The U.S. labor force is the largest it has ever been, and unemployment is at its lowest level since 1969, yet the percentage of potential workers in the workforce remains well below pre-pandemic levels, with millions of Americans still missing from the job market.
Some 62.4% of adults either had a job or were seeking one in January, the U.S. Bureau of Labor Statistics reported Feb. 3. This was up slightly from 62.3% in December 2022 but still below the pre-pandemic participation rate of 63.3% in February 2020. With the total workforce at a record 160.1 million in January, the lower labor participation rate means roughly 2.3 million fewer people are working than otherwise would be.
If a significant portion of the millions of potential workers currently outside the job market start seeking work, they could help shrink the yawning gap between labor supply and demand. They could also help accelerate the Federal Reserve's interest rate hike push to cool the U.S. labor market, or at least the market's ongoing wage growth, which has contributed to the highest inflation in four decades. Data suggests, however, that the largest share of missing workers are older Americans who economists believe have retired and may never return to employment.
"If the surging cost of living doesn't tempt people back into the workforce, then I'm not sure what else will," said James Knightley, chief international economist with ING. "I am not optimistic people will come back. Once you've left, I imagine it is difficult to summon the courage and motivation to step back in."
'Challenges to supply'
The number of Americans who have remained on the employment sidelines since the pandemic's early days clouds the path forward for the historically tight labor market. There are about two open jobs for every unemployed worker. If the labor participation rate in January matched the 63.3% in February 2020, it would reduce the roughly 11 million open jobs by about 20%.
"There remain challenges to supply," said Shannon Seery, an economist with Wells Fargo. "The implications of this are more persistent labor shortages, and as long as demand for workers remains strong, this in turn will prevent a full normalization in wage growth."
Workers between ages 25 and 54, prime working age, have largely returned to work since the early days of the pandemic. The participation rate for this group was 82.7% in January, down slightly from 83% before the pandemic.
Workers between the ages of 20 and 24 have also largely returned.
People ages 55 and over, however, have yet to significantly return. In January, the participation rate for this group was 38.7%, compared to 40.3% in February 2020. While the size of the 55-plus age group remains relatively flat from pre-pandemic times, there are about 300,000 fewer of these workers than in February 2020, and the number of older Americans still outside the workforce remains high.
If the participation rate had recovered to pre-COVID-19 levels in January, 1.55 million more Americans in the 55-plus age group would be in the workforce. The number of older Americans still missing from the workforce is roughly double those missing from the prime age and 20-24 age groups combined.
Gone for good
The most likely explanation is that older workers who left the labor force in the early days of the pandemic due to health concerns likely opted for early retirements, said Augustine Faucher, chief economist of The PNC Financial Services Group.
"Basically, there are a lot of baby boomers who retired early because of the pandemic, and they aren't coming back into the labor market," Faucher said. "That is, the pandemic accelerated retirements that would have taken place over a period of years.
Other factors keeping workers home, such as childcare limitations and ongoing health concerns, will likely abate over time. The departure of older Americans from the labor market is "stickier," Seery with Wells Fargo said.
"I'd say it's certainly possible and likely that the labor force participation rate will eventually return to pre-pandemic levels, but there are serious demographic headwinds such as the aging population and accelerated retirements that are making this more challenging," Seery said.
If older Americans were not motivated to come back as businesses hiked wages and benefits to lure workers, they likely would not ever return, PNC's Faucher said.
"I don't think they're ever coming back," Faucher said. "And I expect the labor force participation rate will gradually decline over the longer run as the younger baby boomers gradually leave the labor force."