November 28, 2023

US employers added an impressive 528,000 jobs in July, far more than expected, and wages jumped higher than expected – and yet the number of people working or looking for work fell. Where is everybody?

The Labor Department said Friday that the size of the labor force fell by 63,000 in July, even as the population grew by 177,000. The labor force participation rate – the share of people working or looking for work – fell by one-tenth of a percentage point to 62.1%.

The mystery of the shrinking workforce and declining labor force participation is one of the persistent conundrums of the post-pandemic recovery. The labor market has been very strong—so strong that many believe we can’t be in a recession despite two straight quarters of negative economic growth—but somehow that hasn’t pulled a larger share of Americans into the workforce.

“I can’t have a client meeting without someone asking me where all the workers have gone. No idea, but apparently they are gone,” Credit Suisse analyst Zoltan Pozsar wrote in a note to clients on Monday.

Harvard economist and former Obama administration adviser Jason Furman he said on Friday that he is “confused” by the July drop.

There’s also another mystery going on here, which is almost the mirror image of what’s confusing Furman. The household survey says the number of people in employment rose by only 179,000 and the employment-to-population ratio rose just 0.1%. Where did all those workers come from in July if the participation rate didn’t increase and the overall employment level just increased? Just as we do not know where the workers have gone, we do not know where they have come from.

A brief tour of the recent history of the workforce

Travel restrictions, business closures and concerns about COVID led to a drop in labor force participation in the spring of 2020. We jumped to a low of 60 percent in April, but then rebounded quickly for the next three months. In the summer of 2020, however, the recovery stalled. Employment rose rapidly through October but participation did not.

Participation received a second boost in the spring of 2021 when vaccines were released, and a few months later employment began to rise rapidly again. Then we hit another air pocket, which may be related to an increase in the number of infections and schools remaining closed. The reopening of schools and a drop in infections led to a third increase that began in November 2021 and lasted until March this year.

After the peak in March, participation began to fall again. Notably, employment growth peaked last month. Until this month, job growth, as measured by the payrolls survey, was at its slowest pace in more than a year. Part of the decline in participation may simply be that the rate of employment growth has slowed.

Another strange thing started in March 2020. Even though we were still adding jobs, the level of employment as measured by the household survey leveled off. This is the survey the Department of Labor uses to construct the unemployment rate, participation rate, and other demographics about who is working. It is constructed by asking households about their employment status. It differs in several ways from the payroll survey, which asks businesses, nonprofits, and governments about employment, hours, and wages. (You can read about the differences between surveys here.)

Enticing the self-employed into payrolls

When you run the household survey alongside the payroll survey, you notice a few things. First, the household survey shows a higher level of employment than the payroll survey. This is because it includes agricultural workers, self-employed workers whose businesses are not anonymous, people on unpaid leave from work and unpaid family workers. The payroll survey only counts people included in the payrolls of non-agricultural establishments (also called the establishment survey).

Second, you can see that the household survey shows that employment growth stopped in March. Businesses were adding to payrolls, but the overall level of employment was not rising. The best explanation for this is that businesses attract many workers from what economists call margins; but instead of hiring people who were not working, they hire self-employed people. Workers are attracted to the payrolls of external employers by their own businesses. Also, some of the people who leave the labor force are replaced by new entrants, keeping the level of employment stable.

We can see this in the self-employed figures in the household report. The number of self-employed in July shrank by 279,000. On a five-year chart, we can see that self-employment collapsed in the spring of the pandemic and peaked last August. It has been declining rapidly since then, likely because so many workers are shifting from self-employment to payrolls.

This solves the minor mystery of where all the workers we add to the payroll come from.

The decline in labor force participation coincides chronologically with the leveling off of the employment level, suggesting that there may be a connection. Perhaps wage growth alone is not enough to encourage increased labor force participation. Perhaps the level of employment, as measured by the household survey, is what is really driving participation now. One possibility is that the opportunities or rewards for self-employment are contracts, driving some workers into the payroll and sending some out of the labor force altogether.

Real wages are falling

Inflation can also play a role. Although nominal wages are rising, they have not kept pace with inflation. So real wages fall. This makes giving up leisure time for work less compelling on the sidelines. Basically, employers are offering workers less money to work than before, which means more people who don’t absolutely need to work will choose not to. The self-employment gig may not be worth pursuing if your clients aren’t paying you that much in real terms, so you decide to hang up your boots, so to speak. Or maybe you’re a young person who decides to hold off on looking for paid work until wages improve. In short, the real productivity of work has decreased, so some people choose not to invest their time in it.

If it sounds absurd to say that people would choose not to work because prices are rising, keep in mind that unemployment is extremely low and the level of employment is near an all-time high. People are far more likely to relate to a person with a job than at any other time in recent history, and those jobs seem pretty secure right now. This makes it easier for a small percentage of the population to decide not to work.

Keep in mind that the labor force only contracted by 63,000 in July, so we’re not talking about a mass exodus of workers.

The role of seasonal adjustments

It’s work, too, considering the labor force participation rate didn’t actually shrink in July and payrolls didn’t rise by 528,000. Before seasonal adjustments, the participation rate increased from 62.5% to 62.6%. The payroll number shrank by 325,000. This is not malicious. The headlines you read are seasonally adjusted to smooth out month-to-month fluctuations in employment to give us a better perspective on the health of the economy. What the seasonal adjustments for July tell us is that the economy is expected to lose a lot of jobs in July, and this year it didn’t lose that many. In the non-seasonally adjusted payroll growth chart below, the big dips are in January, when payrolls shrink after the holidays, and the small dips are in July. This year’s July payrolls contraction was the second-smallest since the 314,000 payroll contraction in 1966, surpassed only by last year’s small contraction of 41,000.

In other words, it was a very strong tally for July even if you ignore the seasonal adjustment.

Similarly, the seasonal adjustment tells us that the labor force participation rate is expected to jump in July, which it usually does and it did this year. But this year’s jump was smaller than typical, so it’s seasonally adjusted for a fall. The chart below shows the unadjusted labor force participation rate. Each of the spikes is a July.

Declining real wages combined with very low unemployment have raised the opportunity cost of labor. Thus, the number of workers has not kept pace with population growth, reducing the participation rate and keeping the level of employment stable, even as wages rise rapidly.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *