The Labor Supply and Long-term Demographic Challenges

By Bolton October 9th, 2023

Written for Bolton by Zack Fritz, Sage Policy Group

The COVID-19 pandemic caused a sudden and permanent shock to the U.S. labor supply. As many workers opted for an early retirement, the domestic labor force contracted sharply, shrinking more than 5% in the first half 2020. While it reached full recovery in the latter parts of 2022 and, as of August 2023, is about 2% larger than at the end of 2019, the labor force currently has about 3 million fewer workers than it would have had based on the pre-pandemic rate of trend.

As a result of this supply shock, the number of open, unfilled jobs across the economy spiked from fewer than 7 million at the start of the pandemic to more than 12 million during the first quarter of 2022. At that time, there were more than two job openings per unemployed worker, which is by far the highest that ratio has ever been.

For employers, this unprecedented level of worker scarcity led to several suboptimal outcomes, the most obvious of which is higher labor costs. Because business owners not only had to fight to fill open positions but also to retain existing employees, the rate at which employers laid off workers fell to the lowest level on record and, as of July 2023, has yet to return to the pre-pandemic norm.

While employers have struggled to stay adequately staffed (and customers have suffered the effects of short-staffed service), employees have taken full advantage of these new dynamics. According to data from ADP, the median worker who switched jobs in 2022 got a 16% year-over-year pay increase, while the median worker who stayed at their job got a (still-large) 7-8% pay increase. Eager to take advantage of these higher wages, workers quit their jobs at the highest rate on record for much of 2022 and early 2023.

As of this writing, some of the worker-shortage induced labor market upheaval has faded. Job openings have drifted back down to about 8.8 million, which is still high but closer to the pre-pandemic level than to the all-time high set in early 2022. Workers, many of whom have settled into their new higher-paying jobs, are also back to quitting at a fairly standard pace. The unemployment rate has risen to 3.8%, the highest level in a few years but still exceptionally low by historical standards.

Despite recent moderation, labor constraints are here to stay. This structural worker shortfall would have come when the Baby Boomers retired over the next decade, the pandemic simply accelerated the trend (while also significantly denting immigration numbers in 2020 and 2021).

These dynamics have been compounded by historically low domestic fertility rates, and absent comprehensive immigration reform, which at least in the short-term seems unlikely, labor is likely to remain scarce for the foreseeable future.

One immediate implication is that workers will continue to take advantage of their increased bargaining power, as evidenced by the recent UPS contract negotiations and a number of high profile strikes. Another is that parts of the country that have struggled with population loss in recent years, like much of the northeast, will continue to post lackluster growth.

For workers, especially those at the lower end of the income spectrum, this labor-constrained economy is a welcome development. Businesses and policymakers, on the other hand, will have to adjust to this new reality.