Throughout the developed world, rapidly tightening labor markets have been a common characteristic of the economic recovery during the Covid-19 pandemic. This tightening reflects labor shortages and has led to strong wage growth in many countries. The drivers of this tightness are of great interest for economists and policymakers.
We examine whether a fall in individuals’ willingness to work has contributed to the labor shortage observed in the US. To do so, we use data from a survey on job search behavior that directly asks workers their weekly desired work hours. We treat this measure as an estimate of each individual’s potential labor supply.
Our study shows that desired work hours fell considerably during the pandemic, making the US labor market much tighter than what the unemployment rate implies. Perhaps the notion that people were less willing to work during the pandemic is not so surprising, since the popular press has highlighted anecdotal evidence of people dropping out of the labor force for various reasons.
Our research shows, however, that much of the decline in labor supply comes from a much less appreciated source: the preferences of people who are already outside of the labor force (i.e. who neither have looked nor are looking for a job). In normal times, there is a sizable number of people who are classified as out of the labor force (based on the definitions used in government surveys) who nevertheless do occasionally enter the labor market. These individuals tend to prefer a small but nontrivial number of work hours per week. Anecdotally, the group includes retirees, stay-at-home moms, students, and others who pick up jobs such as bagging groceries, working at a reception or concierge desk, helping out at a local business, and so on. These individuals may not necessarily need to work, but they are happy to do so as long as the hours and work conditions fit their lifestyle.
Before the pandemic, 59% of those classified as out of the labor force reported having at least some desire to work. During the pandemic, this fell to 50%. The nine percentage point decline reflects a substantial decrease in the overall willingness to work and occurred in addition to a dramatic drop in labor force participation at the onset of the pandemic. Furthermore, issues directly related to Covid-19 were a major factor behind the decline in the willingness to work, though more so in 2020 than in 2021.
Economists have long known that labor force participation is an important factor for understanding the strength of a labor market. Our research shows that the nonparticipants matter too, because many of them are willing to do some work. Their potential labor supply therefore has important implications for labor market tightness, and consequently for the ability of employers to find workers and for the wages employers must offer.
Finally, we note that the degree to which the behavior of nonparticipants affects labor market tightness depends on the flexibility of the labor market, as more flexible markets make it easier for nonparticipants to find jobs that match their desired hours.
© R. Jason Faberman, Andreas I. Mueller, and Ayşegül Şahin
Jason Faberman is senior economist at the Federal Reserve Bank of Chicago.
Andreas Mueller is associate professor of economics at the University of Texas at Austin and a Research Fellow of IZA.
Ayşegül Şahin is professor of economics at the University of Texas at Austin.
The views expressed in this paper are our own and do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.
We recognize that IZA World of Labor articles may prompt discussion and possibly controversy. Opinion pieces, such as the one above, capture ideas and debates concisely, and anchor them with real-world examples. Opinions stated here do not necessarily reflect those of the IZA.