Help wanted sign in a restaurant window in Hell’s Kitchen in New York on Sunday, January 9, 2022.

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US employment jumped in January despite Omicron wave

Karen Dynan (PIIE) and Wilson Powell III (Harvard Kennedy School)


Photo Credit: Sipa USA/Richard B. Levine


US payroll employment jumped by 467,000 in January, much more than most analysts had expected. Businesses apparently perceived strong demand for their output and were willing to hire workers or keep workers who were hired for the holiday season on their payrolls. Although many more workers than usual missed some days of work because of illness—presumably driven by omicron—many were paid for at least part of the report's reference period and thereby were counted as employed. 

By contrast, movements of the key indicators in the household survey were muted in January. The unemployment rate ticked up to 4.0 percent, while the labor force participation rate was unchanged after removing the effect of updated population controls. The participation rate remains well below its pre-pandemic level, having retracted far less of its initial deterioration than the unemployment rate has.

The unemployment rate is just 0.5 percentage point above its pre-pandemic level—consistent with other indicators suggesting that the pool of people looking for jobs is small relative to the outstanding demand for workers. Not surprisingly, wages continue to rise briskly, with the largest gains where worker shortages appear to be most acute.

Looking ahead, employment growth can be sustained at high levels and worker shortages can ease substantially only if more people return to the labor force. There is limited evidence as yet about how quickly the various factors holding back participation are likely to dissipate, but the most likely outcome is that many of the factors will fade, albeit gradually.


In contrast to expectations for a modest gain, payrolls rose 467,000 in January, as shown in figure 1. The January reading and substantial upward revisions to payroll employment gains in November (+398,000) and December (+311,00) suggest that trend employment growth did not moderate in late 2021 as previously believed. Such sizable employment gains even as omicron cases surged augur well for continued momentum in the labor market in coming months.

Even so, employment remains 2.9 million below where it was just prior to the pandemic and, as shown in figure 2, 4.2 million shy of the current level implied by the Congressional Budget Office's pre-pandemic projections adjusted for slower-than-expected population growth. Although it remains to be seen what will constitute a "normal" level of payroll employment growth going forward, reaching that level will probably be a protracted process. 

Figure 1 Change in nonfarm payroll employment
Figure 2 Payroll employment shortfall


Payroll employment increased in January in most industry sectors, led by continued gains in leisure and hospitality and in professional and business services. Looking past short-run fluctuations, employment has shown a sizable rebound in all sectors relative to pandemic lows, with the exception of government, as shown in figure 3. The largest remaining gaps relative to early 2020 levels are in food services, other private services (including utilities, social assistance, and other), and education. Professional services, transportation and warehousing (a sector bolstered by the shift to ecommerce), and retail trade have now surpassed pre-pandemic employment levels. 

Figure 3 US employment has rebounded across sectors, but gaps remain


The US unemployment rate increased slightly to 4.0 percent in January. The labor force participation rate was 62.2 percent last month, the highest mark in the expansion; however, the apparent increase in participation relative to the figure in December's report is an artifact of the Bureau of Labor Statistics' updating of population figures, and the participation rate was unchanged after adjusting for that updating. Supplemental data showed large increases in the number of people reporting that they were unable to work because their employer closed or lost business because of the pandemic or were prevented from looking for work because of the pandemic. 

The unemployment rate currently stands just ½ percentage point above the level seen in the robust labor market of early 2020. The current low level is particularly striking given the massive scale of job loss early in the pandemic, which led to an unemployment rate of nearly 15 percent. As can be seen in figure 4a, the net increase in the unemployment rate is now at the low end of the range at the comparable point in earlier downturns, including some that were far less disruptive than the current cycle. 

Figure 4 Change in unemployment rate and labor force participation rate from business cycle peak

The low level of the unemployment rate is telling us that the number of people who do not currently have jobs but are actively seeking employment is about what it would be in a normal healthy economy. But few would describe the current state of the labor market as normal given what has happened with labor force participation. Like the unemployment rate, the labor force participation rate moved dramatically in the early part of the pandemic, falling by more than 3 percentage points. However, unlike the unemployment rate, the labor force participation rate has not moved quickly back to earlier levels, remaining below the levels of earlier cycles, as shown in figure 4b.


Anecdotal reports and various indicators suggest that a number of factors are still suppressing labor force participation. An exceptionally large number of people reported in the Census Pulse Survey that they did not work in early January because they were ill with the virus or were caring for someone ill, but even three months earlier—before the highly contagious omicron variant emerged—several million people reported being absent from their jobs or out of the labor force for that reason. The same survey suggests that another couple of million people were not working in January for fear of getting or spreading the virus. 

Difficulty obtaining reliable childcare probably is another factor keeping some parents out of the workforce (with employment in the child day care sector down about 10 percent from its pre-COVID level), though some evidence suggests that the effects of these challenges on aggregate labor force participation may not be particularly large. 

In addition, many households have greater financial cushions today than they did in early 2020 because their spending has been constrained by the pandemic and their income has been supported by government payments. For households that traditionally have had almost no savings, these cushions can help them weather a few months of not working—an option they did not have prior to the pandemic. For households that went into the pandemic with assets such as homes or stocks that have since appreciated in value, the wealth gains have been even larger. 

Some insight into the importance of these different factors may be gleaned from the stark differences in labor force participation by age, which are shown in figure 5. The sharpest initial drops in participation—represented by the full bars (including both the light and dark segments)—were for younger workers. However, the recoveries in participation—represented by the light segments—have also been larger for younger workers. Individuals who are 55 or older initially saw the smallest decline in labor force participation but have seen less rebound from their pandemic low than other groups. This pattern probably owes, at least in part, to a sharp increase in the wealth of these households, which contrasts with their experience following the global financial crisis, as seen in figure 6.

Figure 5 Change in labor force participation rate since February 2020 by age
Figure 6 Aggregate wealth for households ages 55-69

Looking ahead, with wealth gains making retirement a more comfortable option, the lower labor force participation rate of older individuals probably will be at least somewhat persistent. However, improving COVID-19 conditions and dwindling financial buffers will probably encourage more individuals in other age groups to return to the labor force over the coming year and beyond.


Average hourly earnings for all private workers were 5.7 percent higher in January 2022 than in January 2021, marking the fastest year-over-year rise on record (excluding early 2020 when wage growth was heavily affected by compositional effects).

The unemployment rate and the number of unemployed workers per job opening are both close to the levels seen in the strong labor market just before the pandemic, as shown in figure 7. Those measures alone imply a tight labor market that would push up wages. Moreover, the rate at which workers are quitting their jobs—which seems especially useful in predicting wage growth—has moved well beyond its pre-pandemic mark. 

Figure 7 Measures of labor market tightness

The largest increases in wages have been for workers in sectors where worker shortages appear to be acute. Wage growth in the retail and hospitality sector surged in 2021 on a compositionally adjusted basis, as shown in figure 8—although today's average hourly earnings data indicate almost no change in January. Many lower earning workers are benefiting from these gains given their disproportionate representation in this sector.

Figure 8 Employment cost index: Wage and salary growth

Federal Reserve policymakers will be paying close attention to wage increases in coming months, as continued runups in excess of productivity gains would put further upward pressure on inflation.

Data Disclosure

The data underlying this analysis are available here [zip].

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