No, the Fed Can’t Make People Go Back to Work
(Bloomberg Opinion) -- Why are U.S. workers still not back on the job? What policy makers assumed would be a temporary crisis, caused by the fears and disruptions of Covid-19, is looking more permanent, a shift with longer-term implications for the U.S. economy.
The workforce participation rate in the U.S. has shown little improvement since the summer of 2020, after the economy reopened from pandemic lockdowns. The Federal Reserve should signal to markets that it plans to reduce support for the economy after its meeting this week.
Specifically, the Fed should indicate that it will eliminate its purchases of Treasury securities by March, rather than ending them in June, as it had previously planned. It should wrap up its purchases of mortgage-backed securities even sooner. It should also signal to markets that it is concerned about inflation, and is willing to raise interest rates several times, beginning in early 2022, if price increases don’t moderate.
The central bank has a dual mandate to keep inflation low and stable and to promote maximum sustainable employment. Getting workers back into jobs after the pandemic has been the Fed’s responsibility. But the longer workforce participation remains suppressed, the more it becomes Congress’s job, not the Fed’s, to get workers off the sidelines.
In February 2020, 63.3% of adults were in the workforce, either employed or looking for work. Then, when the pandemic kept people at home and governments restricted business activity, participation plunged over the next two months, to 60.2% in April 2020. By August 2020, after social distancing guidelines were lifted, many people rushed back to work, with 61.7% of adults back on the job. Yet participation has hovered around that level ever since. Last month, the rate was 61.8%.
In the summer of 2020, I would have advised the Fed to try to get it back to 63.3%. But I have since changed my mind, due in large part to the stubborn refusal of workforce participation to recover even when aided by rapidly rising nominal wages. The Fed needs to accept that a hot labor market isn’t enough to bring many of these workers back and attend to the worrisome rise in consumer price inflation instead.
Research from the St. Louis Fed suggests that the pandemic led to over 2 million early retirements. And, according to data from the U.S. Census Bureau, nearly 5 million people are not working because they are caring for children who aren’t in school or day care — many affected by classrooms that have been closed due to Covid.
The same Census statistics show over 6 million people not working this fall because they are suffering from Covid symptoms, caring for someone who is sick, or concerned about getting or spreading the virus.
The Fed’s policy of keeping interest rates low is not going to change most early retirees’ plans or reopen closed classrooms. Nor are the low rates — intended to increase overall economic activity and employers’ need for workers — likely to draw people back into the workforce while they are caring for the sick or remain concerned about getting Covid.
Early retirements and the virus aren’t the only reasons people are on the sidelines. They can afford to be: Households are sitting on over $2 trillion in savings above what they would have had if the pandemic never happened.
This financial cushion was created in part because consumers had fewer opportunities to spend money when social distancing restrictions were in place. The stimulus checks and generous unemployment benefits intended to support households and workers since March 2020 have also played a role.
These extra savings are helping to fuel consumer demand, contributing to inflationary pressure. They are also allowing people to be choosier about which jobs to accept, and confident that positions will be waiting for them because employers’ demand for workers is white hot.
But if labor demand cools off before workers are ready to return, they may find it harder to get a job than they currently expect. Moreover, businesses are able to produce more goods and services than before the pandemic, despite the economy being down 6 million workers. The longer the labor shortage continues, the more businesses will find a way to permanently get by with fewer workers.
Congress should be seeking ways to get people back into jobs. President Joe Biden’s Build Back Better agenda includes a laudable expansion of federal earnings subsidies. By increasing the financial reward for working, these subsidies draw people into employment. But the proposal is temporary, an attempt to make room for other programs that will do less good for workers. Congress should refocus Build Back Better on a few urgent problems, including workforce participation, rather than take the scattershot approach the bill currently uses.
For example, worker training programs that focus on transferable and certifiable skills and “soft skills” have been shown to increase earnings, making employment more attractive. And Congress should be looking to reduce barriers to employment, like excessive occupational licensing requirements.
These ideas — along with similar programs — have little to do with the business cycle. They should be pursued in recessions and expansions. The Fed can push up employment during periods of economic weakness, when demand is suppressed. But today’s economy has more demand than is healthy. Workers are on the sidelines for reasons that loose monetary policy can’t counteract.
Congress acted with urgency when the effects of the pandemic began to ease. It’s time it took the same responsibility for getting the economy back on track.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”
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