Banks lose out to capital markets when it comes to credit provision

“…This paper studies the impacts of Covid-19 illnesses on the labor supply of U.S. workers using longitudinal data from the Current Population Survey (CPS). We first document that the rate of week-long health-related absences has been substantially elevated during the pandemic relative to pre-pandemic seasonal patterns, and that these excess absences appear to reflect Covid-19 illnesses. In a typical pandemic week, about ten workers per thousand missed an entire week of work due to their own health problems, as compared to six health-related absences per thousand workers in an average week from 2010 to 2019.Excess absences covary with reported Covid-19 cases both in the national time-series and a state panel, and are higher among occupations with higher Covid-19 exposure. Second, we show that health-related absences generate persistent reductions in labor supply. Using an event study, we find that workers who miss an entire week due to probable Covid-19 illnesses are approximately 7 percentage points less likely to be in the labor force one year after their absence compared to otherwise-similar workers who do not miss work for health reasons. These estimates appear representative for Covid-19 illnesses specifically, not only as an average over myriad health issues, and they are about the same as the average effects of pre-pandemic health-related absences. One reason why Covid-19 illnesses reduce labor supply is that they push older workers into retirement. Our results are thus best interpreted as identifying not “long Covid” in isolation but rather the overall labor-supply adjustment, across mechanisms, induced by Covid- 19 illnesses. We next use our results to assess the aggregate impacts of Covid-19 illnesses on the U.S. labor force participation rate. Combining our event-study results with the excess rate of health-related absences, we estimate that Covid-19 illnesses have reduced the labor force participation rate by 0.2 percentage points, or by approximately 500,000 workers, through June 2022. This point-in- time impact is near our estimates of the steady-state impact of Covid-19 illnesses at the average rate of health-related absences in 2021. These losses fundamentally reflect an overall increase in the health-related absence rate with no change in the average long-run impact of an absence. We also discuss additional considerations that would increase or reduce the total effect of Covid-19 illnesses on labor supply relative to our preferred estimate. Overall, the loss in U.S. labor supply from Covid-19 illnesses appears substantial, comparable to an additional year of U.S. population aging at its current pace.Finally, we calculate the average cost of a Covid-19 absence in forgone labor earnings through fourteen months after the absence, including both extensive and intensive margins of adjustment. The average Covid-19 absence results in forgone earnings of at least $9,000, about 90 percent of which is due to persistent labor-supply reduction beyond the week-long absence itself. This economic cost can be viewed as a revealed-preference measure of the medium-term health impact of Covid-19 illnesses. In aggregate, we calculate that the per-year value of the lost labor supply is approximately $62 billion, which is about half of estimated losses from cancer or diabetes….”

Evidence of Covid Impact on LFP

“…We find that Covid-19 illnesses have likely become, over the last two years, an important contributor to the net change in the participation rate. By June 2022, Covid-19 illnesses reduced the participation rate by 0.18 percentage points, with a range of 0.13 to 0.22 percentage points, as we show in Appendix Figure A21. These reductions in the participation rate imply that approximately 500,000 adults are neither working nor actively looking for work due to the persistent effects of Covid-19 illnesses, with a range of 340,000 to 590,000 adults. This point-in-time participation-rate loss is near the steady-state loss associated with the 2021-average rate of health-related absences. That is, if the health-related absence rate remains near its 2021 level, and if the impacts of Covid- 19 absences are unchanged, then our estimates suggest the participation rate will be persistently reduced by approximately 0.2 percentage points….”

Gopi Shah Goda and Evan Soltas, "The Impacts of Covid-19 Illnesses on Workers,"National Bureau Of Economic Research, September 2022, https://www.nber.org/papers/w30435

“…Then again, there is another composition effect at work in these statistics that I haven’t discussed. While women’s labor-force participation rates rose from the 1950s through 1990s, men’s fell. So while the current labor-force participation rate for all Americans in their late 50s and early 60s is near an all-time high, for men it’s well below the rates that prevailed before the mid-1970sThe puzzle of why labor-force participation fell so much among US men of all ages was a major topic of economic discussion in the 2010s that’s probably due for a revival. For those in their late 50s and early 60s the decline wasn’t all bad news, as generous early retirement packages surely drove some of it. Those are less common than they used to be, whileboosting male 55-64 labor force participation back to, say, the August 1970 rate of 82.6% would add 2 million would-be workers to the US job market. Bringing the participation rate for so-called prime-age men (25-54) back to 1970 levels would add another 4.5 million.Reversing changes that happened half a century ago is surely a lot harder than reversing those of the past couple of years. But maybe it’s the next frontier….”

Justin Fox, "The 55-and-Older Labor Market Exodus Is a Statistical Mirage,"Bloomberg, September 9, 2022, https://www.bloomberg.com/opinion/articles/2022-09-09/americans-older-than-55-haven-t-given-up-working

The 55-and-Older Labor Market Exodus Is a Statistical Mirage

I’m in my late 50s and I’m on the job. So are more than 70% of Americans aged 55 through 59, according to the Bureau of Labor Statistics. In fact, my age group’s labor-force participation rate was approaching record levels earlier this year before undergoing its usual summer decline.

Americans in their early 60s are pretty close to record labor-force participation, too. The big declines are all among those 65 and older. But — and here’s where things get really weird — those declines are still smaller in percentage-point terms than those for the 55-and-older group overall. This strange data quirk is the result of so-called composition effects, caused by the shifting age distribution within the age group, which I’ll discuss a little later. First, though, let’s get around the strange quirk by looking at labor market changes for smaller age groups.

The reason the 55-and-older numbers get so much attention is that it’s the one of the few age groups for which the BLS provides seasonally adjusted labor market data. The unadjusted numbers come with big seasonal swings and, especially when you’re looking at narrow age groups such as 55 through 59, a fair amount of month-to-month statistical noise. Still, there are ways to deal with both, such as comparing three-month averages from this summer with those from before the pandemic in 2019.

As for the two under-60 age groups that haven’t returned to or surpassed their summer 2019 participation and employment rates, those in their early 20s may be staying in college longer to make up for pandemic gap years and other delays, or still struggling to recover from the many disruptions to the job market and society in general in 2020. For those in their late 30s child-care complications could be a culprit, although curiously, women in that age group are back to pre-pandemic levels while men are not.

For workers 60 and older, who in the decades before the pandemic had been experiencing steady gains in labor-force participation and employment, it makes sense that a disease that was far deadlier for the elderly drove many out of the labor force — because of either fear of catching Covid-19 or struggles with Long-Covid complications after catching it. The remarkable performance of stocks and other assets in 2020 and 2021 may also have led some affluent older workers to retire earlier than planned.

But again, members of the 60-to-64 age group left only briefly. Their labor-force participation rate hit an all-time high in March 2020, when low response rates amid lockdowns may have skewed the data, and came close to that again last November. (“All-time” for these numbers only goes back to June 1976, but statistics available back to 1948 for the broader 55-to-64 age group indicate that recent rates are the highest over that period too.)

Those 65 and older have in fact seen a clear drop in labor-force participation after decades of gains. But 65-plussers made up only 6.6% of the labor force in August, compared with the 16.4% share accounted for by those 55 through 64. Their 1.1 percentage point labor-force participation decline since summer 2019 works out to 626,835 missing would-be workers — not nothing, but also not that huge a deal in a labor force of almost 165 million.

The labor-force participation decline for the broad 55-and-older category is 1.7 percentage points whether measured in seasonally adjusted data from February 2020 or in unadjusted summer-2019-to-summer-2022 comparisons, as I did with the other age groups. How can this be bigger than the decline for those 65 and older, not to mention those in their late 50s and early 60s? Well, the youngest baby boomers are turning 58 this year, meaning that the younger end of the 55-and-older group is now being replenished with the less-numerous members of Generation X.

Because of this, the average age of Americans in the 55 and older category rose even through the ravages of Covid-19 and will continue doing so. 1 Meanwhile, labor-force participation tends to peak around age 40, and decline as people age beyond that. So with each passing year, the 55-plus labor-force participation rate will drop even if the rates for every year of age within the group remain the same. The reverse transpired as the baby boomers began to enter the age group two decades ago, as will also be the case for the 75-plus age group that they started joining last year.

Then again, there is another composition effect at work in these statistics that I haven’t discussed. While women’s labor-force participation rates rose from the 1950s through 1990s, men’s fell. So while the current labor-force participation rate for all Americans in their late 50s and early 60s is near an all-time high, for men it’s well below the rates that prevailed before the mid-1970s

Corporate tax revenues boomed in 2021 and some supporters of the 2017 Tax Cuts and Jobs Act (TCJA)argue that the big tax reductions in the bill deserve the credit But there is a much better explanation: Last year’s strong economic growth, high inflation, and pandemic-related relief legislation increased both corporate profits and the taxes business paid. Soon after the TCJA was passed, the Congressional Budget Office (CBO) forecast corporate tax receipts would fall from 1.5 percent of Gross Domestic Product (GDP) in 2017 to 1.2 percent in 2018 and 1.3 percent in 2019 and remain below the 2017 share until 2022 (Figure 1). Actual corporate tax receipts fell even farther to 1.0 percent of GDP in 2018 and 1.1 percent in 2019. The onset of the pandemic in early 2020 drove the economy into recession and kept corporate tax receipts low. In 2021, corporate tax receipts grew dramatically to 1.7 percent of GDP, higher than CBO’s 2018 forecast. For 2022, CBO now forecasts corporate tax receipts will remain strong but fall to 1.6 percent of GDP, only slightly higher than it predicted in 2018. The reasons are pretty clear: In 2021, the economy grew at its fastest pace in three decades and inflation rose at its highest rate in four decades. Fiscal stimulus and easy money raised the demand for goods and services much faster than they increased output, which was restricted by pandemic-related supply constraints. Together, those factors drove prices higher. In general, higher demand translates into higher profits for corporations and higher compensation for workers. Profits increase despite the higher compensation largely because prices of goods tend to respond more quickly to increased demand than wages. Higher corporate profits translate into higher corporate taxes. Profits rose to an average of 12.2 percent of GDP in 2021, more than a percentage point higher than the 11.1 percent average between 2017 and 2019 (Figure 2). Some have suggested that the higher profits were the result of strong business investment. However, this is inconsistent with the data on rate of return for corporations. As profits rose from 2020 to 2021, the rate of return on assets for nonfinancial corporations increased from 7.8 percent to 9.4 percent, higher than the average of 8.4 percent over 2017 and 2019. If higher investment boosted U.S. corporate assets during that period, the pre-tax rate of return on corporate assets would have fallen—not increase, as it did.

William G. Gale, Kyle Pomerleau, and Steven M. Rosenthal, "The booming economy, not the 2017 tax act, is fueling corporate tax receipts,"Brookings Institution, June 3, 2022, https://www.brookings.edu/blog/up-front/2022/06/03/the-booming-economy-not-the-2017-tax-act-is-fueling-corporate-tax-receipts/

The booming economy, not the 2017 tax act, is fueling corporate tax receipts

Corporate tax revenues boomed in 2021 and some supporters of the 2017 Tax Cuts and Jobs Act (TCJA) argue that the big tax reductions in the bill deserve the credit (Wall Street Journal, Goodspeed and Hassett). But there is a much better explanation: Last year’s strong economic growth, high inflation, and pandemic-related relief legislation increased both corporate profits and the taxes business paid.

Soon after the TCJA was passed, the Congressional Budget Office (CBO) forecast corporate tax receipts would fall from 1.5 percent of Gross Domestic Product (GDP) in 2017 to 1.2 percent in 2018 and 1.3 percent in 2019 and remain below the 2017 share until 2022 (Figure 1). Actual corporate tax receipts fell even farther to 1.0 percent of GDP in 2018 and 1.1 percent in 2019. The onset of the pandemic in early 2020 drove the economy into recession and kept corporate tax receipts low.

The reasons are pretty clear: In 2021, the economy grew at its fastest pace in three decades and inflation rose at its highest rate in four decades. From early 2020 to early 2021, Congress passed multiple bills designed both to cushion the economic and public health impact of the pandemic and help the economy recover.

These measures will pump more than $5 trillion into the economy over their respective 10-year budget horizons compared to the TCJA that totaled $1.9 trillion. The Fed’s accommodative monetary policy also stimulated the economy.

Fiscal stimulus and easy money raised the demand for goods and services much faster than they increased output, which was restricted by pandemic-related supply constraints. Together, those factors drove prices higher. In general, higher demand translates into higher profits for corporations and higher compensation for workers. Profits increase despite the higher compensation largely because prices of goods tend to respond more quickly to increased demand than wages.

Higher corporate profits translate into higher corporate taxes. Profits rose to an average of 12.2 percent of GDP in 2021, more than a percentage point higher than the 11.1 percent average between 2017 and 2019 (Figure 2).

Some have suggested that the higher profits were the result of strong business investment. However, this is inconsistent with the data on rate of return for corporations. As profits rose from 2020 to 2021, the rate of return on assets for nonfinancial corporations increased from 7.8 percent to 9.4 percent, higher than the average of 8.4 percent over 2017 and 2019. If higher investment boosted U.S. corporate assets during that period, the pre-tax rate of return on corporate assets would have fallen—not increase, as it did.

Nearly 64 percent of adults between the ages of 55 and 64 were working in April, essentially the same rate as in February 2020. That’s a more complete recovery than among most younger age groups. The share of Americans reporting that they were retired did rise sharply in the spring of 2020. But retirement is not an irreversible decision. And research from the Federal Reserve Bank of Kansas City has found that at the pandemic’s onset, there was a steep drop in the number of people leaving retirement to return to work, attributable at least partly to fear of the virus and a lack of job opportunities, swelling the ranks of the retired. As the economy has reopened and the public health situation has improved, these “unretirements” have rebounded and have recently returned roughly to their prepandemic rate, according to an analysis of government data by Nick Bunker of the Indeed Hiring Lab. The return of older workers has been concentrated among those in their late 50s and early 60s, people who were still several years or more away from retirement when the pandemic began. The employment rate among those 65 and older fell more sharply and has been much slower to recover.That suggests that the pandemic might have led some people who were already closer to retirement to accelerate those plans, and that the greater health risks they faced may have made them less likely to return to work while the virus continues to circulate.

Ben Casselman, "‘I Had to Go Back’: Over 55, and Not Retired After All,"New York Times, May 19, 2022, https://www.nytimes.com/2022/05/19/business/economy/older-workers-labor-force.html

‘I Had to Go Back’: Over 55, and Not Retired After All

When Kim Williams and millions of other older Americans lost their jobs early in the coronavirus pandemic, economists wondered how many would ever work again — and how that loss would weigh on the economy for years to come.

Ms. Williams, now 62, wondered, too, especially when she struggled for months to find work. But in January, she started a new job at an AAA office near her home in Waterbury, Conn.

“I’m too young to retire, so I had to go back,” she said.

Whether by choice or financial necessity, millions of older Americans have made the same move in recent months. Nearly 64 percent of adults between the ages of 55 and 64 were working in April, essentially the same rate as in February 2020. That’s a more complete recovery than among most younger age groups.

“The bottom line is that older workers have gone back to work,” said Alicia Munnell, director of the Center for Retirement Research at Boston College.

For many people, retiring early was never an option. Ms. Williams spent more than 25 years in manufacturing, working for a Hershey’s plant making Almond Joy and Mounds bars. The job paid reasonably well, and offered a retirement plan and other benefits. But in 2007, Hershey’s closed the factory, moving production partly to Mexico.

Ms. Williams, then in her 40s, went back to school, earning an associate degree in hospitality and eventually finding a job as a supervisor at a local hotel. But the position paid significantly less than her factory job, and she drew down her retirement savings to cover medical expenses and other bills. When she was laid off again in June 2020, just a few weeks after her 60th birthday, Ms. Williams had little in savings.

Ms. Williams tried to change careers again, this time going back to school to train as a medical secretary. But she has been unable to find work in her new field. In January, with her savings gone, she took a job at AAA for $16.50 an hour, $2 an hour less than she earned at the factory in 2007, before accounting for inflation. She says she will have to work at least until she can start drawing her full Social Security benefits at age 67.

“If I could’ve left at 62, I would’ve left at 62, but I can’t,” she said. “Not all of us made that money where I could move down to Florida and get a $400,000 house.”

The fastest inflation in decades has added to the pressure on people of all ages to return to work. More recently, so has the turmoil in financial markets, which has taken a bite out of retirement savings.

But even some people who could retire are choosing to return to work as the pandemic ebbs.

When the Long Island fitness studio where she worked as a spinning instructor shut down early in the pandemic, Jackie Anscher lost both a job and a part of her identity. In an interview with The New York Times that summer, she described what seemed at the time like an abrupt end to her career as “a forced retirement.”

But after spending the beginning of the pandemic reorganizing her life and re-evaluating her priorities, Ms. Anscher, 60, has begun teaching spin classes again as a substitute instructor at a local gym, and she is looking for a more regular gig. Her husband is already retired — “he’s been waiting for me to go fishing,” she said — and the couple could afford for her to stop working. But she isn’t ready to hang up her cycling shoes.

“I liked what I had. I loved who I was in front of the room,” she said. “It’s about my mental health. For me, it’s about preserving me.”

Older workers weren’t any more likely than younger workers to leave the labor force early in the pandemic. But economists had reason to think they might be slower to return. Unemployed workers in their 50s and 60s typically have a harder time finding jobs than their younger counterparts, because of ageism and other factors. And unlike after the 2008-9 recession, when depressed housing prices and high debt levels left many people with little choice but to keep working, in this crisis prices of both homes and financial assets kept rising, providing a financial cushion to some people nearing retirement age.

The share of Americans reporting that they were retired did rise sharply in the spring of 2020. But retirement is not an irreversible decision. And research from the Federal Reserve Bank of Kansas City has found that at the pandemic’s onset, there was a steep drop in the number of people leaving retirement to return to work, attributable at least partly to fear of the virus and a lack of job opportunities, swelling the ranks of the retired.

As the economy has reopened and the public health situation has improved, these “unretirements” have rebounded and have recently returned roughly to their prepandemic rate, according to an analysis of government data by Nick Bunker of the Indeed Hiring Lab.

Still, the return of early retirees to the labor force is a reminder that rising wages and abundant job opportunities can draw in workers who might otherwise remain on the sidelines, Mr. Bunker said. The labor force shrank during the last recession, too, and some economists were quick to declare that workers were gone for good. But many people eventually came back during the strong job market that preceded the pandemic: It provided opportunities to people with disabilities and criminal records, to people with little formal education and to people who had taken time away from work to raise children or to care for ailing parents.

That pattern may be repeating itself, but on a much more compressed timeline.

“Don’t underestimate labor supply,” Mr. Bunker said. “Don’t count out the possibility that people want and need work. It has happened much more quickly than what we saw after the global financial crisis, but the broad principle is the same.”

When Tad Greener lost his job managing utilities for a Utah university in late 2019, he wasn’t worried at first about finding a new one — the unemployment rate, after all, was near a 50-year low. But Mr. Greener had hardly begun his search when the pandemic hit and the bottom fell out of the economy. Suddenly, he was 60 years old, unemployed and facing the worst labor market in nearly a century.

Mr. Greener eased up on his job search during the first phase of the pandemic, in part because of some health issues unrelated to the coronavirus. By spring of 2021, he was ready to work again, but he had little luck applying for jobs. He thinks many prospective employers were turned off by the combination of his age and his time out of the work force.

“It’s a daunting task to be 62 years old, to be unemployed for over a year and to try and find work,” Mr. Greener said. “There were times where I didn’t think I was ever going to be able to go back to work.”

As the economy reopened, however, many businesses struggled to hire enough workers to meet the surge in demand. That prompted employers to consider candidates they might otherwise have dismissed, or to look for ways to attract people who could work but weren’t looking.

In Mr. Greener’s case, he learned about a new “returnship” program from the State of Utah that was meant to help people who had been out of the labor force get back to work. Last fall, he was accepted into the program, landing a part-time job in the state Office of Energy Development, which quickly turned into a permanent, full-time job. Now that he is back at work, Mr. Greener says he plans to stay until he is 67, or perhaps longer if he stays healthy.

“Every day I hear about how there aren’t enough workers available,” Mr. Greener said. “There are a lot of older workers that are being written off, or at least finding it much more difficult to get back into the workplace, who have a lot of years and things to offer.”

Even though the unemployment rate is barely higher than the 50-year low of 3.5% it registered in February 2020, just before the Covid-19 crisis struck, there were 1.2 million fewer jobs than there were back then. Throw in population growth and the shortfall from prepandemic levels is even larger. The labor-force participation rate—the share of workers with a job or actively looking for one—was 62.2% last month versus 63.4% in February 2020.

Justin Lahart, "The U.S. Economy Is Desperately Seeking Workers,"Wall Street Journal, May 6, 2022, https://www.wsj.com/articles/desperately-seeking-workers-11651851566

The U.S. Economy Is Desperately Seeking Workers

There are two ways for the job market to cool off. One is for hiring to slow considerably. The other is for more people to enter the labor force. The latter is obviously preferable, but it isn’t clear how much of the latter the U.S. is going to get.

The Labor Department on Friday reported that the economy added a seasonally adjusted 428,000 jobs in April—equal with March’s gain and showing employment is growing at a heady clip. The unemployment rate, which is based off a separate survey, held at a very low 3.6%.

What would help the situation a lot is for more people to come back into the workforce. Even though the unemployment rate is barely higher than the 50-year low of 3.5% it registered in February 2020, just before the Covid-19 crisis struck, there were 1.2 million fewer jobs than there were back then. Throw in population growth and the shortfall from prepandemic levels is even larger.

The reason the unemployment rate is low despite reduced employment levels is that, to be counted as unemployed, one must be actively seeking work. A lot of people aren’t doing that. The labor-force participation rate—the share of workers with a job or actively looking for one—was 62.2% last month versus 63.4% in February 2020. That is, of course, much better than it was during the worst of the pandemic, but a lot of the things that seemed like they might draw even more people back into the labor force, such as the availability of vaccines, the easing of Covid-19 concerns and the ending of extra benefits for the unemployed, didn’t have as much of an effect as economists hoped.

Maybe with the advent of warmer weather, the continued easing of Covid-19 worries and the stockpiles of savings many Americans built up during the pandemic starting to diminish, more people will go on the job hunt. That is certainly what the Fed is looking for: In his press conference Wednesday following the Fed’s meeting, Chairman Jerome Powell said that he and other members of the central bank’s rate-setting committee “generally expect that we’ll get some additional participation.”

If that increase doesn’t come, however, the Fed will be put in a position where it will feel it needs to bring job growth down sooner rather than later. To do that, it will need to lift rates more quickly, raising the odds that it goes too far and sends the economy into a recession.

America is increasingly falling behind its peer nations. In the 1990s, America was a leader in employment levels thanks to its strong economy and relative accessibility to working women. The 2001 recession and the “jobless recovery” that followed knocked America back down to a level more in line with its peer nations—and then the 2008 recession knocked America far behind. Today, Italy—a nation notorious for its perennially broken labor market—is the only member of the G7 with lower prime age employment levels. Countries like Portugal and Japan—which have by no means experienced surges of dynamism or explosive economic growth over the last two decades—have managed to beat out the US and achieve 85% prime age employment rates. Male employment has been declining across advanced economies as men spend more time raising children and employment transitions away from traditionally male-dominated industries like manufacturing. Still, in few countries has the decline been as stark and as dramatic as in the US. Male prime-age employment rates in the US were nearly 10% off all-time-highs in 2009, and still remain 5% below their high-water mark.the majority of flows into employment every month do not come from unemployment but rather from outside the labor force.This is true during all but the very worst recessions (i.e., early 2020), butduring boom times nearly 3/4 of all flows into employment come from outside the labor force. Granted, that’s partially because the number of Americans outside the labor force is just so large (about 100 million people compared to about five million people in unemployment), but it also reveals how rapid growth in employment numbers can occur despite low unemployment numbers. American economic policymaking and punditry has a horrible history of presuming that workers outside the labor force are lost forever. In the 2010s drops in employment for non-college educated people were blamed on a “skills gap”. Drops in employment for young people were blamed on their laziness. Drops in employment for men were blamed on video games. By the late 2010s employment rates had basically recovered to pre-recession levels for all of these groups, proving that it was artificially weak labor demand keeping them out of the workforce.

Joseph Politano, "We Have a Chance to End America's Great Employment Failure,"Apricitas Economics, May 7, 2022, https://apricitas.substack.com/p/we-have-a-chance-to-end-americas

We Have a Chance to End America's Great Employment Failure

Regular readers of Apricitas will know that I focus heavily on the labor market as both an indicator for the state of the US economy and a goal for policymakers to influence. I believe—with good reason—that wages, work, and employment are the most important parts of economic well-being. The labor market is the market of markets—businesses depend on labor for basic function, workers depend on labor income for their consumption, investments require labor to make them valuable, and governments require labor to ensure the functioning of the state. Nearly every firm and household must, at some point, engage with the labor market. So much of prosperity at an individual and household level comes down to your employment, job security, and wages. Indeed, the most powerful countries in the modern world are not the ones with the largest natural resource reserves or the biggest armies but those with the best and most productive workforces.

That is why the last 25 years have been modern history’s biggest tragedy. A series of poor macroeconomic policy choices have resulted in decades of shrinking employment and lost wages across many high income countries—but especially in America. During the late 1990s, America’s labor market was arguably the strongest in the world. The 2001 and 2008 recessions left it permanently scarred—and now America significantly lags many of its peer countries.

For the sake of America’s workers, it must lead again.

America’s Great Employment Failure

Fundamentally, America lacks the institutionalized employment protections that many high-income nations have. When the pandemic struck, countries across Europe used the government’s tab to institute furlough and job retention schemes to keep workers in place despite the economic slowdown. The US has no such capabilities (hence the scramble to implement enhanced unemployment benefits at the start of the pandemic). The end result is that recessions in the US manifest as massive declines in the workforce. Couple that with the relatively weak policy responses to the 2001 and 2008 recessions and you have a situation where labor demand and employment remain artificially low for more than two decades. The good news is that the COVID recession saw by far the strongest and swiftest policy response in American history, allowing employment to recover to pre-pandemic levels in two short years. Still, there are millions of people who could be brought into employment in the next stage of the economic expansion. It will be to America’s great benefit if these people are brought into the workforce.

Idle Hands

Not have a job
Have actively looked for work in the last four weeks
and be currently available for work

Unsurprisingly these qualifications mean that many people who want to work are not counted as unemployed. About five million people are not in the labor force but say they want a job today, and these people are not counted as officially unemployed even though by any colloquial definition they would be considered unemployed. That’s another massive pool of possible workers that could be drawn into employment if labor demand remains strong.

American economic policymaking and punditry has a horrible history of presuming that workers outside the labor force are lost forever. In the 2010s drops in employment for non-college educated people were blamed on a “skills gap”. Drops in employment for young people were blamed on their laziness. Drops in employment for men were blamed on video games. By the late 2010s employment rates had basically recovered to pre-recession levels for all of these groups, proving that it was artificially weak labor demand keeping them out of the workforce. When companies increased their hiring intensity and wages began rising, many of these workers were drawn back into employment. During the pandemic we saw a microcosm of this regarding workers who were pushed into early retirement due to COVID. Policymakers and forecasters worried that these workers were out of the labor market for good, but as COVID abated and labor demand recovered many of these workers have since reentered the workforce. We shouldn’t discount the possibility of future employment gains just because those workers would come from outside the labor force instead of unemployment.

What Could You Do With An Extra $9,600 a Year?

In 2019 Americans earned, on average, about $9,600 less than they would have if growth had continued at the pre-Great Recession pace. Matt Klein puts it best: “Americans have been living below their means—producing, consuming, and investing less than they otherwise could have—for 15 years.” Much of that drop in earnings came from an inability or unwillingness from policymakers in Congress and the Federal Reserve to pursue the kind of aggressively stimulative monetary and fiscal policies that caused the post-COVID employment recovery to be so rapid. Think about all the buildings that went unbuilt, the skills that went undeveloped, and the inventions that went uninvented because America chose to idle tens of millions of workers—its most valuable resources—for decades.

Inflation has, understandably, taken center stage in today’s macroeconomic policy debate. As the Federal Reserve tightens monetary policy to reduce inflation, it is likely that the rate of employment growth will also slow. Truth be told, the rate of employment growth was always bound to slow at this point simply because the vast majority of previously-employed people have returned to work. The key remains to balance the need to combat inflation with the need to expand and strengthen America’s workforce. We have an opportunity to end America’s decades long employment failure, and it’s an opportunity we simply can’t afford to pass up.