Why Aren’t Unemployed Workers Returning to Work?

August 13, 2021

People working in an office before COVID-19 unemployment increase

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What does this say about the future of the US economy?

Despite a meaningful drop in July’s unemployment rate from 5.9% to 5.4%, economists are struggling to understand why there’s a labor shortage with 8.6 million workers unemployed and nearly 10 million job openings. 

As of July, the US economy still had about 7 million fewer jobs than it  did before the first lockdowns in 2020.   

While some of the workforce shortage could be explained by the pandemic and unemployment benefits, there’s a bigger story beneath the data that says more about where the post-pandemic economy is headed. 

Currently, unemployed workers get 38% of their salaries replaced, on average, plus an additional $300 per week through unemployment benefits, which conservative governors are scrapping, hoping to boost workforce participation.

Are unemployment benefits the cause?

While most economists agree the benefits create some disincentive to work by decreasing the financial costs of being unemployed, the size of that effect is unknown. 

So far, the overall picture from the data suggests that unemployment benefits aren’t the leading cause of the labor shortage, though studies have shown they can explain part of it.

Despite having enough open jobs to return to their pre-pandemic payrolls, some of the hardest-hit industries like services, leisure and hospitality, and retail are seeing the largest worker shortages. 

Some of this can be explained by the almost historic levels of job switching. It’s creating gaps between the jobs people want and the ones they used to have, which is driving up wages and negotiating power for some traditionally low-skilled workers in these lagging industries. 

Contributing factors to unemployment

The cost and personal demands of child care are also keeping workers at home – women especially. While some of this is expected to change as schools open in the fall, the pandemic’s uncertainty and the demand surplus in the labor market have many mothers taking a wait-and-see approach. Others could be settling into a new lifestyle where they spend more time at home, forcing businesses to increase wages and benefits as incentives.

Part of the gap can also be explained by trends that predated the pandemic like automation and an aging workforce. 

With baby boomers coming of age for retirement, economists expected the labor force to shrink, adding to the workforce shortage. By decreasing workforce opportunities and increasing home values, the pandemic accelerated this trend dramatically. 

Forcing companies to do more with less and cut down on person-to-person interactions, the pandemic also increased the pace of automation. This means there are going to be a larger number of high skilled jobs in industries like technology and manufacturing at the  expense of low-skilled labor, even sooner than expected.

The pandemic pressured workers to rethink everything and despite positive jobs data, many of them aren’t ready to get back to work. In this buyer’s market, people are using their negotiating power to weigh their options, reassess their priorities, and try something new. Their choices and the response of business, amidst rising pressures to automate and a shrinking workforce will have a lasting impact on the future of the American economy.



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