The Tight US Labor Market: Missing Hours, Missing Workers

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A defining feature of the US economy since 2021 has been the unusual tightness of the labor market. The unemployment rate, currently 3.5 percent, not long ago reached historic lows, while currently about 7 percent of available jobs are unfilled, a historically high level.

Labor markets can tighten if labor demand increases or labor supply contracts. In Where Are the Workers? From Great Resignation to Quiet Quitting (NBER Working Paper 30833), Dain Lee, Jinhyeok Park, and Yongseok Shin focus on recent changes in labor supply. They report that between 2019 and 2022, the total number of hours worked in the American economy declined by 3 percent. They decompose this decline into extensive-margin changes — workers leaving the labor market — and intensive-margin changes — workers reducing their hours — and break down these changes among demographic groups.

Reductions in hours of work by those in the labor force, particularly men with some college or bachelor’s degrees, have contributed to labor market tightness.

On the extensive margin, as of November 2022 the labor force participation rate was about 0.8 percentage points below its prepandemic value, reflecting a sharp drop in 2020 followed by a slow and incomplete recovery over the next two years. The decline was strongest among men without college degrees, whose participation rate is now 2 percentage points below its prepandemic level. This is part of a longer-running deterioration in the labor force participation rate of less-educated men. The decline has been strongest among younger cohorts of men who were in their teens or 20s during the Great Recession, perhaps indicating that experiencing a recession during one’s formative years can result in long-run labor market precarity. Since the Great Recession, the labor force participation rate among these cohorts of men has been consistently lower than the rates of the previous cohorts. The researchers argue that the events of the past three years reinforced pre-existing trends in labor force participation.

Meanwhile, intensive-margin decreases in hours worked have played a surprisingly important role in the decline in total hours worked. Between 2019 and 2022, there was a 33-hour decrease in annual hours worked per capita — the total number of hours worked during the year divided by population size. Fifteen hours of this decline are attributable to the drop in labor force participation, while the other 18 are due to intensive-margin hours reductions among employed workers. These large intensive-margin changes are a new phenomenon: previous changes in aggregate hours worked were driven mostly by extensive-margin adjustments.

The intensive-margin decline in hours between 2019 and 2022 has been largest among prime-age men. In contrast to the extensive-margin results, though, hours have dropped the most for more-educated men — those with some college or a bachelor’s degree. Men who were previously working very long hours and earning large amounts have cut their hours the most. Among women, the decline in hours has been similar across education groups.

These hours reductions are more likely to be the result of voluntary reductions in labor supply by workers than involuntary cutbacks due to declining employer demand. Survey evidence shows a drop in workers’ desired hours over this period. In addition, given the tightness of the labor market overall, workers who desire more hours could easily leave their current employer and find another job with longer hours.

— Shakked Noy

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