This is the fourth article in a series examining the transformation of the American workforce during the pandemic. Part I looked at what is driving this change, Part II looked at the rise of $15 an hour as the de facto minimum wage in the private sector and Part III discussed the surge in new business formations.
The American economy remains roughly 5 million workers short of the 158 million who were in the labor force before the pandemic.
Behind the shift: A lack of prime-age workers, the exit of baby boomers and the willingness to simply walk away from a job.
A lack of prime-age workers, the exit of baby boomers during the pandemic and the willingness by many to simply walk away from a job are indicative of a structural change in the economy.
This profound change will require a reformulation of economic policies, portfolio investment strategies and approaches to the way companies attract and retain workers.
And it is all happening in a remarkably short time. Starting with the financial crisis of 2008-09 and now with the pandemic, two major shocks have disrupted the underlying structure of the American economy.
Simply keeping track of the changes, let alone understanding them, is difficult.
But one thing is clear: The changing outlook of workers is not only about wages. Pay is going up and will not revert back to pre-pandemic trends. Instead, the changing outlook is about things that cannot be so easily quantified; it’s about nothing less than the meaning of work and life, and finding a balance.
Those changes in labor force composition, wages and the integration of sophisticated technology into the everyday workplace will define the transformation of the American workforce and the start of the post-pandemic economy.
State of play
Over the past few economic cycles, as the economy has emerged from a downturn, workers have streamed back into the labor force once the unemployment rate drops below 5%. This time, though, that has yet to occur, prompting a question: Where are all the workers?
We see five factors at play:
- The retirement of baby boomers.
- The spread of the delta variant.
- The ghosting of the labor force.
- The intergenerational transfer of wealth.
- The “you only live once” effect.
Just as we point to the aftermath of the Second World War as a turning point, economists 50 years from now will most likely point to the pandemic as the starting point for the next evolution of the American economy.
Retirement of the baby boomers
More than 3 million more baby boomers have retired during the 18 months of the pandemic than would otherwise have been expected. That leaves a big hole in the labor force that’s unlikely to be filled and, perhaps more important, a loss of institutional knowledge within firms.
According to the economist Miguel Faria e Castro at the Federal Reserve Bank of St. Louis, the number of retirees as a percentage of the U.S. population had been stable at 15.5% during the decade before 2008. But 2008 was the first year that baby boomers could collect social security, and the percentage of retirees began its rise.
Jump ahead to March 2020 and the first weeks of the pandemic, and the percentage of boomers retiring increased as older employees were pushed to the side or opted for retirement as the economy shut down.
This rush to the exits resulted in 3 million “excess” retirements, which according to Faria e Castro “is more than half of the 5.25 million people who left the labor force from the beginning of the pandemic to the second quarter of 2021.”
The trend in retirees is also evident in the sudden drop in the labor force participation rate among the population of older men and women. Since the initial exit in March 2020, labor force participation for those 55 and older has been declining, particularly for women.
We would note that because the 55-and-older cohort includes a portion of the generation after the baby boomers, it is difficult to rule out an eventual return to pre-pandemic retirement trends.
This acceleration in retirement is not unexpected. Economic demographers over a decade ago at the Boston Federal Reserve put forward basic scholarship that indicated that growth in the labor force that had held near 1% a year since the Second World War would slow to roughly half a percent as boomers left the workforce.
That time has arrived, and it would appear to be part of the structural changes that the American economy is undergoing.
The spread of the delta variant
When will life return to normal? For families directly affected by the coronavirus, that’s not going to happen. For the broader U.S. economy, normal is also going to be different.
The coronavirus has claimed 5 million lives worldwide, with more than 760,000 lives lost in the United States by the end of October. We are closing in on 47 million coronavirus infections and, in simple terms, COVID-related deaths in the U.S. are greater than during the Spanish flu in 1918-19 and are nearly double the number of American military deaths during the Second World War.
The comparison to the Spanish flu is complicated: Many of the military deaths during the First World War were from the flu rather than from military action.
Notwithstanding less sophisticated tracking and medical capabilities, the Spanish flu killed 0.65% of the U.S. population in 1918-19 compared with COVID having killed 0.23% in 2020-21.
In addition, the Spanish flu recorded a high mortality rate among healthy people, including those 20 to 40 years old, who were not as affected during the COVID outbreaks.
The comparison with the Second World War is also complicated by the young age of the soldiers killed in military action. Though the coronavirus has killed predominantly older people, there has been an increase in the percentage of deaths among younger people in recent months.
With monetary policy in its infancy, the postwar economy was plagued by recessions and wild swings in inflation.
We attribute that to the vaccination program initially directed at older people and this year’s indiscriminate spread of the delta variant among unvaccinated younger cohorts.
It is also difficult to compare today’s wages and inflation to the postwar period. Wage and price controls were still in effect in the immediate postwar economy, with employers offering benefits like health insurance to compete for workers in a tight labor market.
And with monetary policy in its infancy, the postwar economy was plagued by recessions and wild swings in inflation before the economy took its place as the industrial engine of a global economy.
If there is a reasonable comparison to be made to more recent recessions, it is that wage growth in the pandemic era is rising instead of continuing to fall. In the first months of the pandemic, average hourly earnings were pushed higher by the furloughing of low-wage and less-experienced workers during the economic shutdown.
More than a year later, average hourly earnings have returned to their pre-pandemic trend and continue to move higher in response to a shortage of workers in some occupations.
Because of the reluctance of many in the labor force to return to their previous occupations, we expect wages to increase as employers compete for a smaller pool of workers.
Finally, and as with the retirees, the sheer number of COVID deaths and infections—and the long-term complications for many who have been infected—will impose additional costs on the economy in terms of scarce health-care resources and income diverted to less productive enterprises.
A shrinking labor force and a declining birth rate will have an adverse effect on economic growth.
At the same time, a shrinking labor force and a declining birth rate will have an adverse effect on economic growth, while concerns for personal safety will exert an unquantifiable impact on their behavior. This will result in further integration of technology into the labor force and another look at immigrants as a substitute for a small workforce.
How long all that lasts might turn out to be immaterial. The pandemic is spurring fundamental changes in how and where we work and shop, where we live, and how we find meaning in our lives.
Before this is over, automation and remote working will have replaced a number of jobs that—like toll takers who have been replaced by transponders—are unlikely to come back.
There is the chance that the coronavirus and its variants will eventually be nullified by universal vaccination. But while the economic fallout from the pandemic is most likely in its infancy, the changes that emerge from it are permanent.
The ghosting of the labor force
In the drawn-out recovery from the financial crisis of 2008-09, economists agreed that the fiscal response was not big enough.
One area where the fiscal response fell short was around workforce development. Because of the extended duration of unemployment in that time, many workers did not keep up with technological advances.
This time, the digital transformation of the economy has only accelerated, spurred by the need to work from home, among other factors. For many baby boomers, it is proving to be too much to handle, prompting their exit from the workforce.
In addition, the pandemic has created a workforce unwilling, or at least reluctant, to expose themselves to infection and families unable to pay for the child care and elder care necessary to go back to work.
We can see this in the increase in job openings and surmise that at least a portion of the increase in the number of those quitting their jobs are doing so for family reasons.
Put simply, the cost of child care is greater than the take-home pay of low-income workers.
We can only point to anecdotal evidence from surveys of manufacturers who report prospective employees who do not show up for interviews or who do not show up for work.
In addition, the poaching of workers by firms offering bonuses if workers start immediately has contributed to the phenomenon of ghosting.
Though the reasons for ghosting are probably all of the above, the impact can be seen in the drop in the labor force participation rate among those in their prime working years—those 25 to 54 years old.
This cohort includes young adults taking on family responsibilities, and older adults with the skill set to mentor younger workers. Losing even a portion of the most productive segment of the workforce will arguably have consequences long past the health crisis.
The intergenerational transfer of wealth
Who is financing the departure of so many from the labor market? We can point to the increase in savings during the pandemic and then turn to the baby boomers once more.
Making a career choice is possible only if there is something to fall back on should times get tough. Households have accumulated $1.7 trillion in savings, which is roughly a trillion dollars over pre-pandemic averages.
Although not every family has accumulated substantial wealth, there are plenty of houses and apartments whose market value keeps going up. And there are enough retirement plans, IRAs and savings accounts out there to lend support to the younger generations during this crisis.
The impact of higher savings is likely to be around for some time. A report by Cerulli Associates in 2019, as reported in New York magazine, “projected that, over the next quarter century, roughly 45 million U.S. households will collectively bequeath $68.4 trillion to their heirs.”
The transfer of wealth might be enough to finance the early retirement of a growing number of Gen-Xers.
The report said that the transfer of wealth will be the largest in human history. Generation X stands to inherit 57% of that wealth, and millennials will collect the bulk of the rest, the report said.
That transfer might be enough to finance the early retirement of a growing number of Gen-Xers, a temporary sojourn from the workforce of the millennials or the backing of the flourishing number of startups during the pandemic. Whatever the case, this is changing the American labor force.
The deaths of 760,000 people from COVID-19 over the past two years has ushered in an intergenerational wealth transfer that we cannot yet quantify. Bu it is under way and in one respect is financing the ghosting of the American workforce.
The ‘you only live once’ effect
The casualties taken by American society over the past two years are in many ways unprecedented. All of us know someone who was directly affected by the pandemic—someone who spent weeks in a hospital or a male relative in his prime working years who will need breathing assistance for the rest of his life.
That shock—compounded by long hours of working at home and unexpected solitude—has prompted self-reflection among many over how they want to spend their lives. You only live once, the saying goes.
For some, that reflection, away from work, was partially financed by unemployment benefits. For others, it was defined by memorial services that never happened, years of lost opportunity and other life-altering changes that defy quantification.
It is reasonable to assume that many in the workforce have decided that what they were doing before the pandemic was no longer suitable.
There were family members whose care was more important than their job. And there were those who thought that there was nothing to lose by making a midstream correction in their career or by striking out on their own.
That period of solitude, and the decisions made around work and life, are occurring in real time and it is best to acknowledge them and realize that these are decisions that carry long-term consequences for the workforce and in the workplace.
Just as the Great Depression and the world wars changed the framework of economic development, the coronavirus is affecting our society and economy in subtle and not-so-subtle terms.
The pandemic has caused what economists call a shift in structure, most visibly in the choices we make in where we live and how we work and shop. The old paradigms of economic activity—wages, inflation and development— remain important but for many are not driving economic decisions and behavior.