Michael Hicks: Lingering effects of COVID on work

It has been two-and-a-half years since the COVID pandemic pushed the United States into recession. The national economy remains burdened by the pandemic, particularly in labor markets. While the unemployment rate is low, levels of total employment and labor force participation have failed to return to pre-COVID levels. New data is beginning to offer a better understanding of why that is the case.

The U.S. is still about 1% below its pre-COVID participation rate, which is simply the number of people working, divided by the number of working age adults. That works out to roughly 1.6 million fewer people employed or looking for work. However, that figure overstates the health of the recovery. We also need to consider the growth of the available labor force. By my calculations, that should be another 2 million people.

Altogether, it seems something like 3.6 million fewer people are now in the labor force than should have been without COVID, give or take about half a million. There are several competing hypotheses as to why this is happening.

Looking purely at levels of participation by age group, the big decline in labor force participation came among adults 55 or older. This should be of little surprise because this age group saw the biggest loss of life during COVID and experienced the most morbidity. The reason this could be a reasonable explanation for the big loss of labor force participation is that baby boomers work past retirement age at much higher rates than do older generations. So, for the past two decades, much of the increase in labor force participation came from baby boomers.

Today, about 70 percent of the total loss of workers post-COVID came from baby boomers, who are not today 25 percent of the labor force. So, it is clear older workers either left work or retired early in pretty large numbers as a consequence of the disease. Again, this could be due to risk but the astonishing rise in stock prices doubtless convinced many it was time to retire.

To understand other problems, we must observe what state variation did to labor force participation. There are several factors to consider. Death rates from COVID varied remarkably by state. Florida, for example, had a death rate that was twice that of Indiana’s. While Florida had a higher share of adults aged 65 or older, a little statistical modeling work reveals that the older age share of the population explains only a small share of the labor force decline.

Labor markets could also be influenced by the type of state response to the pandemic. Too restrictive — the business-employee relationship might have been severed. Poorly executed — state laws would result in higher disease incidence, more death and morbidity. Again, Florida is a good place to consider, particularly since Florida’s governor is thought by many to have responded well to the crisis.

Florida’s COVID death rate was stunningly high compared to Indiana’s, and their labor force participation rate today is a full 4 percentage points below that of Indiana. Today the overall unemployment rates in both states are the same, and both are still below their pre-COVID labor force. Perhaps there is something else at play on labor market outcomes.

Oxford University has created a nice index of COVID restrictions they call the severity index. This is the list of restrictions placed on state and local governments by state leaders. It is part of an international effort to understand the cost and benefits of public health measures. On this scale, Indiana ranks 2nd nationwide as having the least restrictive COVID rules. Florida isn’t near Indiana on that ranking, doing no better than sixth place.

Indiana had half the death rate, with far less restrictive policies than did Florida. When it comes to the mix of governments restrictions, Indiana had what was arguably the best statewide response. I believe this was largely due to respect for federalism, which allowed local governments, particularly schools, to adjust their approach as local conditions warranted.

This is critical because prime working-age deaths from COVID were much larger than most Americans think. COVID killed almost 3,000 prime working-age Hoosiers (aged 20 to 59), and more than 10,000 Floridians in the same age group. Florida’s death rate among prime working-age adults was more than 15 percent higher than Indiana’s, or 1,500 extra deaths.

It must also be said that Indiana’s state response was almost wholly focused on the wellbeing of Hoosiers. In the decades to come, historians and economists will study this in more detail. I think it is early enough to conclude a few important things. In what was clearly the biggest crisis to face any state since the Civil War, Indiana’s response was among the most effective in the nation.

COVID also affected survivors of the disease. A recent Brookings study reports that about 1.6 million workers are out of work due to long-term complications related to COVID. Indiana’s share of that would be about 1,500 more prime-age workers. Whether or not this remains a problem will depend on the ongoing severity of individuals suffering from lengthy inability to work due to the disease.

Finally, the disease imposed huge costs on home caregivers. School closures, and the disease itself, left many households with new duties at home. Women bore the brunt of this. The labor force participation rate of women plummeted in the early days of COVID and has failed to return to pre-COVID levels. Some of this may be due to choice, to either remain home with children or to continue to provide care to an ill family member.

What isn’t clear is how these outcomes affect families. Beyond the obvious negative effects of death and morbidity, many of these changes are benign or positive. A worker’s choice to retire is just that, a choice. If a family wishes to forego some earnings to pursue home schooling or to stay at home with young children, that is a choice. Having choice is the essence of a free market economy, and the policy role lies primarily in expanding choice, not deciding for folks.

The loss of older workers has also resulted in wage increases, particularly at the bottom rungs of the income scale. This is a rare moment when the demand for workers outstrips supply sufficiently to see it in the wage data. That is a rare silver lining to a deep and saddening period in world history.

Michael J. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected]