For example, the labor force participation rate of women ages 25 to 34 fell nearly 5 percentage points after the pandemic began, according to the Bureau of Labor Statistics. While employment in this group has recovered, it remains below pre-pandemic levels.
The decision to leave childcare work has been a key obstacle for women during the pandemic. The problem remains, but has largely eased, Roth said.
“I wouldn’t say that’s the main driver of wage inflation today, but it’s an important piece of the puzzle,” Roth said.