Will they, or won’t they return? Addressing the postpandemic labor force deficit

There are three main reasons why we might now see a smaller labor force going forward: slower population growth, the withdrawal of older people from the labor force, and care issues. Some of their impact is likely to be temporary; slower population growth may weigh on the economy for some time, and the withdrawal of older people from the labor force may be permanent.

Slower population growth

The US State Department issued only 240,000 new immigrant visas of all types in fiscal year 2020, about half the 460,000 issued in fiscal year 2019.² Foreign-born residents are slightly more likely to participate in the labor force. And Census data on the working-age population does show a small decline over the course of 2020. This is only a fraction of those 5 million missing workers. However, it’s also the most likely way that the United States can increase the growth rate of the labor force in the future should that become a policy goal. Immigration remains a contentious political issue. Therefore, a large upsurge soon is unlikely even as the economy recovers.

Another impact will occur a couple of decades from now, when a possible “COVID baby bust” might result in a lack of new, young labor-market entrants.³ That, however, is not a matter of immediate concern for companies struggling to figure out how to manage during this year’s likely postpandemic boom.

The childcare deficit

The pandemic illustrated how much the economy depends on schools (and day care for younger children) to allow people with children the ability to work. The labor force participation rate of people with children under 18 fell by one percentage point in 2020, representing about a million potential workers. Although schools are not primarily for child care, the pandemic demonstrated that the availability and productivity of many workers depend on children being in school.

The good news is that these workers are likely to return to work. Most school districts are planning to completely reopen for in-person classes in the fall of 2021, and summer camps and day cares will likely be open this summer as vaccinations increase and the COVID-19 caseload falls.⁴ This suggests that most, if not all, of those parents will be back in the labor force this year. The return of those who left the labor force to take care of relatives other than their children is more uncertain, and while we don’t have estimates of this group, it is likely to be small.

A retirement surge

About half of the decline in the labor force was accounted for by people over the age of 55 (figure 2). The participation rate for these older workers fell almost two percentage points. Although the 55+ cohort made up less than a quarter of the labor force in 2019, before COVID-19, the Bureau of Labor Statistics had been expecting this group to grow more rapidly than the population as a whole and to account for 63% of the total growth in the labor force between 2019 and 2029. COVID-19 has clearly reduced the participation of the current older workforce. What’s more, the continued worries about workplace safety may mean that future growth could also be curtailed.⁵

Moreover, recruiting older workers presents two problems for employers. First, older workers are more likely to have taken early (or perhaps even not-so-early) retirement. For workers with significant retirement investments (although less than half of older Americans have retirement accounts), the solid performance of financial markets over the pandemic period could strengthen the incentive to permanently leave the labor force.⁶ Employers may, despite this, be able to entice some of these workers to return to work. But it will take some effort and imagination on the part of recruiters to convince people to come out of retirement once they have gotten busy with grandchildren and hobbies.

Second, older workers are more likely to be affected by COVID-19, and they know it. They are, therefore, likely to be more sensitive than younger workers to risks associated with a return to work. That’s particularly true for the occupations that are likely to experience strong demand in the near term. Workers in leisure and hospitality and food service occupations—the industries that are likely to lead the rehiring binge this year—are more likely to work in risky conditions.⁷ Hiring managers who want to re-employ older workers will need to take those concerns into account to successfully entice older people back to work.

Much depends on employer behavior

While we foresee a permanent decline in the labor force after COVID-19, employers can take steps to prove us wrong. For instance, organizations can look at newer ways of navigating the new labor market as opposed to those firms that insist on persisting with prepandemic methods. The pandemic has provided employers with some tools—through more effective remote work methods, for example—that can help improve the flexibility of work and reassure workers about their safety. Employers that are serious about meeting potential employees in the market and can successfully address their safety and productivity concerns have the opportunity to increase the worker pool. Businesses that fail to do this may well have to recruit from a smaller pool of workers—just as our forecast predicts.