MNI: Fed's Barkin Fears Persistently Short Labor Supply

The Covid-19 pandemic may have left the U.S. with a persistent labor shortage that will put a lid on growth while keeping inflation higher, Federal Reserve Bank of Richmond President Thomas Barkin said Friday.

Labor force participation has fallen more than 1 percentage point compared to early 2020 and there are many reasons to think it might not recover, Barkin said. Unemployment has regained its pre-pandemic lows, but even after businesses and schools reopened and vaccines became widely available, participation remained stubbornly below its pre-Covid levels. The labor force participation rate in November dropped another tenth to 62.1%.

That has significant long-term implications for U.S. policymakers, Barkin argues. The labor shortage has helped feed inflation. The PCE price index, the Fed's preferred measure of consumer inflation, is 6.0%, near 40-year highs. (See: MNI INTERVIEW: US Wage Pressures Likely To Be Longer Lasting)

"Fewer workers would constrain our growth and pressure inflation until businesses and governments can deliver productivity enhancements and/or structure incentives to bring more workers into the workforce."

Policymakers should be exploring policies that encourage workforce participation and preparation, such as more generous parental leave like in Canada or subsidies and pushback against mandatory retirement ages as in Japan, Barkin suggested.