Key Themes and Takeaways
  • Today’s perceived labor shortage—the coexistence of record job openings with high unemployment—reflects COVID-related changes in labor supply and the dynamics of labor market re-equilibration during a period of rapidly rebounding demand.
  • During the pandemic, labor force participation declined most sharply for women with family responsibilities and for workers over 55. Women’s labor force participation is expected to increase in late 2021, but the decline for older workers reflects a wave of early retirements that will reduce the labor force beyond 2021.
  • Matching unemployed workers to job openings is more difficult now than in the early phase of the recovery due to the exhaustion of worker recalls, increasing skill gaps in particular occupations, and a closing employment gap.
  • Wage increases in 2021 thus far are concentrated in low-wage service jobs which experienced the highest COVID-related losses, and especially in Leisure and Hospitality.
  • The expiration of expanded unemployment insurance benefits is likely to impact wage and employment changes primarily in Leisure and Hospitality. Preliminary evidence from states that have already terminated benefits do not show employment effects in other sectors.

During the second quarter of 2021, many businesses accelerated their return to full operation, meeting a rebound in discretionary spending that resulted in part from the COVID-19 vaccination campaign and re-openings around the country. As production ramped up, so did the demand for labor. In both April and May 2021, the Bureau of Labor Statistics (BLS) reported more than 9 million job openings in the United States—the highest numbers since the BLS began reporting job openings in 2000.

Even so, unemployment remains stubbornly high. In January, 10.1 million people were unemployed; the number of unemployed fell only to 9.5 million in June. This masks some employment growth from people who had left the labor force earlier in the pandemic. Nonetheless, many employers are encountering difficulties in filling open positions amid high unemployment and record job postings. This has given rise to a perception that the United States is experiencing a labor shortage, especially in the hardest-hit sector of Leisure and Hospitality, holding back what otherwise would be a rapid economic recovery.Labor Shortage Draws Attention of U.S. Lawmakers, Wall Street Journal, June 3, 2021.

What does a labor shortage mean?

A labor shortage is the consequence of labor supplied being less than labor demanded at currently offered compensation levels. As demand for goods and services recovered in 2021, a common expectation was that workers would come back quickly to their old jobs, restoring the old, pre-pandemic equilibrium of employment and wages. Instead, unfilled job vacancies together with persistently high unemployment demonstrate that the COVID pandemic, as well as disrupting the demand for labor, also affected its supply.

First, labor force participation fell. Simply put, this means that fewer people are looking for jobs now than before the pandemic. Second, job matching takes time. Matching unemployed workers to open jobs is becoming progressively more difficult as employment gaps in different sectors shrink toward zero, slowing the rate of job recovery as the economy gets progressively closer to its post-pandemic equilibrium.

Even acknowledging supply effects in labor markets, the characterization of a labor shortage as a disequilibrium of demand and supply suggests that it can be alleviated most directly by raising wages.Additionally, employers can add nonwage benefits such as health insurance and 401(k) plans to their compensation package, or they can provide flexible scheduling and opportunities for career advancement. In fact, many employers are doing so, especially in low-wage occupations hardest hit by layoffs during the pandemic. However, other employers may not be so quick to raise wages or other compensation if they believe the contraction in labor supply is only temporary and that the pre-pandemic equilibrium of employment and wages—or something close to it—will eventually re-establish itself with the passage of time.

A critical question is whether changes in labor demand and supply during the course of the COVID pandemic, and manifesting today as a labor shortage, are likely to produce temporary or permanent effects on employment and wages as the economy recovers to a new, post-COVID normal.

Our analysis focuses on these questions: * Why is labor supply lower now than before the pandemic?

Why is labor supply lower now than before the pandemic?

Labor force participation is below its pre-pandemic level by almost two percentage points, with more than 3 million fewer Americans in the labor force today than before the pandemic. Declines are larger for women than men, and larger for younger and older Americans than prime-age workers (25–54). Even among prime-age workers, labor force participation declined from 82.9% in February 2020 to 81.7% in June 2021. This invites several questions: Why did people drop out of the labor force? Who is likely to return in the near future? Who may have left the labor market permanently?

Women have disproportionately withdrawn from the labor force. At the pandemic’s onset, more women than men exited the labor force. After schools and daycare centers closed, many women stopped working to take care of children or support other family members at home. Using responses to a question from the Current Population Survey (CPS) about the key reasons individuals are not in the labor force, we estimate that in April 2020, almost 1.4 million women left the labor force specifically to take care of their family.IPUMS-CPS, University of Minnesota, While many women have returned to work since the pandemic’s beginning, the number of women who report being out of the labor force in order to take care of their family has remained high. In May 2021, this group of women accounted for more than 60% of the total drop in the female labor force participation since March 2020, an increase from 38% of the drop at the pandemic’s onset. As schools and daycare centers fully reopen this fall, many of these women may be able to return to work.

Baby boomers are retiring faster than ever. The pandemic also led to an increase in the rate of retirement among older Americans. Between 2016 and 2020, 2.6% of the population 55 and older retired annually. During the pandemic, this rate increased to 3.3%. Some older workers who lost their jobs during the pandemic decided to retire instead of looking for a new job, while others retired due to health concerns posed by the pandemic. Overall, we estimate there were at least 500,000 more retirements from May 2020 to April 2021 than expected from the pre-pandemic trend.

Unexpected retirements can have important effects on the labor market, particularly in industries or occupations with a relatively high share of older workers. For example, COVID-related retirements may have worsened an existing shortage of long-haul truckers.How can trucking companies get more drivers on the road?, June 1, 2021. In 2020, 30% of Truck Transportation workers were age 55 or older, per CPS data.

In the next few years, we expect to see the retirement rates go down because early retirements during the pandemic shifted forward retirements that would have ordinarily occurred later. However, in contrast to the example of previously working mothers, it could take several years for the number of older workers to re-stabilize to a pre-pandemic share of the workforce. This change will be of special interest to workers compensation, because older workers tend to have more days away from work after an injury and have experienced rising injury frequency in recent years.Latest Trends in Worker Demographics, Research Brief,, March 2021.

Are wage increases driving employment recovery in low-wage occupations?

Anecdotal reports of hiring difficulties are particularly prevalent in Leisure and Hospitality, especially from restaurants. Leisure and Hospitality has experienced the largest employment gaps throughout the pandemic and has seen the largest increase in job openings rates during 2021. But Leisure and Hospitality is a sector offering low wages and benefits and is subject to high turnover, even in good times. Even as businesses are posting new openings, laid-off and unemployed workers from this sector are considering other options for reemployment.

A recent survey by the online employment marketplace ZipRecruiter, Inc. found that 70% of the unemployed in Leisure and Hospitality are looking for work outside this sector.Job Openings Are at Record Highs. Why Aren’t Unemployed Americans Filling Them? The Wall Street Journal, July 9, 2021. Other industries tend to offer more job stability, potential advancement, predictable schedules, as well as higher wages.Customers Are Back at Restaurants and Bars, but Workers Have Moved On, The Wall Street Journal, July 13, 2021. To remain competitive, many employers in Leisure and Hospitality are now offering not only wage increases, but also more training, flexibility, and other benefits.McDonalds Owners Offer Tuition, Child Care to Lure Burger Flippers, The Wall Street Journal, July 12, 2021.

Recent wage increases are boosting hiring, especially in Leisure and Hospitality. Throughout the early stages of the pandemic, wages for production and nonsupervisory workers in Leisure and Hospitality remained flat. But from the end of 2020 to June 2021, they grew 10.6%—around five times faster than the average of all other sectors. Big wage gains are driving big gains in employment. More than half of the total increase in private employment in the second quarter of 2021 was in Leisure and Hospitality alone.

This exceptional wage growth in Leisure and Hospitality is concentrated among the lowest paid workers in the sector. The figure below shows the hourly wage distribution of food preparation and service workers for March 2020 and June 2021. The median hourly wage for food preparation and service workers increased from $11.25 to $12.75, but the wage distribution for higher-paid workers (above $15 per hour) remained mostly unchanged.

Other research has found that wage gains in low-wage service occupations apply only to new entrants and do not extend to existing workers.“Wage Pressures in the Labor Market: What do they say?” Julie L. Hotchkiss, Federal Reserve Bank of Atlanta’s Policy Hub. No. 5-2021 Many of these new hires are younger, inexperienced workers replacing older workers who have moved on after the pandemic. This could raise injury frequency in the short run, but sustained wage and benefit increases that reduce turnover could put downward pressure on frequency in future years. Younger workers also tend to have lower injury severity. With a median age of 32, Leisure and Hospitality is already the youngest sector of the economy.

In some cases, recent pay increases have taken the form of a signing bonus rather than a higher wage rate.Higher Wages, Signing Bonuses Help Fuel Restaurant Job Rebound, Leslie Patton, Bloomberg, June 4, 2021. Signing bonuses make sense when employers expect the shortage of workers, and thus the upward pressure on wages, to be only temporary. As individuals who withdrew from the labor market gradually return to work, wage pressure can be expected to ease. In the meantime, bonuses and targeted wage increases are alleviating some labor shortages in Leisure and Hospitality, contributing to second quarter growth of nearly one million jobs in the sector.

How does job matching affect the pace of employment recovery?

Recalls versus new hires. Because the COVID recession saw more temporary layoffs than any previous recession,Workers on temporary layoff are expected to return to their previous employer within six months from separation. At the onset of the pandemic recession, temporary layoffs accounted for 80% of all unemployment but only 15% during the Great Recession. job recalls were the main engine of the early recovery. There were more than 18 million workers on temporary layoff in April 2020. When employers looked to restaff after the initial shock of the pandemic, they turned first to their previous employees rather than looking for new hires.

By now, most employee recalls have long since been made. As of June 2021, 1.8 million workers remain on temporary layoff. That’s one-tenth the number at the pandemic’s onset and just 1 million above the amount in the fourth quarter of 2019. Thus, the bulk of employment growth today comes through a more traditional recruiting process of attracting, interviewing, and selecting new candidates. The lengthier process of hiring via recruiting contributes to the slowdown in the recovery, especially when so many workers are moving across sectors.

Skill gaps. After recalls are exhausted, employers may still require additional workers with specific skills not widely available in the labor market.

Skill gaps have slowed employment growth in manufacturing and construction, along with the disruptions to supply chains. According to a survey by Deloitte and The Manufacturing Institute, 46% of manufacturing employers found it difficult to fill their positions due to skill mismatch during 2020.Creating pathways for tomorrow’s workforce today: Beyond reskilling in manufacturing, Deloitte, May 4, 2021. Reported skill gaps in manufacturing predate the pandemic, but the pandemic made it worse. According to the same survey, 34% of employers reported difficulties in hiring qualified workers in 2018. Similarly, 88% of commercial construction contractors reported moderate to high levels of difficulty finding skilled workers in the second quarter of 2021, and 35% reported turning down work due to skilled labor shortages.U.S. Chamber of Commerce Commercial Construction Index Q2 2021.

Which workers and sectors are most affected by changes to unemployment insurance?

Although we have discussed labor supply, wage changes, and job matching separately, they are in fact interconnected. Higher compensation brings people back to work, reshuffles workers across sectors, and increases the speed and quality of job matching. Conversely, any factor that alters the costs or benefits of unemployment relative to returning to work can affect the labor shortage through each of these three channels.

The $300 supplemental unemployment benefits funded by the Federal Pandemic Unemployment Compensation program is an example of how these three channels work together. By temporarily lowering the cost of remaining unemployed, it allows workers to be choosier about their next job opportunity. This can also slow job matching and reduce labor supplied as workers demand higher wages or broaden their employment search to new jobs or sectors.

Any of these effects should be largest for the lowest-paid workers, since the extra benefits make up a greater percentage of their potential earnings. For example, our analysis indicated that, under the current $300 per week federal subsidy, an average worker in Leisure and Hospitality can receive 17% more in unemployment benefits than the average weekly wage in that sector, although this figure varies by state.

A recent report found that the initial federal subsidy ($600 during the time period studied) lowered job-finding rates in food preparation and service, the lowest-paid occupation classification, but did not affect job-finding rates for other workers.UI Generosity and Job Acceptance: Effects of the 2020 CARES Act, Nicolas Petrosky-Nadeau and Robert G. Valletta, Federal Reserve Bank of San Francisco, Working Paper 2021-13, June 2021. So a wage increase can bring back food preparation and service workers within Leisure and Hospitality. And as we have noted already, wage increases over the past six months for these occupations have been dramatic, especially for the lowest paid workers. This upward pressure on Leisure and Hospitality wages will likely decline in coming months because expanded unemployment benefits are set to expire on September 6, 2021.

Using BLS employment data for May and June, we find that employment gaps in Leisure and Hospitality decreased more in the 22 states that opted out of the federal subsidy to unemployment insurance in June than in those that did not. However, this differential did not occur in other sectors.Other observers have likewise found scant evidence linking UI termination with increased employment growth in June across all sectors. Several such are surveyed in U.S. states ending federal unemployment benefit saw no clear job gains,, July 20, 2021. The result for Leisure and Hospitality likely reflects some causal effect of the benefit changes but also differences between the groups of states. For instance, the Leisure and Hospitality employment gap declined more than average in North Carolina and Kentucky, two states that did not terminate benefits but are demographically similar to many other Southern or Midwestern states that did. Early termination of extended benefits likely accelerated return to work for some low-wage workers, especially in Leisure and Hospitality, but did not appear to exert a major influence on closing employment gaps more rapidly across all sectors.

What happens next?

Looking forward to year-end 2021 and into 2022, we think that these expectations are reasonable: