Will companies be able to find workers in 2021 and 2022? It may be very difficult. Some of President Biden’s policies are aimed at stimulating demand for workers. Jerome Powell is leading the Federal Reserve in the same direction. But other policies will diminish people’s interest in going to work. These conflicts coincide with a demographic trend of little growth in the working age population. The net result will be a great opportunity for people who want to work, and poor opportunities for companies trying to expand. In this environment, demand stimulus is more likely to raise inflation than to promote real economic growth.

The Biden-Powell policies are based on the idea that even in the months before the pandemic, there was considerable slack in the labor force. Though the unemployment rate was a low 3.5% just before the pandemic, critics note that discouraged workers are not counted by the usual measure. That is, someone who reports wanting a job but not bothering to look for one is not considered unemployed, but rather “not in the labor force.” There are other people who might come out of the woodwork if jobs were more readily available, such as stay-at-home parents, students and early retirees.

There’s some truth in the idea, but just some. Stimulus advocates point to the peak in the employment/population ratio, which was achieved in 2000. By 2019 the ratio had dropped 3.6 percentage points (from 64.4% to 60.8%). But this ratio misses the aging of the baby boomers, who turned gray in massive numbers of the period. The ratio can be adjusted for changes in age and sex of the population. This “what if” story ask what the employment/population ratio would have been if there were no change in the composition of the population by age and sex. (Data are from the Current Population Survey of the Bureau of Labor Statistics, based on BLS methodology.) This age and sex-adjusted ratio only dropped 0.7 percentage points, not 3.6, raising doubts that our current population is likely to work like that two-decades-ago population.

The Black and Hispanic populations have also grown as a share of the total, and both have higher unemployment rates, on average. (We don’t have detailed enough data to adjust for age and sex and race and ethnicity all at once.)

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Another measure of labor market tightness, the rate of voluntary quits, reached its highest sustained level in 2019 (though it had spiked a bit higher for one month in 2001).

At the same time that the Biden administration is trying to stimulate demand for labor, other policies diminish the incentive for people to work. Extra unemployment insurance payments have a statistically significant impact. The size of the effect is not usually large, but we don’t have full studies with the bonus payments that started last year. Plenty of business owners reported last summer that their laid-off workers were reluctant to return to their old jobs because they were taking home more money not working than when they had been working. The plus side of unemployment insurance is that it allows people to be picky, not needing to take a lower-paying job when more job search would enable them to find a higher-paying job. That effect, however, must be balanced against the direct disincentives of the program.

The effort to stimulate more jobs will, like all things, hit diminishing returns. It will be harder and harder to get more people into the workforce. It can be done, of course, but through higher and higher wages and benefits. A person who believes work is not worth the time and bother at $15 an hour may be willing to take a job at $20. But the stimulus needed to get that much higher demand for labor will certainly be inflationary.

The massive stimulus from the Biden administration and the Fed will certainly happen. Arguments against it are probably futile, The business implication is that companies will be competing for a limited pool of workers. Wage inflation will accelerate. More importantly, the labor retention rate will become the key metric for business success in the coming years.

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