Recession fears have grown in recent weeks as inflation continues to weigh on household budgets and the Federal Reserve looks set to raise interest rates and further slow the economy.
As if unaware, however, the job market boomed. Hiring last month exceeded expectations and defied warnings of a slowdown.
But the good jobs news could ultimately jeopardize the economy. Wages last month rose 5.1% from a year earlier, offering welcome relief to workers but also sobering news for Fed officials who fear runaway inflation due to US dollar gains. income.
In turn, a lesser-known data point has attracted outsized attention: the share of the adult population that is not working or actively seeking work. If the supply of workers is abundant, this slacks the labor market and limits wage growth. However, labor force participation stood at 62.1% last month, significantly lower than the pre-pandemic level of 63.4%.
The weak supply of workers is keeping the labor market tight and helping to fuel rising wages, which could exacerbate inflation and push the economy into a recession, economists told ABC News.
Americans “should be worried about that,” Stephanie Roth, senior market economist at JP Morgan Private Bank, told ABC News. The company predicts a recession as the most likely outcome for the economy, it said, adding that “a still tight labor market and high wage inflation would be a key reason.”
The alarm raises a key question at the heart of economics: how can millions of missing workers be left on the sidelines and still afford to pay their bills?
Here’s how the unemployed continued to live and why it matters:
Retirement rates have increased
Economists say the main explanation for why so many people have stayed out of the labor force is because of people who retired during the pandemic.
In the past three months, 3.6 million more Americans have left the workforce and said they don’t want a job, compared to the same period in 2019, said Aaron Sojourner, an economist at the Upjohn Institute, at ABC News. Of those 3.6 million people, people aged 55 and over accounted for about 90%, he added.
A stock market tear during the pandemic has swelled the assets of some older Americans, allowing them to subsist without income. Meanwhile, the heightened risk of serious illness faced by older Americans amid the COVID outbreak has left them worried about exposure in the workplace, Sojourner said.
“They had their finances in a position that allowed them to make the choice to stay out,” he said.
A downturn in the stock market this year has rattled this financial stronghold for retirees, however, said Roth of JP Morgan. Yet the reluctance of many older Americans to re-enter the workforce is due to the resilience of their pandemic-era economies and the difficulty of returning to a bygone lifestyle.
“Now they’ve settled into their retirement lives and they’re less inclined to get back into the workforce,” Roth said.
Another financial lifeline for unemployed Americans is the stock of savings many have built up during the pandemic, economists have said.
The COVID era has bolstered household savings thanks to government stimulus measures and high asset prices combined with a lockdown lifestyle that has suppressed expenses such as travel and dining out.
U.S. households amassed about $2.3 trillion in savings in 2020 and 2021, according to a Federal Reserve study last month. Moreover, households in the bottom half of the income distribution still held a combined excess savings of $350 billion at the middle of this year, according to the study.
Those savings have given workers the ability to make major changes like quitting their jobs and cutting expenses to make up for lost income, Jesse Wheeler, an economics analyst at research firm Morning Consult, told ABC News.
“The lifestyle choices people have made during the pandemic to move house, work a little less, and spend time with family — those kinds of choices are sticky,” Wheeler said.
Recently, however, savings for many have dwindled, Wheeler said.
Last month, the personal savings rate fell to 2.3%, the lowest rate in nearly two decades, according to Commerce Department data.
With inflation lingering near a 40-year high, shoppers dipped into their savings to keep consumption levels steady while weathering high prices, he added.
“Obviously that’s not going to be sustainable in the long run,” Wheeler said. “People eventually have to cut spending or re-enter the workforce to increase their income.”
Informal work and self-employment
The data showing a shrinking workforce likely overlooks some Americans who continued to work, especially in self-employment or informal jobs, economists said.
During the pandemic, new business apps exploded and remained above pre-pandemic levels, according to Census Bureau data. The Bureau reported nearly 433,000 new business applications in October, a sharp increase from 313,000 in December 2019. In July 2020, new business applications reached 552,000.
The government survey that calculates monthly hiring in the United States may miss some self-employed workers, Roth said.
Some people who work at gigs describe themselves as employees while others don’t, said Wheeler of Morning Consult.
Typically, people who hold formal jobs in delivery or ride-sharing services describe themselves as employed in response to requests. However, people who rely on jobs like babysitting, house sitting or dog walking often don’t call themselves employed, Wheeler said.
The rise of gig work across the economy likely accounts for some of the absentees from the labor force, Sojourner said.
“There are a few more people who see informal work as an option to sell some of their time and skills,” he said.
Depend on a spouse or other family for support
The savings boom and increase in remote working during the pandemic has led some married households to go from two incomes to one, and pushed some workers to move in with family members, allowing previously employed people to subsist on the support of loved ones, economists have said.
Although this change is likely to affect only a small portion of those not in the labor force and data remains limited, the phenomenon highlights a lifestyle change appreciated by some who have prioritized childcare or other pursuits rather than work, they said.
“People have changed their lifestyle, maybe moved to the suburbs or consolidated households, maybe gone from one income to two,” Wheeler said. “They realized they preferred that lifestyle and didn’t want to go back to it.”
For example, the labor force participation rate of women aged 25 to 34 fell nearly 5 percentage points after the start of the pandemic, according to data from the Bureau of Labor Statistics. Although employment in this group has rebounded, it remains below pre-pandemic levels.
The choice to give up work to care for children has been a major obstacle for women during the pandemic. While the problem remains, it has largely subsided, Roth said.
“I wouldn’t say it’s the most important driver of wage inflation today, but it’s an important piece of the puzzle,” Roth said.
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