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Job Market’s 2.6 Million Missing People Unnerves Star Harvard Economist

Bloomberg logoBloomberg 1/18/2023 Ben Steverman

(Bloomberg) -- Behind the five-decade low US unemployment rate of 3.5% lies a 2.6 million-person mystery.

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That’s roughly how many more Americans should be working or looking for jobs if the economy’s labor force participation rate was the same as before the Covid-19 pandemic. But something’s still off, leaving everyone from mom-and-pop businesses to Federal Reserve economists scrambling to answer a crucial question: Where are these workers?

Economist Raj Chetty and his big-data experts at Harvard University’s Opportunity Insights lab went looking for these missing people. Their research relies on an innovative method of tracking the economy, built in the early months of the pandemic, that blends anonymized transaction data from private companies. 

The data highlight to Chetty and his team just how much those awful months in 2020 still haunt the US economy. Even as their tracker shows metrics like job listings, consumer spending and small business revenue surging back above January 2020 levels, the US is missing about a fifth of its pre-pandemic low-income workforce. At least some of those workers moved to higher-paying jobs, but, after adjusting for wage growth, researchers found employment for the poorest quarter of the workforce was still 13.5% below pre-pandemic levels at the end of 2021.

The Shrinking Low-Wage Workforce | Estimated change in employment compared to January 2020 © Bloomberg The Shrinking Low-Wage Workforce | Estimated change in employment compared to January 2020

Analyzing local trends, researchers found an important clue to where those missing workers went: Low-wage workers are scarcest where 2020’s devastation was worst.

As it turns out, the hardest-hit businesses were in the richest neighborhoods. In areas like Boston’s Back Bay, New York’s Upper West Side and Brentwood in Los Angeles, the pandemic and its aftermath have thrown into chaos the lives of millions of employees who once waited on the wealthy in restaurants, bars, gyms and hair salons.

“It is clear there are large swaths of the population who are still not employed, and these are low-wage workers who lost their jobs in precisely the places where high-income people cut back on spending so sharply a couple years ago,” Chetty said.

The pandemic sent shockwaves throughout the US labor market and created a divide between the professional class — where many roles could be done remotely — and those in lower-income jobs like retail and hospitality, which require in-person interaction. That makes certain areas, like those with dense office space and businesses that cater to workers who may never fully return, a sharp focus for researchers seeking to understand the lasting economic consequences of the Covid era.

Missing Recovery

While almost every other gauge of the economy had fully recovered by the end of 2021, Chetty’s tracker shows low-wage employment levels have been stagnant for more than a year.

A Full Recovery for Consumer Spending | Even the hardest-hit sectors have exceeded pre-pandemic levels © Bloomberg A Full Recovery for Consumer Spending | Even the hardest-hit sectors have exceeded pre-pandemic levels

Economists have puzzled over why, finding partial explanations in everything from opioids and immigration restrictions to an aging population and fear of Covid. Chetty and his team argue against a few of these theories, preferring to look at the local level instead.

When low-wage employment is plotted on a graph by county, the highest-rent areas are missing the most workers — the places where bars, restaurants and health clubs were most empty in 2020. Chetty, along with professors John Friedman of Brown University, Nathaniel Hendren of Harvard and Michael Stepner of the University of Toronto, write the “strongest predictor” of the drop in employment is “the size of the initial shock.”

Even before Covid, low-income workers were getting older — the US population’s median age has steadily risen since the 1970s — and struggling with employment barriers like a lack of affordable child care and housing. Then the pandemic made almost everything worse, including strains on families, effects on health, the hassles of commuting and the stress of the jobs themselves.

Of course, Covid-induced strains or job losses didn’t set off a downward spiral for every low-income worker. Many managed to reinvent themselves, switching industries, negotiating raises or moving to areas with better opportunities. And wage growth broadly has been higher for those in the lower income brackets. 

Pressure Building

Still, even many of those who managed to replace their lost jobs have never been the same.

Rafael, an undocumented immigrant from Nicaragua who asked not to use his last name, was working in a kitchen whipping up Mediterranean food in 2020 when the orders stopped coming in. The Maryland restaurant shut permanently.

While Rafael liked the conditions at his last restaurant, he decided that, at age 57, he can’t risk returning to the kitchen.

In restaurants, “there’s a lot of pressure and they really expect a lot of energy and labor,” he said. “But with my age, I’m losing energy bit by bit every day.”

Since then, he has been earning money cleaning houses and caring for an elderly man. But the odd and unpredictable gigs aren’t enough, especially with rent and almost everything else getting more expensive. “Unfortunately, I just don’t have the necessary hours I need,” he said, speaking in Spanish through an interpreter.

Those trying to make it work in megacities say their former employees are following the higher-paid, work-from-home cohort to areas of the country that are more affordable.

‘Easier, Rewarding’

“People who had a year and a half to figure out what to do with their lives figured out they wanted easier jobs, or jobs that were more rewarding,” said Philippe Massoud, who has struggled with staff shortages at his Lebanese restaurants, named Ilili, in New York and Washington. “They moved to places they didn’t have to commute one hour each way to get to work,” like North Carolina, he said.  

A shortage of affordable housing near good jobs is a national problem. Real estate costs in Portland, Maine, jumped when city-dwelling professionals descended on the charming New England city to buy second homes during Covid.

For lower-paid employees, “it’s getting tougher and tougher to live closer to downtown as time goes on,” said Andrew Volk, co-owner of cocktail bar Portland Hunt and Alpine Club.

Paying workers more is a partial solution — one that Volk and Massoud have tried, even though it required raising prices.

“It’s just a question of making sure your wages are attractive and you offer a good benefit package,” said Aaron Seyedian, owner of a cleaning service, called Well-Paid Maids, that prides itself on paying $22 per hour in Washington and $27 in New York.

He finds himself soaking up employees from other industries, including former managers at retail stores or restaurants who are relatively well-paid but fed up with those jobs.

Inflation Impact

But the extra money only goes so far when inflation has hit many lower-income families the hardest. And even a substantial raise won’t solve situations where life is making it impossible to get back to work. 

Kayla Cooper, a 34-year-old mother of three young children, lost her job in 2020, then worked for two years as a contact tracer from home. But the trained social worker now can’t find anything that provides the same flexibility or sufficient pay and benefits to compensate for crushing child care bills.

“If I’ll be making $24 an hour but daycare is $25 an hour, why am I going back to work?” she said. “I feel pushed out of the workforce.”

US Lags in Share of Prime-Age Adults in Workforce | Labor force participation rate for 25-64 year olds, by country © Bloomberg US Lags in Share of Prime-Age Adults in Workforce | Labor force participation rate for 25-64 year olds, by country

The US once led the world in the proportion of women who worked, but nearly every developed nation now surpasses the US in their labor force participation rate for women. The share of both men and women in the American workforce has been dropping since the turn of the century.

One difference is “the US has never had a comprehensive labor supply policy” to bring more workers onto the job, said labor economist Kathryn Edwards. Child care subsidies, paid sick and family leave, and the right to part-time work would lower the job barriers for parents and other caregivers, older workers and people with disabilities.

Divided control of Washington makes any major changes unlikely for the next couple years. In the meantime, local governments and businesses may need to get creative in strategies for bringing workers back, particularly to the places where they’re most scarce.

Despite unemployment and other economic measures looking pretty good, “policymakers need to not be lulled into a sense of complacency,” said Friedman, the study’s co-author and a co-director of Opportunity Insights. Long-term unemployment can cause “a lot of damage to careers and the economy long term.”

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