MNI INTERVIEW: Workforce Should Return to Pre-Covid Levels

U.S. labor force participation is likely to recover fairly quickly once the worst of the Covid pandemic lifts, former U.S. Labor Department chief economist Heidi Shierholz told MNI, pushing back against the notion that the crisis has inflicted permanent damage on the job market.

“I fully expect that we’ll see a much greater bounceback of the labor force participation rate as we get the virus under control,” said Shierholz, now president of the Economic Policy Institute.

“That’s what policymakers should be thinking of – not that we’re at 3.9% unemployment and so this is like the steady trajectory. This is so different and it’s really important that we plan for loosening as we get the virus under control and people come back to the labor force in droves.”

Workforce participation fell sharply during the pandemic and has recovered more gradually than Federal Reserve policymakers might have hoped given the strength of the job market.

Indeed, Fed officials faced with surging inflation have been forced to move away from their promise to await a more complete recovery in employment that includes a rebound in participation. Many have said that participation may take years to recover as preferences have shifted during Covid, including a wave of some million-plus new retirements.

“We are totally below full employment if we were in a non-pandemic world, we have a jobs gap on the order of 6 million jobs,” said Shierholz.

“But the labor market is massively tighter than it would be with a jobs gap that big if we were in a non-pandemic world. The pandemic is just keeping millions out the labor force due to health and safety concerns, parents and others with care responsibilities.”

FULL RECOVERY

Shierholz said the Biden administration’s latest fiscal package, including support for child-care, might help parents make a smoother return to the workforce. U.S. female labor force participation lags other rich countries that have implemented family-friendly policies, she noted.

“Once Covid is in the rearview mirror, there’s no reason to believe labor force participation won’t get back to pre-recession levels,” Shierholz said. With the passage of Biden’s Build Back Better legislation, “it could go even higher.”

Labor force participation peaked at around 67% in 2001 and has been trending lower since. Some of that is due to an ageing population, but the more pronounced declines appear partly cyclical, as evidenced by a rebound late in the last expansion.

Shierholz said the recent spike in inflation was crimping consumers’ bottom lines, but she was not concerned about a wage-price spiral that might embed price rises more deeply in consumer and business psychology.

“Inflation reduces people’s real wages, so I don’t want in any way to diminish that,” she said. “But when you look at inflation, it’s not coming primarily from the sectors where you’re seeing the strongest wage growth. It’s certainly not a dominant factor.”

Cleveland Fed economists Robert Rich also told MNI this week he is not very worried that wages will become a predominant driver of inflation.