Barkin: To address inflation, U.S. must rethink labor

As the U.S. moves to a short-labor environment, it will be necessary for businesses, governments and nonprofits to reassess their approach to labor, Federal Reserve Bank of Richmond President and CEO Tom Barkin said Friday in Richmond.

Speaking at the Virginia Chamber’s 2022 Virginia Economic Summit and Forum on International Trade, Barkin said that although the nation’s unemployment rate has dropped back to levels last seen before the pandemic, workforce participation has not risen to pre-pandemic numbers. In November, the national participation rate was at 62.1%, down from 63.4% in February 2020.

Although the Fed has increased interest rates by 0.75 points four times this year to address the 40-year-high inflation rate, that did not dampen job growth. The U.S. added 263,000 jobs in November, according to the Labor Department’s Bureau of Labor Statistics payroll numbers released Friday. That’s about three times the break-even level of workforce growth, meaning the U.S. is still adding jobs faster than workers, Barkin explained.

“The result has been historic labor market tightness,” he said, particularly in skilled trades. The labor shortage, in turn, has contributed to inflation, Barkin said. The Personal Consumption Expenditures (PCE) price index, which measures the changes in the prices of goods and services compared to the same month a year ago, was at 6% overall in October, a near 40-year high.

“The unmatched outcome is fewer workers that would constrain our growth and pressure inflation — unless and until businesses and governments can deliver productivity enhancements [and] restructure incentives to bring more workers into the workforce,” he said.

By contrast, businesses had adapted to the growing labor force the U.S. experienced for decades, benefitting from the post-World War II baby boom, as well as other factors such as more women entering the workforce, more college-educated workers, better health allowing workers to live longer and historically high immigration levels. Businesses also benefitted from increased access to low-cost offshore labor over the past several decades.

Now, however, businesses must adapt to a labor shortage, Barkin said. “Employers are reconsidering working conditions, revising schedules and redesigning jobs to better match worker preferences.” Some, he noted, are partnering with community colleges to attract skilled trades workers.

Businesses also are taking active roles in reducing barriers to work by providing child care or housing support.

Within the Fed’s Fifth District (which includes Virginia, North Carolina, South Carolina, West Virginia and Maryland), a steel company has hired full-time recruiters and started its own soft-skills training program, and a poultry provider has dropped drug tests and background checks from its hiring process, he said.

Although the labor shortage has led some businesses to raise pay to meet market demands, workers still could be vulnerable, Barkin noted. Employers who raise pay will demand higher productivity or raise prices, which will lessen demand and, eventually, jobs. The U.S. could also see an increase in offshoring and automation that reduces staffing needs.

Learning from others

Governments and nonprofits should consider playing a role in broadening the labor supply, exploring policies that encourage workforce participation and preparation, Barkin said.

Case studies from other countries show possibilities. In 2000, Canada and the U.S. had similar percentages of women participating in the labor force. Now, Canada’s women labor participation has risen five points, while the U.S. has seen a decline of one percentage point. In 2020, the U.S. women’s labor force participation rate was at 56.2%.

Declining availability of child care led directly to some mothers leaving the U.S. workforce during the pandemic, according to a report released in April by the U.S. Chamber of Commerce, with 58% of all parents saying they left jobs because they couldn’t find or afford child care. Flexible work arrangements could ease pressure on parents, Barkin said, citing research from the Federal Reserve Bank of San Francisco.

Another factor in the U.S.’s labor shortage is a decrease in workers ages 55 and above, which had a higher labor force participation rate in February 2020 than they do today. If that population was at the February 2020 rate today, there would be 1.4 million more older workers.

The U.S. has an employment-to-population ratio of 56% for adults ages 60 to 64. In Japan, though, the employment-to-population ratio for workers ages 60 to 64 is at 70%,  a 19.3-percentage-point rise from 2000. Some of this depends on overall better health among the Japanese population, but an end to mandatory retirement at certain ages and the addition of training programs for employers hoping to hire and retain senior workers have also helped, Barkin said.

Meanwhile, limits on immigration during the pandemic have caused a 500,000-person decline in prime working age immigrants in the U.S., Barkin said, an issue he thinks the federal government should address. “It’s worth exploring things like increased legal immigration, which would bring those with skills, work ethic and entrepreneurship into our workforce.”

In short, it’s time for businesses, governments and even economists to reassess what they think they know about the labor market, Barkin said. “Increasingly, I worry that we’re moving to an environment where labor is short and not long. The situation can be managed — other countries have proven that — but it requires real intentionality.”

Editor’s note: This article has been updated to reflect the correct rise in Japan’s employment-to-population ratio increase among those ages 60 to 64 from 2000.