Long-run changes in the labor force have slowed its growth and are likely to result in a shortage of workers even if the economy falls into recession.
Between 2008 and 2020, the labor force grew at an average rate of 0.06%. Assuming that does not slow further—it very well could because of demographic dynamics and a lack of immigration—the number of jobs necessary to stabilize the unemployment rate at or near the Congressional Budget Office’s estimate of full employment of 4.4% will be roughly 95,000 per month in 2023 and then slowing to 25,000 per month in 2024.
Over the next two years, the economy will need to add only about 60,000 jobs per month to keep the economy near the CBO’s estimate of full employment.
In our analysis, we are assuming that the number of unemployed people will increase by only 20% over 18 months once the recession sets in.
This is a modest trough-to-peak increase in the number of out-of-work people relative to the 50% increases during the recessions of 1980s and 90s. But it is perhaps more consistent with the current demand for labor and the limited supply of willing workers.
We then expect the number of unemployed workers to decrease by 20% over the next two years as the recovery takes hold, which is also a rough estimate based on previous recoveries.
The policy implications of this new dynamic in the labor force are significant. First, it will almost certainly require a policy rate well above the Federal Reserve’s current implied rate of 2.25% to 2.5% that the central bank assumes is neutral.
We are certain that policymakers, investors and the commercial community have not priced this in and are only at the early stages in their consideration of such a significant potential change in the labor force.
Second, sooner or later the American commercial sector is going to have to start a conversation around the need to import workers through the immigration channel.
Because there are no near-term solutions if more people do not re-enter the labor force or no rational compromise on immigration can be reached, the labor shortage will accelerate the turn to technology and advanced forms of automation as the primary solutions to address those labor dynamics.