The perplexing December jobs report is raising concerns about how many Americans may have permanently left the labor force because of the COVID-19 pandemic.
The U.S. added 199,000 jobs last month, well below economists’ expectations, but the unemployment rate dropped sharply to 3.9 percent, the Labor Department reported Friday. Wages also rose 0.6 percent last month while labor force participation stayed flat, a sign of growing demand for workers before the omicron variant took off in the U.S.
Employers have struggled for months to hire and retain workers, who have enjoyed new leverage in pandemic-restrained economy.
There were more than 10 million open jobs posted in November, according to Labor Department data released Tuesday, and more workers voluntarily left their jobs — likely to take new ones at higher pay — than ever before. Jobless claims have also lingered below pre-pandemic levels since mid-November with businesses desperate to avoid layoffs of scarce workers.
Even so, the intense need for labor has not drawn roughly 1.7 million Americans who left the labor force in 2020 — and thus aren’t counted in the unemployment rate — back into the job hunt.
"The unemployment rate is now only 0.4 percentage point higher than it was prior to the pandemic. But with 1.7 million fewer people in the labor force than would be expected given the state of the economy, the labor market is less recovered than the unemployment rate would suggest," wrote Jason Furman
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Meager labor force participation can limit economic growth and productivity while leaving more Americans out of the full benefits of the post-pandemic recovery. Bringing more Americans back to work is also key for reducing pressure on supply chains and consumer prices, which rose in November at the fastest annual pace in four decades.
Economists expected COVID-19 vaccines, the end of federal pandemic jobless aid, and school reopenings to help draw Americans back to labor force last year. It is not yet clear how the omicron variant will affect the economy, but many economists fear it could keep many of those workers out of the labor market—if they ever planned to come back.
Surging cases have spurred many schools and service-sector businesses to limit or eliminate in-person interaction. And while omicron appears to be less severe for those who are fully vaccinated against COVID-19, health experts say it is still likely to overwhelm hospitals with sick patients.
“These less than stellar numbers were recorded before the omicron variant started to spread significantly in the United States. Hopefully the current wave of the pandemic will lead to limited labor market damage,” explained Nick Bunker, research director at Indeed, in a Friday analysis.
“The labor market is still recovering, but a more sustainable comeback is only possible in a post-pandemic environment," he continued.
With no end to the pandemic in sight, the Fed is facing difficult choices about how to best position the economy to keep expanding without boosting pressure on employers.
The Fed last month announced it would reduce its monthly bond purchases at a faster pace and hinted toward an interest rate hike as soon as March. While the Fed had been wary of pulling back on stimulus and limiting future job growth, the bank has since pivoted to staving off higher and broader inflation.
“The reality is we don't have a strong labor force participation recovery yet, and we may not have it for some time,” Fed Chair Jerome Powell
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“At the same time, we have to make policy now and inflation is well above target, so this is something we need to take into account,” he continued.
Fed officials acknowledge that a deep omicron-driven downturn could weaken the economy enough to take pressure off inflation at the cost of fewer job gains. But some economists insist the Fed should not hike in March even if demand for workers remains high.
Adam Ozimek, chief economist at Upwork, said the U.S. may actually be gaining more jobs than the monthly employment report indicates. The Labor Department has made substantial upward revisions to previous monthly job gains, which are calculated through a survey of businesses, and added 114,000 to October and November’s totals in the latest report.
"The establishment data makes it look like job growth is slowing down. And if job growth is slowing down while labor demand is high, that would suggest that a lot of people have permanently or semi-permanently excellent labor force. And if you throw the high inflation in with that, it begins to look like a coherent story. But I really don't believe it,” Ozimek said.
He added that a lack of significant uptake in Social Security collection and a deep need for lower-paying jobs means the Fed should be patient in allowing the economy to recover.
“They really need to see what's happened to underlying job growth, and the signals are just too murky there to conclude that it's slowed down,” Ozimek said.
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