Key Themes and Takeaways
  • Decreased labor supply is driving the tight US labor market. About 3 million fewer people are working or looking for work today than would be at the pre-pandemic rate of participation in the labor force.
  • The biggest drops in labor force participation are for workers under age 25 and workers over 65. Participation among prime-age workers from 25 to 64 is almost completely recovered to its pre-pandemic rate.
  • The share of workers remaining in the labor force past age 65 had been rising before the pandemic. The post-pandemic drop in labor force participation among older workers reverses that trend.
  • Foreign-born workers contributed a large share of labor force growth before the pandemic. Reduced immigration since 2020 closed one of the main pathways to increase the labor force besides increasing the participation rate.
  • Labor supply issues are likely to persist as workforce demographics indicate slow labor force growth over the next decade. The recent drop in labor force participation for older workers casts doubt on one of the few major drivers of projected growth.

Despite a Tight Labor Market, Many People Who Left the Labor Force Are Staying Out

Through the third quarter of 2022 and into October, US labor market statistics paint a picture of continuing strong labor demand. After surpassing pre-pandemic employment in June, US private employment grew by about 1 million jobs in the third quarter. October’s 3.7% unemployment rate remains near a historic low. Average hourly earnings are nearly 5% higher than a year ago. While employment and wage growth were both even larger earlier in the year, these are very strong gains by pre-pandemic standards.

Surveys show that businesses are still searching for new workers. There were 9.7 million private job openings in September 2022, lower than earlier in the year but still about 50% above pre-pandemic levels. Likewise, the monthly new hires rate of 4.5% exceeds any pre-pandemic rate since the Great Recession.

Despite strong demand, labor supply has been slower to recover. The labor force participation rate, which is the share of adults living in the United States who are either employed or looking for work, fell sharply at the pandemic’s onset and has not recovered.

Increasing labor force participation is critical to alleviate the labor shortage impacting the US labor market. With a historically high number of job openings and a historically low unemployment rate, filling open jobs and growing US employment depends on enticing people back into the labor market. Increasing the labor force participation rate is especially important because demographic change suggests very little natural growth in the labor force over the next decade.

The Labor Force Participation Rate Is (Still) Below the Pre-Pandemic Rate

The current labor force participation rate is 62.2%, slightly more than one percentage point lower than February 2020’s 63.4%. With an adult population of 264 million, this translates to around 3 million fewer people in the labor force than there would be at the pre-pandemic participation rate.

In fact, the headline labor force participation rate has not changed much in 2022. After an initial drop and partial recovery early in summer 2020, the participation rate did not recover further until late 2021. It increased from 61.7% in October 2021 to 62.4% in March 2022, but it has not gone higher in any month since then.

Increased labor demand usually brings new workers into the labor force. The lack of participation growth in recent months is surprising, given the high labor demand coupled with low unemployment.

Although the line between being unemployed and not in the labor force can be fuzzy, rising labor demand usually brings more people to the workforce. In fact, increased labor force participation was an important element of job growth in the expansionary period just before the pandemic. The labor force participation rate grew by one percentage point from 2015 to February 2020 despite an aging population. Over the same time frame, the participation rate rose by nearly two percentage points among prime-age individuals from 25 to 54.

A lot of Americans who are available to enter (or reenter) the labor market are not actively searching for work. Per the Current Population Survey, 5.7 million people out of the labor force report they currently want a job, over 700,000 more than before the pandemic and nearly as high as the number of officially unemployed, just over 6 million as of October.

The ratio of people out of the labor force but wanting a job to people counted as unemployed is higher than it was pre-pandemic and much higher than it was earlier in the pandemic recovery. Today, for every American searching for a job, there is another one who is not actively looking but is ready to take a job if an opportunity comes along.

What’s different this time? There are two main reasons why the labor force is growing slower after the post-COVID recovery than in prior times of high labor demand.

The first is the lingering effects of COVID-19. A recent study attributes about a 500,000-person reduction in the labor force (0.2 percentage points in the labor force participation rate) to the effects from COVID-19 illnesses. This estimate becomes larger if we include indirect impacts of caregiving for others’ illnesses and related factors.The Impacts of Covid-19 Illnesses on Workers, Gopi Shah Goda and Evan J. Soltas, September 2022, NBER.

The second is reduced immigration. Less immigration reduces population growth and, therefore, the size of the labor force. Reduced immigration does not directly affect the labor force participation rate, but by taking people out of the US population who have a particularly high propensity to work, the labor force shrinks.Lowering immigration does have a small impact on the headline labor force participation rate, mostly because new immigrants are more likely to be working-age than the general population of US adults. But this effect is small compared to the direct change in the labor force from reducing immigration. Foreign-born residents, despite being only about one-sixth of the labor force, contributed nearly half of US labor force growth in the decade before the pandemic in 2020.

New immigration has slowed dramatically. We estimate that nearly half a million fewer worker visas had been issued through February 2022 than would have been expected from pre-pandemic trends.Q1 2022 Quarterly Economics Briefing, NCCI, April 25, 2022. Other research estimates that 1.7 million fewer working-age immigrants lived in the United States as of June 2022 than would have been expected from the pre-pandemic trend.US Immigration Rebounds But Remains Far From Plugging Labor Gaps, Jonnelle Marte and Augusta Saraiva, Bloomberg, October 5, 2022.

Who Is Returning to the Labor Force and Who Isn’t?

The stable labor force participation rate in 2022 masks continued demographic changes. At the pandemic’s onset, the youngest and oldest workers experienced the largest rates of job losses. Many older workers retired instead of searching for new employment. Women were more likely than men to leave the labor force, especially mothers affected by disruptions to their children’s day care and in-person schooling.For a more detailed snapshot of how these factors contributed to a smaller labor force as of early 2022, see the Q1 2022 Quarterly Economics Briefing, NCCI, April 25, 2022.

Individuals’ decisions to return to the labor force differed in both speed and magnitude, according to their demographic characteristics. Women lagged men at first but are catching up now. Participation among workers aged 65 and above still lags their pre-pandemic rate and is not increasing. This is an especially important statistic because of population aging. Whether older people choose to stay in the labor force becomes more important as they become a greater share of the population.For fuller treatments on the aging workforce, pandemic impacts, and workers compensation, see Latest Trends in Worker Demographics, NCCI, March 4, 2021; and Is There a Labor Shortage?, NCCI, August 11, 2021.

Labor force participation among younger and older workers is staying down. During the pandemic, the biggest declines in the labor force participation rate came from younger and older workers, not from workers in mid-career. This disparity sharpened during 2022. Prime-age workers from 25 to 54 have almost fully recovered to their pre-pandemic labor force participation rate. But labor force participation remains 3% below the February 2020 rate for those under age 25 and about 3.5% below for those aged 55 and older.

Notably, after a partial recovery in 2021, the labor force participation rate fell in recent months for both younger and older groups.

The pandemic accelerated many workers’ retirement decisions, reversing at least temporarily a trend toward increasing labor force participation for older Americans. Breaking down labor force participation for those 55 and older, we see that the critical change in labor market behavior is not early retirement, but a lower propensity for people to work past the traditional retirement age of 65. In short, the decline in labor force participation among people 55 and older is really a decline for those 65 and older:

How much of this decline is due to the special circumstances surrounding the COVID pandemic, and how much is likely to persist? The changing patterns of remote work may be impacting retirement choices. A recent survey finds that older workers are slightly less likely to have the option to work remotely and slightly more likely to decline the option when it’s available.Americans are embracing flexible work–and they want more of it, McKinsey & Company, June 23, 2022. It is plausible, though speculative, that the rise in remote work contributes to reducing labor force attachment among those over 65.

Women are coming back into the labor force. Women were more likely than men to leave the labor force during the pandemic, especially those under age 55. Women perform a disproportionate share of caregiving duties, an increasingly demanding role during school and day care closures, and increased illness rates caused by COVID-19.

Through early 2022, women’s labor force participation recovered much slower than men’s. But women have continued to return to the workforce since February 2022, while men’s labor force participation declined slightly. Together, these effects nearly erased the gender gap in participation rates that had existed since 2020 when the pandemic started.

Breaking out labor force participation changes by both age and gender demonstrates nuances in the main narratives about labor force participation by age and gender separately.

For the middle and older age ranges, men and women have had similar labor force participation declines from February 2020 to the present. The graph shows they did not take the same path, but they are currently in about the same place. There are still differences in the decline by gender for younger workers, which is the smallest and most volatile of the three age ranges. Big demographic differences in participation change remain between younger and older versus prime-age workers, but these differences are no longer large between men and women.

What Does Lower Labor Force Participation Mean for Workers Compensation?

A smaller labor force is driving a tight labor market. Despite a slowing economy, there are continued signs of labor shortages. Wage growth and job turnover remain high, especially for low-wage jobs. The Atlanta Fed Wage Tracker estimates a 12-month moving average of 5.9% median wage growth overall, and 7.3% for those in the bottom wage quartile. Job quits are still well above pre-pandemic rates, as the lack of incoming workers makes firms compete harder for those working somewhere else, and workers unhappy at their current jobs have opportunities elsewhere.

While strong demand for labor is good for workers, there are associated considerations from the perspective of workers compensation. Workers in their first year with a new employer have a higher risk of injury, especially in physical-labor intensive sectors like Transportation and Warehousing or Manufacturing.The Great Reshuffle and Workers Compensation Frequency, September 28, 2022, NCCI. Large nonuniform wage increases and shifts of workers across sectors create short-term disconnects between wages, indemnity benefits, and premiums.Why Wage Inflation Matters in Workers Comp, NCCI, May 26, 2022.

This environment of high wage growth and job turnover, especially for low-wage workers, will persist as long as the labor market remains tight. The tight labor market might end in any of several ways, including a mix of these scenarios:

Fewer older workers affect workforce demographics and may hurt future employment growth. The demographic consequences of an aging workforce is a familiar topic in workers compensation. Older workers have experienced increasing incidence rates in recent years and tend to have more days away from work when injured than younger workers. Older workers are more likely to have comorbidities when a work injury does occur.Latest Trends in Worker Demographics, NCCI Annual Issues Symposium Presentation, May 12, 2020. The changing propensity of older workers to remain in the labor force, especially after 65, may therefore impact claim frequency and severity, as well as affecting employment.

The number of older people who choose to participate in the labor market is critical to future employment growth. The Bureau of Labor Statistics (BLS) projects the US labor force will grow by 7.7 million from 2021 to 2031 (0.5% annualized growth), with 4.9 million of that coming from workers 65 and older.US Bureau of Labor Statistics, Employment Projections Program, 2021–2031.This point bears repeating. Most labor force growth over the next decade is expected to come from those past the traditional working age.Projected labor force growth for workers under 65 is a combination of substantial growth for ages 35–54 (due to the large cohort of millennials) and labor force declines for age ranges 16–34 and 55–64.

Two factors cause this projected growth for older workers:

These factors carry roughly equal weight. About half of the projected 4.9 million labor force growth for workers 65 and older is due to population growth, and the other half is due to participation. The difference between these factors is that population growth through aging is certain. Older people’s labor force participation is not.

The large projected increases in labor force participation rates further highlight the slow recovery in older cohorts’ labor force participation since early 2020. To meet these projected contributions to labor force growth, it is not enough for older workers to simply recover to pre-pandemic participation rates. They must significantly exceed those rates.

For example, a 10% increase in the labor force participation rate among each subgroup from 2021 to 2031, roughly in line with historical averages, would lead to record-high participation for those over 65 but still leave a shortfall of nearly 1.5 million workers compared to the projection. The projected growth is not unreasonable, but it is aggressive.

Older Americans’ attachment to the labor market is central to employment growth in the coming years. There are simply not many other avenues for it to come from. The labor force is expected to grow by only half a percent per year despite fairly optimistic assumptions about labor force participation. Long-term employment growth is going to be slow, and it will be even slower if more older workers leave the labor force.