MNI INTERVIEW: US Labor Force 'Missing' 2.5M Workers - KC Fed

Around 2.5 million workers are "missing" from the U.S. labor force, a figure that's increased half a million since May, Federal Reserve Bank of Kansas City senior economist Didem Tuzemen told MNI.

"We have lost people from the labor force since March," she said. The decline in the size of the labor force has been driven by "missing" workers, who may yet return, rather than demographic factors such as slower population growth and an aging population, she said in an interview.

Using data from the U.S. Census Bureau’s Current Population Survey, Tuzemen estimates the size of the U.S. labor force if it had continued to grow at its 2015–19 trend during the pandemic then discounts both slower population growth and the aging of the population. She estimates that as of July the missing labor force is now around 2.5 million.

"If we had stayed in the 2015-2019 labor force trend or population growth trends, and also if there was no aging, then we would have around half a million more people in the labor force," she said. "Slower population growth and aging of the labor force or the population means that 1.5 million people would not be in the labor force regardless."

Weaker population growth is also related to slowing immigration, she said, citing work by University of California, Davis's Giovanni Peri showing that about 2 million foreign-born workers are "missing" today. (See: MNI: Low Immigration To Keep Lid on Labor Supply -Fed Staffers)

LABOR SUPPLY

Currently, individuals age 65 and older make up the majority of the missing labor force as their labor force participation rate has remained persistently below pre-pandemic levels throughout the recovery, she said. "It's still the older individuals that make up the majority of the missing labor force."

Increases in the size of the aggregate labor force in the near term will depend on the pace of recovery in the labor force participation rates of these older groups and further increases in the prime-age labor force participation rate, which had been on an increasing trend in the 2015–19 period. The labor force participation rate has fallen 0.3 percentage points since March to 62.1% today, from 63.4% before the pandemic.

"The main reason why the labor force is now below the pre pandemic is because labor force participation rates of different demographic groups are below their pre pandemic levels," she said. "We really need all age groups for people to participate more in the labor force to get somewhere close to the pre pandemic levels."

Goldman Sachs economists say some cyclical recovery in prime-age labor force participation over the next year could contribute about a third of a percentage point to the overall labor force participation rate. But over the long run they expect the rate to decline in line with demographic trends, mostly due to population aging, slipping to 62.0% by the end of 2024, and 61.8% at the end of 2025.

Tuzemen declined to offer forecasts on the participation rate and on what millions of missing workers could mean for wage pressures going forward, noting the need to see how labor demand fares. An update to the Kansas City Fed's Labor Market Conditions Indicators index released last week showed momentum in the labor market continuing to ease but remaining above its longer-run average.