Why is US labour supply so tight?

By in Global Macro, US Economy

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Goldman Sachs has released a new paper entitled “Why is US Labor Supply so Low?”, which is leading to wage pressures:

Goldman shows that US labour force participation rate has declined more since 2019Q4 than in most other developed economies:

Goldman ascribes four main drivers of the US’ low participation rate:

  1. About one-half of the US labour force participation rate shortfall is attributed to generous fiscal support, which has likely discouraged labour supply.
  2. About one-third of the shortfall is attributed to the way in which fiscal support was delivered via generous unemployment benefits instead of job retention schemes.
  3. Roughly one-sixth of the shortfall is attributed to virus fears.

The next chart decomposes the factors working to reduce US labour force participation:

Nevertheless, Goldman expects the US participation rate to rise by 0.5% to 62.2% by end-2022. This will occur on the back of a diminishing fiscal drag as savings are run down. However, participation will remain structurally below its pre-pandemic trend, since job losses have triggered permanent labour market exists, especially for older workers.

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