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Friday, July 2, 2021
Retirements accelerated in the pandemic
In a few hours, the June jobs report is expected to show some 720,000 jobs were added back to the U.S. economy last month, while the unemployment rate dropped to 5.6%.
The rebound in the leisure & hospitality sector — where the bulk of pandemic-related layoffs were concentrated — will remain a key focus for investors, as will signs of wage pressures continuing to build.
But this report comes at a crucial juncture for the economic recovery, and the future of Federal Reserve policy. And we think it offers a great chance to think bigger picture about what forces have been shaping, and will continue to shape, the post-pandemic world we live in.
Earlier this week, we highlighted the view from some economists that a full labor market recovery is "only a matter of time" given the robust economic growth, the lifting of COVID-19 restrictions, widespread vaccinations, and the end of enhanced unemployment benefits.
And the case is straightforward: more than 7 million fewer people were employed as of May than before the pandemic, and a booming economy should bring most of them back into the fold.
But Michael Pearce over at Capital Economics published a note earlier this week that we've been thinking about for the last several days. He outlined what he sees as the "biggest single factor" explaining labor shortages right now — retirements.
"The potentially biggest single factor explaining the [labor] shortages is the surge in retirements," Pearce writes.
"Close to half of the 3.5 million drop in the labor force can be attributed to retirements, which we argued were unlikely to be reversed once the economy reopened. Retiree data tracked by the Dallas Fed show that, following a big initial surge in the early stages of the pandemic, retirements appear to have settled on a new, higher trend. Relative to the pre-pandemic trend, retirees account for an additional 0.6% of the population than we might have anticipated. That is equivalent to 2 million workers, which would explain more than half of the current shortfall in the labor force." (Emphasis ours.)
As mentioned above, for months we've focused on the gap between February 2020 employment figures and where we stand today. That gap remained stubbornly wide through May.
Though as Pearce highlights, however, the reduction in the size of the labor force suggests many people aren't coming back. As of May, the total size of the civilian labor force stood at 160.9 million; in February 2020, this stood at 164.5 million.
In the Morning Brief over the last several months, we've discussed the fits-and-starts nature of this recovery. And perhaps that is — at least in part — a response to folks we might've been expected to fully re-engage with the economy realizing their time has passed.
"It is possible that, with many choosing to retire, the pace of retirements will be slower than average over the coming years, contributing to faster labor force growth on average over the period," Pearce writes.
"But that is likely to happen over a period of many years, so will not be a significant factor reversing labor shortages over the next few months."
A longer-term idea to keep in mind ahead of today's report.
Editor's note: Morning Brief will be observing the Fourth of July on Monday, July 5. We will be back Tuesday, July 6.
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