What Did We Learn This Week? (02/23/2023) - Where are the Workers

For the last six months or so, I have been writing about the structural changes that have occurred in the labor market driven by the confluence of several factors including aging demographics, deglobalization and declining legal immigration. I have also discussed the inflationary importance of the anemic Labor Force Participation Rate (LFPR). On the first Friday of every month, economists and market participants breathlessly await the release of the Household and the Non-Farm Payroll reports. One of the metrics from those reports most closely watched is the LFPR because if we could get LFPR meaningfully higher, we would add millions of workers to fill all those jobs still being advertised but going unfilled, thereby reducing much of the wage pressures that are driving inflation and keeping the Fed in tightening mode.

Last month, Economists from Washington University published an important working paper with the National Bureau of Economic Research (NBER) that makes the case that much of the labor tightness we are currently experiencing is not only due to lower participation, but also from people in the workforce choosing to work less.

In their paper, Where are the Workers? From Great Resignation to Quiet Quitting, the authors wrote, “the pre-existing trend of lower labor force participation especially by young men without a bachelor's degree accounts for some of the decline in aggregate hours, the intensive margin (workers working fewer hours) accounts for more than half of the decline between 2019 and 2022…Workers' hours reduction can explain why the labor market is even tighter than what is expected at the current levels of unemployment and labor force participation.”

In other words, economists focusing just on the weakness in the LFPR are missing more than half the story. Hours worked are now voluntarily coming down for employees and the impact of that is companies will need to hire more people if the employees they have are choosing to work less or leaving for the opportunity to work less. The authors went on to write, “Although some of the people who quit as part of the Great Resignation did exit from the labor force, many others simply found a new job, possibly with an employer offering more flexible work arrangements and less demanding hours, as well as better pay…Those who engage in Quiet Quitting do not actually quit or leave the labor force, but stop idolatrizing work and seek more work-life balance, including fewer hours.”

The chart below shows that this trend of workers choosing to work fewer hours has been in place for some time, but accelerated amid the pandemic:

Average Working Hours per Year Vs. Weekly Earnings by Year

 The authors continued, “While determining the cause of the hours reduction is beyond the scope of this paper, we conjecture that shifts in preference toward more work-life balance, manifested by the Quiet Quitting phenomenon, is an important factor. The pandemic may have motivated people to re-evaluate their life priorities and also gotten them accustomed to more flexible work arrangements (e.g., work from home), leading them to choose to work fewer hours, especially if they can afford it. Our finding that the hours reduction is larger for those in the right tail of the hours and the earnings distributions supports this interpretation.” By “the right tail of the hours and earnings distributions”, the authors mean the people working and earning the most are the individuals where they are seeing the greatest movement toward wanting to work less. To me, this suggests that there is a certain amount of “burnout” among the most productive of American workers.

To the idea of “burnout”, the authors conclude, “the reduction in hours worked may well persist. And that would not be a perverse outcome. The US stands out among advanced economies in terms of annual hours worked per worker. According to the OECD, the average US worker worked 1,791 hours in 2021. This is significantly higher than the corresponding number from other advanced economies: Canada (1,685), Japan (1,607), the UK (1,497), France (1,490), and Germany (1,349), for example.11 In this context, if anything, there is room for hours worked per worker to further decline in the US.”

My takeaway from this work is that this is yet another factor driving the American worker shortage and it is a factor that appears likely to be enduring. As I have said repeatedly, The Fed can and will destroy demand for labor. I have no doubt that the Fed will be successful in slowing the economy enough to drive down corporate profits and thereby drive down demand for labor. But beyond the current cycle, the trend appears clear that many Americans, broadly speaking, are keenly interested in a better work/life balance and the long-term impact of that will be further wage push inflation.

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Tim Pierotti is WealthVest’s Chief Investment Strategist. 

Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.

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