One of the puzzles of the post-pandemic economy was the persistent gap in the US labor force participation rate, which sits about 1.5 full percentage points below 2019 levels.
A new Fed report explains the gap with early retirements spurred by the pandemic.
"The increased retired share explains essentially all of the shortfall in the aggregate labor force participation rate compared to its level prior to the pandemic," the report says.
This is an important question for policymakers because if there is a pool of 1.5 out of every 100 Americans that could rejoin the workforce then it would significantly loosen the jobs market.
However the conclusions indicate that those workers aren't likely coming back. At the same time, about half of the gap was spurred by the pandemic and they expect that to normalize over time, meaning that participation should get back on the prior curve in time. That will mean a slower fall in the pace of the labor force decline until it normalizes, which the report predicts for "sometime in 2024."
"We use a cohort-based framework to argue that looking forward, unless the pandemic has permanently affected retirement behavior, excess retirements should eventually fade as those who retired early during the pandemic reach ages when they would have normally retired," the report says.
What I wonder is whether the Fed-induced bubble in financial assets led some people to retire early only to see a big chunk of their savings erased this year. That and inflation could force them back into the labor force. Moveover, workers who had planned to retire could also change their plans to work longer for the same reason.
What I also struggle with is Canada, which has similar (or older) demographics than the US saw a much quicker rebound in participation back to the trend.
