MNI INTERVIEW: US Labor Market Surpasses Pre-Pandemic Strength

The U.S. labor market has now recovered many of the workforce gaps brought on by the Covid-19 pandemic, and shortages of workers alone should be enough to slow payroll growth to around 65,000 a month, Federal Reserve Bank of Chicago economist Bart Hobijn told MNI.

Contrary to a prevailing narrative of five million "missing jobs" and a shortfall of workers compared to pre-pandemic levels, cyclical pressures on participation are higher than in February 2020 and have boosted payrolls by more than 1.4 million relative to that time, Hobijn said.

The labor market is now running up against the same problem it had pre-Covid -- baby boomers retiring en masse -- showing how little the pandemic has shifted long-run trends, he said.

"We have a slightly stronger labor market now than we had right before Covid broke out," Hobijn said in an interview. "There really aren't that many missing jobs and there really aren't that many missing workers. It's an interesting rhetorical argument, but when you really look at the data relative to the trends, we're actually a little above it. And that's true for even for the participation rate."

RUNNING OUT OF PEOPLE

Despite rapid hiring since the first lockdowns and layoffs of the pandemic, some economists have noted that total payroll employment is about five million lower than if the pre-pandemic trend growth in payrolls had continued. But Hobijn and University of Texas at Austin economist Aysegul Sahin argued in a paper presented at a Boston Fed conference in October that the vast majority of that gap stems from an "unrealistic" assumption that the 2015-2020 labor market recovery would have continued at the same pace through 2023.

Such an extrapolation would have seen the unemployment rate decline to 2.1% this year, they said. Correcting for that assumption would find only about 1.4 million missing jobs, due to a sharper-than-expected fall in workforce participation and slightly faster population growth since 2020. The participation rate, at 62.6% in July for the fifth straight month, is seven-tenths below its early 2020 level.

But even that decline in participation is largely in line with its long-run downward trend of roughly a quarter-point per year due to demographic factors, Hobijn said. "There aren't that many more jobs we can create without running into the fact that we're running out of people who want to work."

JOBLESS RATE STEADY

Payrolls growth has slowed steadily to 187,000 in July from three-month averages of above 300,000 earlier in the year, according to Friday's report from the Bureau of Labor Statistics, and that's exactly what one would expect from a maturing recovery in the labor market even in the absence of rapid interest rate increases, Hobijn said.

Since the Fed started raising rates in March 2022, the unemployment rate has stayed in a narrow range of 3.4% to 3.7%, and employment gains have largely come from people who have stayed attached to the labor market.

A rising jobless rate would be a better gauge of the impact of restrictive monetary policy and shocks than the pace of payroll job growth, Hobijn and Sahin said in their paper, which built on work they presented at Jackson Hole in 2021. (See: MNI INTERVIEW: US Disinflation In Train But Economy Overheated)

"People think this time is different. But in fact, Covid has had much less of an impact on the long run trends in the labor market than most people argue."