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Current and former Fed staffers say worker shortages won't soon reverse even as schools reopen and federal benefits lapse.
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Hopes for a post-Labor Day reversal of worker shortages plaguing the U.S. recovery are fading as new research suggests workforce participation rates are less influenced by unemployment benefits and school reopenings than by concerns over catching Covid-19, and may only improve well after unemployment bottoms, current and former Fed economists told MNI.
That would mean a more drawn-out timeline for reaching maximum employment even as the Fed faces pressure to raise interest rates to keep a lid on inflation running near a 13-year high.
"The recovery in participation will be slow. I think the Fed understands this, but they're not really factoring in how long it could take," former Fed economist Stephanie Aaronson, now at the Brookings Institution, said in an interview. "It's hard to move a million people from out of the labor force to employment. It's not that they're not going to come back in, but it'll be slow."
September could see some pick-up in hiring over August's disappointing numbers as children physically return to school and employers no longer have to compete with USD300 a week in federal pandemic unemployment benefits, which expired Saturday. But states that ended the benefits early have not reported obviously stronger job growth, she said.
"For a lot of people, what kept them out of employment is fear for their health, and with Delta raging, many could choose to stay home without the benefits," Aaronson said.
A forthcoming state-level analysis of school closures' impact on the workforce from Aaronson and co-author Francisca Alba finds only a "small depressing effect" on participation levels by mothers whose young children lived in districts with full- or part-time virtual learning.
"School closures are highly correlated with other conditions in the state, and with the state of the pandemic," Aaronson said. "Schooling by itself matters, but it's not the only factor. We shouldn't expect that women will pour into the labor force suddenly in September and October because their kids are back in school."
Ending special unemployment benefits could even worsen participation, as local businesses supported by the extra spending cut back on hiring, leading more workers to drop out of the labor market, said Nicolas Petrosky-Nadeau, vice president of macroeconomic research at the San Francisco Fed.
"More people may no longer be reporting to the BLS that they're actively looking for work, and then they'll be counted as non-participants who are no longer in the labor force." he said in an interview ahead of the Fed blackout period. Some of those individuals will still show up in the household survey as discouraged workers, depending on how they choose to answer the question in the household survey, he added.
Recoveries in participation over business cycles also typically lag the unemployment rate, Petrosky-Nadeau noted.
A paper presented at Jackson Hole last month examining movements in and out of the workforce over the business cycle concluded that the vast majority of the current drop in participation is cyclical. As the labor market strengthens, co-author Aysegul Sahin expects participation to bounce back significantly, though with roughly a nine-month delay. By the end of 2023, when the FOMC projects unemployment of 3.5%, her model estimates cyclical factors will still exert 0.6pp of downward pressure on participation.
"An unemployed person is eight times more likely to leave the labor force on average. When a lot of people lose their jobs and it becomes harder to find a job, people leave the labor force at a higher rate," said Sahin, a former New York Fed economist who now consults with regional Fed banks. Conversely, "when the economy is doing well and job loss risk is low, people tend to have more stable employment. Even if they lose their job, they find a job quickly."
In the unusual circumstances of Covid, where black and Hispanic, less educated and female workers were disproportionately affected, the good news is that "attachment to the labor force they built up during the 2014 to 2019 period is not erased," and will support their return when job-finding conditions improve, Sahin said.
The FOMC has committed to keeping rates near zero until a broad and inclusive recovery in employment and inflation is at 2% and on track to moderately exceed that goal. But prices have risen at double target for several months, while the employment objective drifts farther out of reach, with Covid's Delta variant driving disappointing August jobs numbers. At the same time, PMI surveys have shown firms reporting hiring difficulties as a major barrier to boosting output.
Labor participation held steady in August at 61.7%, unchanged from a year ago and still 1.6pp short of pre-pandemic levels. Unemployment recovered to 5.2% from a high of 14.8% in April 2020.