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:
- About one-half of the US labour force participation rate shortfall is attributed to generous fiscal support, which has likely discouraged labour supply.
- 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.
- 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.