Is the labor market returning to normal?

Published February 23, 2023

By Michael Walden

After inflation, the labor market shortage has probably been the top story of the past two years. Many businesses have struggled to find workers, despite increasing their pay. The number of open jobs outnumbers the number of jobless individuals. And there is still a large number of people who could be working who haven’t taken a job.

But the latest national jobs report for January suggests some of these concerns may be improving. The number of non-farm jobs added at businesses exceeded half a million, almost double the December number and the highest since last February.The labor force participation rate, which measures the number of people working or looking for work as a percentage of those who could work, was at its highest level since the pandemic.

Yet maybe the most interesting change is inside the aggregate numbers. After a surge in tech jobs between 2019 and mid-2022, many tech companies have been paring those numbers as they worry about a possible recession. However, at the same time, industries that were having trouble finding workers – like restaurants and personal services – have had better success in recent months. For example, the hospitality and leisure sector, which includes restaurants, hotels, and entertainment venues, added 44% more employees in January compared to their monthly average in 2022.

Some may read these recent results as meaning the job market is returning to what it was before Covid hit.  This may be a stretch. Although the number of job openings per unemployed persons has edged down to 1.7 – from a high of over 2 - it is still much greater than the 1.2 jobs per jobless person existing pre-pandemic. 

Also, because the economy has enjoyed good growth in the last two years, the standard for employment shouldn’t necessarily be the numbers that existed in early 2020. From 2019 to 2022, economic growth in both the nation as well as in North Carolina exceeded employment growth by a significant margin. In short, employment has not kept up with economic output.

There are also long-run trends to recognize. It is common to hear that the labor force participation rate has improved but is still less that the rate prevailing before Covid. Many are expecting the rate to eventually reach earlier levels.

It may not. This is because labor force participation in the country has been declining for several decades. Between 2001 and 2011 the labor force participation rate fell 2.7 percentage points.  Between 2011 and 2021 it fell another 2.5 percentage points, and it’s expected to drop another 1.6 percentage points between 2021 and 2031. 

There are several factors behind these reductions: an aging population, a jump in retirements, a declining birth rate, more young people spending additional time in school and delaying their entry into the workforce, and a re-balancing of the work/life balance for many households.

Hence, what has been happening in the labor force is not all related to Covid. Some is the natural reallocation of jobs as the economy changes. Another is shifts in demographic and societal factors impacting the workforce.

Still, if we don’t have enough individuals to do the work needed in the economy, what are we going to do? There are many possible answers.

One is to improve worker productivity. This means getting more output from each worker.  Usually this is accomplished by matching workers with technology or machinery that allows them to accomplish more in the same time period. Some industries are well suited to do this – manufacturing is a good candidate. 

Others aren’t. For example, productivity improvements in the construction industry have lagged most industries because there are often unique factors at sites preventing the use of mass-produced inputs. For example, walls for buildings can be mass-produced in factories and then shipped to construction sites. But concrete-poured foundations are often not perfectly level, thereby not being a match for precisely leveled factory-built walls.

Another tactic is to expose young people to possible work careers much earlier than their late teens or early twenties. A program in North Carolina is using specially-equipped trucks containing virtual-reality machines to give middle-school and high-school students a “virtually-real” exposure to crafts like plumbing, welding, carpentry, and brick-laying – all occupations in need of new workers. By using the machines students sense they are actually performing the crafts, and many become very excited.  Backers of the program hope it will motivate more students to pursue careers in the construction field.

Many companies are finding they must improve flexibility offered to workers in order to improve their hiring ability. Flexibility includes more options for remote work, greater sensitivity to needs of children and families, and training opportunities within the company that can improve promotion possibilities.

The conclusion is the changes we are seeing in the labor market are not all due to the pandemic.  Many would have eventually happened without the pandemic. They are part of our ever-changing economy.

It is ironic – at least to me – that today’s concern about a labor shortage is exactly the opposite of the prevailing concern less than a decade ago about a possible emerging labor surplus.This was the time when labor-saving technology was beginning to emerge. There were worries the typical unemployment rate could hit 20%.

How times and concerns have changed in less than a decade. But one lesson of history is that change usually is the norm.  So, can we really define a “normal” labor market?  You decide.

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.