US makes solid job gains in October but millions are still on the sidelines

The US labor market accelerated in October, reversing the slowdown in job growth in August and September. The employer survey, which is generally more reliable, showed that the US economy added 531,000 jobs in October, slower than the average pace of 1,027,000 in June and July, but faster than the upward-revised 398,000 in August and September. The delta variant of the coronavirus likely continued to play some role in October. Cases and deaths fell through the month but remained at relatively high levels, while some high-frequency measures like in-person dining and air travel showed modest improvements. Unlike earlier waves of the pandemic, however, delta seems to be slowing but not reversing progress.

The unemployment rate continued its steady fall, hitting 4.6 percent, while the labor force participation rate was flat. The relatively low level of labor force participation, which has barely changed since the summer of 2020, has restrained overall job and economic growth. Low labor force participation appears to be more reflective of a reduction in the supply of labor as evidenced by the strong demand shown by the roughly 11 million job openings, a record low ratio of unemployment to vacancies, and also the fact that nominal wages continued their strong growth in October, rising by 0.4 percent.

The economy is still 6.2 million jobs short of pre-pandemic projections. If job growth continues at this pace, it will take another 13 months to close the gap. A faster pace of job growth will require the unusually low rate of exit from unemployment to rise as well the labor force participation rate to rebound.

The Labor Market Is More than 6 Million Jobs Short of Normal

The state of the labor market can be understood by looking at the set of indicators shown in the table.

Table 1
	October 2021	Difference from pre-pandemic value/trend
Nonfarm Payroll Employment (thousands)	531	-6,194
Unemployment Rate	4.6%	1.1 pp
Realistic Unemployment Rate	6.0%	2.5 pp
Employment-Population Ratio	58.8%	-1.9 pp
Labor Force Participation Rate	61.6%	-1.2 pp
Job Openings Rate	7.0%	2.6 pp
Unemployed per Job Opening	0.67	-0.15
Average Hourly Earnings, Total Private	0.4%	#N/A
Average Hourly Earnings, Private Production and Nonsupervisory	0.5%	#N/A
Note: October 2021 value is 1-month change for nonfarm payroll employment and average hourly earnings. Pre-pandemic trend based on CBO January 2020 forecast for nonfarm payroll employment. Pre-pandemic (February 2020) value for remaining measures. Difference from pre-pandemic value for employment-population ratio and labor force participation rate adjusted for changes in the age-sex composition of the population. Job openings are estimated based on growth in Indeed Hiring Lab job postings. Average hourly earnings growth is chain-weighted based on aggregate hours by industry sector. Sources: Bureau of Labor Statistics via Macrobond; Indeed Hiring Lab; Congressional Budget Office; authors' calculations

The gap between the labor market and normality continued to narrow in October, but the economy remains 6 million jobs short of pre-pandemic projections as shown in figure 1.

The unemployment rate is now only 1.1 percentage point higher than it was prior to the pandemic. But with 2.2 million fewer people in the labor force than would be expected given the state of the economy, the labor market is less recovered than the unemployment rate would suggest. The "realistic" unemployment rate, which adjusts for misclassification and the unusually large decline in the labor force participation rate, was 2.5 percentage points above its pre-pandemic level in October (figure 2). This is consistent both with the still depressed labor force participation rate and employment-population ratio, which are 1.2 and 1.9 percentage points below their respective pre-pandemic values (adjusted for demographic changes).

Labor Force Participation Is Well Below What Would be Expected Given the Overall Economy

The labor force remains substantially smaller than it was in February 2020, with the labor force participation rate falling by 1.7 percentage point over that period. About a quarter of this decline, 0.5 percentage point, can be accounted for by the changing age-sex structure of the population. In general, labor force participation tends to decrease at older ages, particularly for those age 65 and older. Thus, as the population ages, the overall labor force participation rate would be expected to fall even if the labor force participation rates for every age-sex group had been unchanged.

Overall, the 1.2 percentage point decline in the labor force participation rate not associated with the changing demographic structure of the workforce is roughly evenly divided between men and women. Labor force participation rates are roughly as expected for younger workers, but there are nearly equal contributions to declining participation from the 25-54 and 55+ age groups.

Table 2 Contribution to non-aging component of change in US labor force participation rate, Feb-2020–Oct-2021 (percentage points)
Ages	Men	Women	Total
16-24	0.0	-0.1	-0.1
25-54	-0.3	-0.4	-0.6
55+	-0.3	-0.2	-0.5
Total	-0.6	-0.7	-1.2
Sources: Bureau of Labor Statistics, Current Population Survey; authors' calculations.

Historically, higher levels of unemployment are associated with lower labor force participation, as some workers who would prefer to work stop looking because of the reduced likelihood of finding employment. In the Great Recession, the demographically-adjusted labor force participation rate fell by about 0.15 percentage point for each percentage point increase in the unemployment rate, similar to the magnitude of change in several previous recessions. Applying that relationship to the current labor market, we would expect the demographically-adjusted labor force participation rate to be about 0.4 percentage point lower because of the elevated unemployment rate, accounting for about another quarter of the total decline in labor force participation since February 2020.

That leaves 0.8 percentage point, or about half of the total decline in the labor force participation rate, unaccounted for by either changing demographics or elevated unemployment. The relative contributions of these three components are shown in figure 3.

A number of factors could be contributing to the decline in the labor force participation rate, including ongoing concerns about contracting COVID-19, increased depressive and anxiety disorders associated with COVID-19, a reduced inflow of workers leaving temporary retirement, and income effects associated with larger cash balances that give people more flexibility on when they need to return to work.

Some of these factors, including the decline associated with high unemployment, should improve as the pandemic recedes, while others may take longer to resolve or may even be permanent. But returning to the pre-pandemic employment path will require a substantial increase in labor force participation.

Nominal Wages Continue Their Strong Rise Consistent with a Tight Labor Market

Nominal wages were up 0.4 percent in October (4.4 percent at an annual rate), an amount that likely slightly understates true wage growth because of compositional effects as lower-wage workers were added (a rough composition adjustment to reflect the changing industry mix showed wages up 5.2 percent at an annual rate in October). While this is somewhat slower than September's particularly fast wage growth, it is still well above than the pace prior to the pandemic. October inflation, however, is projected to be even higher so that workers may not experience real wage gains.

Through September, a more accurate measure of compensation and wages that is not seriously distorted by composition effects showed strong nominal compensation gains that are above their pre-pandemic trend, as shown in figure 4. Further, consistent with tight labor markets, wage growth from June to September as measured by the Employment Cost Index was at its fastest pace since the early 1980s. Other sources indicate that workers in the bottom quartile of the wage distribution have seen the fastest wage gains. Nevertheless, nominal compensation growth has not kept pace with inflation, so real compensation has fallen since prior to the pandemic.

The strong nominal wage growth is consistent with other indicators of tight labor markets. Job openings and quits have remained elevated in recent months, showing both that jobs are plentiful and also that people have the confidence to quit their jobs, knowing they will be able to find new ones. Data from the US Bureau of Labor Statistics and Indeed Hiring Lab shows that openings were likely around 11 million  at the end of October (corresponding to one of the highest rates of opening on record, figure 5). This represents a marked increase from the end of June, even though 2.4 million jobs have been filled in the interim and the delta strain has spread rapidly.

Even though there continue to be a high number of unemployed workers, the large number of job openings means that at 0.7, the number of unemployed per job opening in October was likely the lowest on record. The number of openings likely exceeded the number of unemployed, even accounting for the unusually large reduction in labor force participation, though this measure is still indicative of somewhat more slack than just prior to the recession.

The Outlook for Labor Markets Going Forward

The pace of job growth in October, and the upward revisions for the previous two months, was solid. But the economy should be able to create jobs at a faster pace if other aspects of labor markets were following their usual patterns, including a higher exit rate of people from unemployment to employment and labor force participation rates rising as the unemployment rate fell. If the pace of job growth continued at October's rate, it would take 13 months for the economy to return to pre-COVID projected employment levels. If the pace of job growth slowed, then the economy could permanently remain below the level of employment projected before the COVID-19 pandemic.

More time should help with the recovery of millions of jobs, but it remains uncertain whether it will bring back all 6 million missing jobs or just a subset of them and how long this process will take. The biggest wildcard is not the strength of demand or desire of employers to hire but the desire of workers to find jobs.

The next many million jobs should be relatively easy to get back given the large number of openings and continued rapid economic growth. More difficult will be the last several million jobs. Jobs may end up short of pre-pandemic projections if people have left the labor force for good (e.g., due to early retirement) or if other changes have permanently reduced labor demand (e.g., employers hiring fewer workers who are higher skill and higher paid). The hope is that all the jobs can be regained, productivity could rise to support wage increases, and continued high levels of demand could put the economy on a future path that is better than what was expected before the pandemic. Time will tell.