The March employment report showed that the U.S. economy continues to recover in the aftermath of the COVID pandemic, with the labor force exhibiting signs of multi-generational tightness. Despite an unemployment rate of 3.6%, among the lowest experienced in the last 50 years, and average monthly job gains of 600,000 over the last six months, the Labor Department reported that there were 11.3 million job openings at the end of February – a surplus of 5.3 million jobs over the number of unemployed workers.

This disequilibrium in the labor market has been due to changes in both sides of the supply-demand equation. Labor force participation has declined from 63.0% in March 2019 to 62.4% in March 2022, resulting in 1.6 million fewer workers in the labor force. On the supply-side, we have written about some of the structural issues that have led to this, namely aging demographics and lower immigration^[1]. However, even if we added back the 1.6 million “missing” workers into the labor force, the U.S. economy would still face a shortage of roughly 3.7 million workers relative to job openings. What explains this huge excess in labor demand?

The chart below looks at a combination of job openings and employment at a sector level, and allows us to measure “aggregate labor demand” from where the demand for workers is filled (current employment) and unfilled (job openings). In general, this measure of labor demand is greater by 3.5 million workers than it was pre-pandemic. On a sector level, we can observe a few key changes:

• The health care and social assistance sector has greater demand for labor despite experiencing minimal losses in employment, reflecting an increased need for health workers during and following the pandemic, in addition to the healthcare needs of an aging population.
• Even if the leisure and hospitality sector filled all of their current job openings, it would still not cover the substantial loss in employment experienced during the pandemic as workers fled for higher-paying or better-quality jobs.
• The top sectors for aggregate labor demand are retail trade, transportation and warehousing, and professional technical jobs (a subset of professional and business services); they have also seen meaningful increases in employment. This is likely driven by strong goods demand throughout the pandemic and an increased need for cost-saving technology in the face of supply-chain issues.

All told, the U.S. economy is not only battling a shortage of workers but also an increased need for them. Some of this demand might be explained by the growing economy, as U.S. real GDP is 3.2% higher than it was in the fourth quarter of 2019. However, it may also be an indication that pandemic-related disruptions to the labor force may have become more permanent than initially thought. The antidote to this labor market disequilibrium will likely have to include a mix of enhancements in productivity, better skills-based training for workers and increased immigration. In the meantime, investors must prepare for challenged corporate earnings, higher inflation and higher interest rates, in turn suggesting the need for active management and diversification.

Growth in aggregate labor demand since pre-pandemic

JOLTS job openings and employment, Feb. 2022 minus Feb. 2020, SA, thous persons

Source: Department of Labor, J.P. Morgan Asset Management. *Other includes mining and logging, construction, information, wholesale trade, financial activities and other services. Data are as of April 12, 2022. 

[1] “The Great Worker Shortage”, David Kelly. https://www.linkedin.com/pulse/great-worker-shortage-david-kelly/?trackingId=UFa%2BEZl6HpW7NNK5f3%2F2eg%3D%3D

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