Written by Tess Britton
Right now, labor supply is tight. The COVID 19 pandemic caused a major decline in employment. Despite the current decreasing case numbers and deaths caused by COVID 19, the labor supply in the U.S. has still not recovered. In fact, “the U.S. is still missing around 4.3 million workers”. While there is still hope that this labor supply deficit is only temporary, some economists worry that it may be more long term. Several economists have shown evidence to suggest that this shortage can be explained by demand for better pay, flexible working arrangements, and immigration limits. Though these factors are shown to be linked to reasons why the U.S. is experiencing a decline in labor supply, one fact rises above the rest as the leading cause for this labor shortage: retirees.
Though the COVID pandemic has played a role in this phenomenon, dramatic changes in aging and demographics in the U.S. has had a long time coming. With an aging population, it is no wonder that our labor force is suddenly so much smaller than it was before. Instead of ‘recovering’ from pandemic lows of labor, could it be possible that we are simply entering an age where labor is in short supply? Some economists and demographers argue that this could be the case and that COVID might have simply expedited the process.
At around the same time when labor supply began to decline because of the pandemic, there also was an uptick in retirees. Most people retire around the age of 62 in the U.S. This age also happens to be considered the start of being considered “at risk” of COVID 19 being fatal if contracted.
With that said, one explanation for the increase in retirees can be explained by simply not wanting to work in dangerous COVID-19 environments – especially for, “those with lower incomes and less education”. Because of the dangers of COVID for older populations, they may lean towards retirement rather than continuing work and potentially risking their lives.
Though this explanation qualifies for lower income and less educated populations, the spike in retirees is seen amongst all income brackets. For more affluent retirees, one explanation is the rising value of assets. While affluent workers may choose to stay with their job and continue working virtually, the rising value of stocks, homes and other assets makes it so they may be incentivized to leave their jobs and reap the benefits of investing instead.
The following chart demonstrates the share of retirees that economists expected to see versus the actual amount.
As seen by the graph displayed above, the retirement ratio increased rapidly following the onset of the pandemic in February 2020. Considering the share of the population retired in 2020, the magnitude of the change to 2021 is dramatic. As such, it is understandable to see what effect this may have had on the labor force as a whole, especially since those who are of retiring age typically do not re-enter the labor force.
Another effect of the amount of early retirement we see post pandemic is the effect on the old-age dependency ratio.
Economics has identified that in order for an economy to be stable, the population of the labor force must not be disproportionately smaller than the population of retirees. The intuition is that retirees are supported by the labor force and thus the old-age dependency ratio must be at an economically efficient level.
Essentially, this ratio measures the share of the labor force in comparison to the share of the population in retirement– or of old age. The idea behind this ratio is that those in the labor force support retirees; therefore making retirees dependent on the current labor force.
With an uptick in retirement in the U.S, the old-age dependency ratio is nearing levels which could be harmful to the U.S. economy as a whole. Current economic research suggests that increasing old-age dependency ratios may increase savings rates, decrease investments, increase housing prices and shift consumption patterns in the long-run. These changes could contribute to lower economic growth overall in the U.S.
Evidently, there are several economic issues that could result from the retirement levels that are being seen currently in the U.S with a myriad of explanations. Based on the reasoning behind the macroeconomic shocks in labor that we are seeing, it may be necessary for policy to be enacted to incentivize the older populations to rejoin the labor force. The simple answer is, jobs must be more attractive opportunities for current retirees than the benefits they are receiving for them to return to work and help to bring the labor force somewhere near its former levels in 2019.
Labor supply is tight, and in order for the U.S. economy to return to its former productivity levels, we simply need more workers. While it may be a stretch to consider bringing retirees back into the workforce, there is research that suggests that loosening rules regarding immigration could lead to economic prosperity in economies who experience a high old age dependency ratio. Other measures have started to be put in place to incentivize domestic workers who are not of the retirement age to come back to work such as flexible working hours, higher wages, and more benefits.
Appendix
Allen, T. (April 2021). The Pandemic Is Changing Employee Benefits. Harvard Business Review.
Ellyatt, H. (October 2021). There are millions of jobs, but a shortage of workers: Economists explain why that’s worrying. CNBC.
Kugler, A. & Oakford, P. (August 2013). Immigration Helps American Workers’ Wages and Job Opportunities. American Progress.org
Mitchell, J., Weber, L. & Chaney Cambon, S. (October 2021). 4.3 Million Workers Are Missing. Where Did They Go? Wall Street Journal.
Munnell, A. (August 2011). What Is the Average Retirement Age? Center for Retirement Research at Boston College.
Omeokwe, A. (October 2021). Covid-19 Pushed Many Americans to Retire. The Economy Needs Them Back. The Wall Street Journal.
Santacreu, A. “Long-Run Economic Effects of Changes in the Age Dependency Ratio,” Economic Synopses, No. 17, 2016. https://doi.org/10.20955/es.2016.17