By Gwynn Guilford and Sarah Chaney Cambon 

Since spring lockdowns were lifted, the demand for workers has snapped back faster than many economists expected. Between April and October the unemployment rate fell by more than half, to 6.9%, undoing more than two-thirds of its initial rise.

But unemployment data overstates the health of the labor market because the supply of people either working or looking for a job has declined. The U.S. labor force is 2.2% smaller than in February, a loss of 3.7 million workers.

The labor-force participation rate, or the share of Americans 16 years and over working or seeking work, was 61.7% in October, down from 63.4% in February. Though up from April's trough, that is near its lowest since the 1970s, when far fewer women were in the workforce.

The supply of workers and their productivity are the building blocks of economic growth. A smaller labor force leaves fewer workers to build machines and clean tables, restraining the economy's long-term prospects.

"If we don't get all the workers back, we can never have a V-shaped recovery," said Betsey Stevenson, economics professor at the University of Michigan, referring to a quick and sustained bounce-back after a sharp decline. "Everybody should be worried about making sure that we don't leave workers behind," she said.

Many economists say it's too soon to conclude this year's decline in participation is permanent. They note labor-force participation usually falls in recessions. The lack of good-paying job opportunities prompt many of the unemployed to give up the job search, return to school or simply retire earlier than they had planned. When labor markets tighten, rising wages and better hours pull people back into the workforce. Heading into the pandemic, labor force participation rates had improved; unemployment fell to 50-year lows and wages rose during the last economic expansion.

Many who have left the labor force had worked in low-wage sectors like retail, hospitality and personal care services disproportionately hit by the pandemic. Once the virus is contained, many of those jobs and workers may return, boosting participation.

Just a third of the increase in the number of people sidelined from the labor force since Feb. 2020 say they still want a job but are not now looking, according to the Labor Department.

Older workers who leave the labor force for good might mean employers turn to hiring more younger workers at lower wages when the economy recovers more broadly. But that's not the same thing as the creation of new jobs, which is the engine of economic growth.

Some economists say the extent to which participation revives depends on how swiftly demand rebounds. Joel Prakken, chief U.S. economist at IHS Markit, believes that the combination of falling unemployment and the reversal of virus-related economic effects will gradually restore participation to pre-pandemic levels.

The economy has already recovered faster than many predicted in the spring, and advances in vaccine development suggest the potential for a strong recovery as the health threat ebbs.

New applications for unemployment benefits declined last week, a sign layoffs are easing but remain high. U.S. services businesses, a key driver of economic growth, gained ground for the sixth straight month in November, adding to signs of a continued recovery.

Nonetheless, some economists see three reasons the pandemic's depressing effect on the labor force could linger. First, it appears to have sped up some baby boomers' decision to retire, shrinking the number of productive workers in the economy prematurely. Second, it is forcing some parents of young children, in particular women, to reduce their hours or stop working altogether, which could make a comeback harder. Third, it is falling particularly heavily on workers with less education and skills. These workers often struggle to find well-paying work and many drop out of the workforce.

Participation fell sharply after the 2007-09 recession and never fully recovered. This partly reflected demographics as the first baby boomers qualified for Social Security in 2008. The recession dampened participation of "prime-age" workers, those 25 to 54, which didn't return to 2007 levels until 2019, when the labor market was strong. Lower participation reduced average annual economic growth by 0.6 percentage points from 2009 to 2017, according to S&P Global.

This recession appears to be speeding up retirements. In the third quarter of this year, about 3.2 million more baby boomers said they were out of the labor force due to retirement than in the same period a year earlier, according to Pew Research. From 2011 through 2019, the number of retired baby boomers rose at a rate of about 2 million annually.

Labor-force participation among workers aged 55 and over logged in at 38.7% in October, down from 40.3% in February.

"It's always harder for older workers to find jobs when they're pushed out," said Teresa Ghilarducci, labor economist at the New School in New York City.

That's especially true for older workers who entered the pandemic already in a vulnerable position. At the start of the year, Karen Naranjo, age 65, was unemployed, networking at charity events while preparing to look for a job at a nonprofit serving homeless or at-risk youth that used her project-management skills. But then the pandemic upended her plans.

Job prospects became slim, and she didn't see a pressing need to compete with the millions of other Americans in desperate need of work. The Chicago resident had enough savings to retire, thanks to a buoyant stock market and years of preparation. The virus risk also made returning to work less appealing.

In October, Ms. Naranjo completed a temporary job knocking on doors for the U.S. Census' population count. Then she retired. She now spends her days reading fiction books, growing vegetables and knitting Christmas presents. Those, like Ms. Naranjo, who can afford to retire but would rather remain an active part of the workforce, still represent a contraction of the labor market. Economists broadly agree that a smaller labor force constrains the economy.

"I feel regret for the things that I'm not going to be able to do," said Ms. Naranjo.

Studies of the 1918 flu pandemic suggest it reduced labor supply by sickening or killing many prime-age workers, particularly men. Covid-19 isn't having that effect: Deaths relative to total U.S. population are much lower, and more concentrated among the elderly. However the virus, especially at the currently elevated level of infections, could discourage the return of older adults to the labor force.

Unlike previous recessions, this one is making it especially difficult for parents, women in particular, to work because of school closures and the loss of child care. Participation has fallen much more for prime-age women than men, and even more among those who are parents. Among mothers in this group with children under 13 years old, it plunged 3.4 percentage points between February and October, while dropping 1.4 for prime-age fathers, according to analysis by economists from the Federal Reserve Bank of Dallas. That compares with a 1.2 percentage-point decline among prime-age adults without younger children.

Some 7 million adults said they weren't working because they were home caring for children who weren't in school or day care, according to recent U.S. Census survey data conducted in late October and early November, up from around 6 million in May. (Pre-pandemic data isn't available.)

With her first three children, Erin Stout, age 35, worked until the day she went into labor, taking off at most four weeks after their birth. By contrast, she hasn't worked or looked for work since her fourth was born in August. "I think returning to work is going to be very hard for me [because] I've been with my kids this many months," she said.

After 13 years as a shift manager at Dairy Queen in Lexington, Ky., Ms. Stout left in February for more fulfilling work at a horse farm and, for a few hours a week, sewing at a rug repair shop. But by late March, Ms. Stout was laid off from both jobs. She and her husband, who had also lost his job as a cleaner, began receiving unemployment benefits and focused on caring for their three elementary school-aged children and preparing for their new baby.

Though their finances have been strained since the federally funded extra $600 weekly unemployment benefit ended in late July, she and her husband are reluctant to look for new jobs soon because they're worried about contracting the virus and sickening their children.

Ms. Stout said her husband will probably start seeking work in January, as they near the point of exhausting their funds. Though she may apply for part-time remote jobs, she finds the prospect of more time at home increasingly appealing. "This is the first time since my 10-year-old daughter was born that I've spent much time with my kids. It's been nice for them and nice for me," she said.

Some economists worry that the pandemic's outsize impact on women -- particularly working mothers -- could set back years of gains in female labor force participation. The climb back could be particularly difficult for prime-age Black mothers. Participation for this group plummeted 6.7 percentage points from February to October.

Historically, women who dropped out of the workforce for a time to care for children often struggled to return, unable to find a job in their previous occupation or command the same wage, said Stefania Albanesi, an economics professor at the University of Pittsburgh.

Others note the reopening of schools and the availability of telework could ease the pressure on parents like Ms. Stout.

"Firms do need women. For example, more women than men have college degrees," said Claudia Olivetti, economics professor at Dartmouth College. The risk, she said, is that women are disproportionately affected by the need to work fewer hours, and end up earning less.

One of the biggest risks to the labor force is "scarring": that unemployment permanently hobbles the ability of some people to find work, especially those with less education.

The number of workers who said their layoff was permanent, rather than temporary, rose to 3.7 million in October from 1.3 million in February. Such permanent job losers are more likely to drop out of the labor force than those on temporary layoff, wrote Stephanie Aaronson and Wendy Edelberg, economists at the Brookings Institution, in a recent analysis. Once out of the labor force, it can take a long time for such a worker to return even as the economy improves. A labor-force dropout is someone who is both out of a job and not looking for one.

Some economists attribute the lag in returning to work to the erosion of skills, and employers' tendency to hire those who are already employed or only recently lost their jobs.

David Deming, a professor of public policy at Harvard University, said in weak labor markets, employers tend to rely on broad educational credentials when deciding who to hire. "Let's say you have a high school degree and worked as a bookkeeper, and your firm closes. Without a credential, you can say 'Oh, I did all these things' but it's harder to certify," he said. "You learned to do a specific set of things but only some of those skills transfer."

This recession has been particularly hard on low-wage jobs that often require in-person interaction in sectors like retail, hospitality and personal care services. Many of those jobs should return when the pandemic is contained, likely once a vaccine is widely available.

However, some jobs will permanently disappear, as new consumer habits stick and as the coronavirus accelerates the shift toward automation, virtual interactions, and e-commerce, said David Autor, economist at the Massachusetts Institute of Technology.

These shifts will create new jobs, but the workers who left the labor force won't necessarily be the ones to fill them. For example, he said, demand for people to provide meals, transportation, cleaning, and security for downtown office workers may never fully recover if white-collar workers continue to work from home after the pandemic recedes.

This may be similar to how, in prior decades, automation and globalization crimped demand for workers executing routine tasks in manufacturing, many of them less-educated, prime-age men. A dearth of middle-skill job openings may have led to higher rates of depression and illness and kept those men out of the labor force for good, according to research by Didem Tüzemen, senior economist at the Kansas City Fed.

Research by a team of economists at the University of Chicago, the Federal Reserve, and Automatic Data Processing analyzing real-time payroll data as of late June found individual companies laid off their lowest-wage workers, keeping their higher-earning employees.

That could translate to lower participation among lower-wage workers in the longer term, since they struggle more to find steady work, said Ms. Albanesi of the University of Pittsburgh.

"The economy is just about us -- what we as people are producing," Ms. Stevenson said. "If we don't have the people, we're not fully recovered."

Write to Gwynn Guilford at gwynn.guilford@wsj.com and Sarah Chaney Cambon at sarah.chaney@wsj.com

(END) Dow Jones Newswires

December 03, 2020 14:16 ET (19:16 GMT)

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