U.S. employers added a whopping 528,000 jobs in July, far more than expected, and wages rose higher than expected — yet the number of people working or looking for work fell. Where is everyone?
The Labor Department said on Friday that the size of the workforce fell by 63,000 in July, although the population has grown by 177,000. The employment rate, the proportion of people in work or job seekers, fell by a tenth of a percentage point to 62.1 percent.
The mystery of the shrinking workforce and declining employment rates is one of the lingering mysteries of the post-pandemic recovery. The labor market has been very strong – so strong that many believe that despite two consecutive quarters of negative economic growth, we can’t be in a recession – but somehow it hasn’t led to a higher proportion of Americans in the labor market .
“I can’t have a client meeting without someone asking me where all the employees have gone. I have no idea, but they are apparently gone,” Credit Suisse analyst Zoltan Pozsar wrote in a note to customers on Monday.
Harvard economist and former Obama adviser Jason Furman said on Friday that he is “stunned” by the drop in July.
I am amazed at the drop in labor participation. Peaked at 62.4% in March and has been declining almost continuously since then – despite tons of job openings, many jobs added, declining cash balances, mostly improving COVID, recession talk scaring people into accepting jobs, etc. pic.twitter.com/M7VskiBVq5
— Jason Furman (@jasonfurman) August 5, 2022
There is also another mystery going on here, which is almost the mirror image of what baffles Furman. According to the household survey, the number of people in work has only increased by 179,000 and the employment-to-population ratio has increased by only 0.1 percent. Where did all these workers come from in July if the employment rate did not rise and total employment barely grew? Just as we don’t know where the workers went, we don’t know where they come from.
A brief tour of the recent history of the workforce
Due to travel restrictions, company closures and COVID concerns, employment rates collapsed in the spring of 2020. We hit a low of 60 percent in April, but then recovered quickly for the next three months. In the summer of 2020, however, the recovery stalled. Employment grew rapidly in October, but participation did not.
Participation saw a second revival in the spring of 2021 when the vaccines were rolled out, and a few months later employment started to pick up again quickly. Then we entered an air pocket again, which may have been related to rising infection numbers and schools that remained closed. The reopening of schools and a drop in the number of infections led to a third wave that started in November 2021 and lasted until March this year.
After the peak in March, participation started to decline again. Interestingly, job growth peaked the previous month. Until this month, job growth as measured by the wage survey was at its slowest pace in more than a year. Part of the withdrawal from participation may simply be that the pace of job growth slowed.
Another weird thing started in March 2020. While we were still adding jobs, the employment level as measured by the household survey remained flat. This is the survey the Department of Labor uses to construct the unemployment rate, employment rate, and other demographics about who works. It is built up by asking households about their employment situation. It differs from the payroll survey in several ways, which asks companies, nonprofits, and governments about employment, hours, and wages. (You can read the differences between the surveys here.)
Attract the self-employed to the payroll
If you also run the household survey in addition to the salary survey, a few things stand out. Firstly, the household survey shows higher employment than the salary survey. That’s because it includes farm workers, the self-employed with an unincorporated business, those on unpaid leave from work, and unpaid family workers. The payroll survey only counts people who are on the payroll of non-farm businesses (it is also known as the establishment survey).
Second, you can see that the household survey shows that employment growth came to a halt in March. Companies expanded payrolls, but overall employment levels did not increase. The best explanation for this is that companies attract a lot of employees from what the financial experts say sidelines; but instead of hiring people who didn’t work, they hire self-employed. Employees are drawn from their own company to the payroll of external employers. Also, some of the people who leave the labor market are replaced by newcomers, so that employment remains stable.
This is reflected in the data for the self-employed in the household report. The number of self-employed persons shrank by 279,000 in July. On a five-year chart, we can see that self-employment crashed during the pandemic spring and peaked last August. Since then, it has fallen rapidly, probably because so many workers are moving from self-employed to payrolls.
That solves the secondary mystery of where all the employees we add to payrolls come from.
The decline in the employment rate coincides chronologically with the flattening of employment, suggesting that there is a connection. Wage growth alone may not be enough to boost labor force participation. It may be that the level of employment as measured by the household survey is now the driver for participation. One possibility is that self-employment opportunities or rewards are being taken, putting some employees on payroll and some out of the workforce altogether.
Real wages fall
Inflation can also play a role. Although nominal wages have increased, they have not kept up with inflation. So real wages fall. That makes giving up free time for work less attractive in the margins. In short, employers are offering employees less money to work than before, meaning that more people who don’t necessarily have to work are choosing not to. Self-employment might not be worth holding on to if your clients aren’t paying you that much in real terms, so you decide to hang up your boots, so to speak. Or maybe you are a young person who decides to hold off looking for gainful employment until wages improve. In short, the real return on labor has fallen, so some people choose not to invest their time in it.
If it sounds absurd to say that people would choose not to work because prices are rising, keep in mind that unemployment is extremely low and employment levels are near record highs. People are much more likely to be related to a person with a job than at any time in recent history, and those jobs seem very safe right now. This makes it easier for a small percentage of the population to decide not to work.
Keep in mind that the workforce shrank by just 63,000 in July, so we’re not talking about a mass exodus of workers.
Many good hypotheses offered in the comments. One: real wages have fallen, so we would expect a shift along the labor supply curve. Should be more important for women and older workers with higher elasticity. https://t.co/JH8lq0CoqG
— Jason Furman (@jasonfurman) August 5, 2022
The role of seasonal adjustments
It’s also work to keep in mind that the employment rate didn’t really contract in July and payrolls didn’t grow by 528,000. Before the seasonal adjustments, the participation rate rose from 62.5 percent to 62.6 percent. The wage figure shrank by 325,000. This is not outrageous. The key figures you read have been seasonally adjusted to smooth out month-to-month variations in employment and give us a better picture of the health of the economy. What the seasonal adjustments for July tell us is that the economy is expected to lose a lot of jobs in July, and not as many this year. On the chart of unseasonally adjusted wage growth below, the major declines are January, when payrolls shrink after the holidays, and the minor declines are July. This year’s July wage decline was the second smallest since payrolls fell by 314,000 in 1966, surpassed only by last year’s nearly 41,000 contraction.
In other words, it was a very strong report for July, even ignoring the seasonal adjustment.
Likewise, the seasonal adjustment tells us that the employment rate is expected to rise in July, which it usually does and did this year. But this year’s jump was smaller than usual, so it’s seasonally adjusted in a decline. The graph below shows the unadjusted labor participation rate. Each of the peaks is a July.
The fall in real wages coupled with very low unemployment has increased the opportunity cost of work. Thus, the number of employees does not keep pace with population growth, causing the participation rate to fall and employment to remain the same even as payrolls grow rapidly.