Labor Market Will Tighten Sharply: Not As Much Slack As Biden Assumes

help wanted sign

Hiring and retaining workers will be harder in the future. (Photo by OLIVIER DOULIERY/AFP via Getty Images) AFP VIA GETTY IMAGES

Will companies be able to find workers in 2021 and 2022? It may be very difficult. Some of President Biden’s policies are aimed at stimulating demand for workers. Jerome Powell is leading the Federal Reserve in the same direction. But other policies will diminish people’s interest in going to work. These conflicts coincide with a demographic trend of little growth in the working-age population. The net result will be a great opportunity for people who want to work, and poor opportunities for companies trying to expand. In this environment, demand stimulus is more likely to raise inflation than to promote real economic growth.

The Biden-Powell policies are based on the idea that even in the months before the pandemic, there was considerable slack in the labor force. Though the unemployment rate was a low 3.5% just before the pandemic, critics note that discouraged workers are not counted by the usual measure. That is, someone who reports wanting a job but not bothering to look for one is not considered unemployed, but rather “not in the labor force.” There are other people who might come out of the woodwork if jobs were more readily available, such as stay-at-home parents, students, and early retirees.

chart of employment population ratio adjusted for age and sex


Adjusted for changes in the age and sex of the population, employment was nearly as high in 2019 as its 2000 peak.


There’s some truth in the idea, but just some. Stimulus advocates point to the peak in the employment/population ratio, which was achieved in 2000. By 2019 the ratio had dropped 3.6 percentage points (from 64.4% to 60.8%). But this ratio misses the aging of the baby boomers, who turned gray in massive numbers of the period. The ratio can be adjusted for changes in age and sex of the population. This “what if” story ask what the employment/population ratio would have been if there were no change in the composition of the population by age and sex. (Data are from the Current Population Survey of the Bureau of Labor Statistics, based on BLS methodology.) This age and sex-adjusted ratio only dropped 0.7 percentage points, not 3.6, raising doubts that our current population is likely to work like that two-decades-ago population.

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