Where have all the workers gone, and why does the US experience stand out from the crowd? It’s a critical question for future growth prospects, because the potential growth of gross domestic product (GDP) is defined in large part by the number of workers available. If that number is down permanently, future GDP is likely to be lower than hoped.
The Great Resignation in the US
On the eve of the COVID-19 pandemic, approximately 155 million people were employed in the US. Wages were rising gradually, but reports of worker shortages were scarce, and few people would have described the US labor market or economy as overheating.
A scant two years later, 152 million people are employed—three million fewer than pre-pandemic. Wages are rising sharply, and worker shortages dominate any discussion of the labor market. Many had expected that the expiration of enhanced unemployment benefits would prod millions of workers to rejoin the labor market, but that didn’t happen. In contrast, workers in the UK and in Europe have returned to the factory or the office in greater numbers than before the crisis.
Fiscal Support Is a Key Distinction
Part of the difference stems from the nature of fiscal support. The US government provides benefits directly to workers who lose their jobs, which allows businesses to shed employees rapidly during a recession. Europe operates much differently: it has prioritized employment stability, providing support to workers through their employers, alleviating much of the need for firms to shed staff.
The distinction was clearly seen in the impact on employment in the early stages of the pandemic. The US shed nearly 15 percent of its workforce, about five times more than the euro area or UK. Of course, it’s a lot easier for employees to return to a job they had before than to find a new one, which likely explains part of the US labor force’s failure to get back to its starting point. But we think there’s much more to it than that.
Demographics: Retirement Timing and Means
The most obvious reason for lower labor force participation is the aging Baby Boomer generation, which has driven a long-term decline in the participation rate for the past two decades. The trend paused in the wake of the global financial crisis (GFC), with older workers delaying retirement given the strong labor market and lingering concerns about financial stability. These dynamics kept the labor participation rate largely stable from 2012–2020.
But demographics are inevitable—retirement delayed isn’t the same as retirement avoided. The US population of those 65 year and older is growing by roughly 1.5 million per year, and the COVID-19 experience has induced many of those who stayed in the workforce even as they aged to leave it now. Older people are more vulnerable to COVID-19, so it makes sense that fewer would be eager to continue working in a riskier environment.
Strong capital markets and household finances in recent years mean that fewer potential retirees face financial pressure to stay in the workforce—a dramatic change from past recessions (Display). Most recently, the S&P 500 took several years to regain its prior peak after the GFC, and many workers on the cusp of retirement found that their eroded savings gave them little choice but to keep working.
After the COVID-19-related sell-off, by contrast, the equity market made up its lost ground within a few months and has risen even further since. That rebound leaves people on the cusp of retirement before the pandemic in much better shape financially today. Assets have outgrown income dramatically, making earned income less important for later-career workers. Add that to the greater health risks of working, and the decision to retire doesn’t seem that hard to make.