The labor market is likely tighter than the macro numbers would suggest.

An examination of the changes in the labor force since February 2020 shows that some may be permanent (demographics), semi-permanent (skills) and transitory (impact of unemployment benefits). These changes would indicate a tighter labor market than the 6.1% unemployment rate would suggest. As a result, we believe there is likely upward pressure on wages.

Focusing on a few key measures: There’s been a 7.6 million reduction in employment, with a 4.1 million increase in unemployed people (the difference being people leaving the workforce) and more than 12 million people receiving emergency benefits. While the labor market should continue to recover, we believe it is going to be difficult to get back to some of these numbers without wage pressures. Specifically, there has been a 2.7 million (non-seasonally adjusted) increase in people age 55+ who are not in the labor force and “do not want a job right now.” Their reasons may include health concerns, early retirement programs, possible 401(k) gains and the different mortgage situation from 2011 – 2014. Additionally, those closer to 65 (and Medicare eligibility) may be more reluctant, especially if they have received stimulus checks.

Looking at the National Federation of Independent Businesses’ “hard-to-fill” jobs, it was tough to find people before the pandemic and it’s even tougher now, with that index at historical highs. Many 55+ workers may have the necessary skills and experience. Notably, those that are leaving the labor force generally have only a high school degree or some college/associate’s degree.

Finally, in considering whether unemployment benefits are keeping workers home, an answer may be in some portion of the 1.6 million people who currently want a job but are not counted as unemployed because they were not actively looking for work in the last four weeks or were unavailable to take a job. That would help explain the difference between the just under 10 million people unemployed and those collecting emergency benefits.

Particularly as a result of the 55+ group, but also due to skills mismatches and the potential impact of those staying home due to benefits, the labor market is probably tighter than the macro numbers would suggest. This will likely put upward pressures on wages in the near-term. How the Federal Reserve characterizes this data within the context of its outcomes-based guidance could have important implications on the timing of tapering/tightening.