Recession fears have risen in recent weeks as inflation continues to strain household budgets and the Federal Reserve prepares to raise interest rates and further slow the economy.
As if blissfully unaware, the job market has thrived. Hiring last month beat expectations and defied recession warnings.
But good job news can ultimately threaten the economy. Wages rose 5.1% last month from a year earlier, offering welcome relief for workers but also sobering news for Fed officials who fear runaway inflation driven by income growth.
In turn, a lesser-known data point has received a lot of attention: the share of the adult population that is not working or actively looking for work. If workers are in sufficient supply, this gives some slack to the labor market and limits wage growth. However, labor force participation was 62.1% last month, well below the pre-pandemic level of 63.4%.
Economists told ABC News that a tight supply of workers is keeping the labor market tight and helping to drive up wages, which risk fueling inflation and pushing the economy into recession.
Americans “should be concerned about this,” Stephanie Roth, chief market economist at JP Morgan Private Bank, told ABC News. The firm predicts a recession as the most likely outcome for the economy, which it says will be “driven by a continued tight labor market and high wage inflation.”
The alarm raises a central question at the heart of the economy: How can millions of missing workers be left out while allowing them to pay their bills?
Here’s how unemployed people make ends meet and why it matters:
Pension rates increased
Economists have provided a key explanation for why so many retirees have been left out of the workforce during the pandemic.
Aaron Sojourner, an economist at the Upjohn Institute, told ABC News that 3.6 million more Americans left the labor force and said they were out of work in the past three months than in the same period in 2019. He added that among these 3.6 million people, people aged 55 and over make up about 90%.
The stock market crash during the pandemic has inflated the assets of some older Americans, leaving them with no income. Sojourner, meanwhile, said the risk of serious illness that older Americans face during the COVID outbreak has left them fearful of workplace exposure.
“Their finances were in such a position that they could choose to stay out,” he said.
JP Morgan’s Roth said the stock market slump this year has eroded financial footholds for retirees. Still, the reluctance of many older Americans to re-enter the workforce owes much to the resilience of their savings during the pandemic and the difficulty of returning to their former lifestyles.
“Now that they’re settled into their lives in retirement, they’re less inclined to go back into the workforce,” Roth said.
Another financial lifeline for unemployed Americans, economists say, is the savings many have built up during the pandemic.
The COVID era has boosted household savings, along with government stimulus and high-flying asset prices, along with a locked-in lifestyle that has eliminated expenses like travel and food.
A study by the Federal Reserve last month showed that US households accumulated about $2.3 trillion in savings in 2020 and 2021. Moreover, households in the bottom half of the income distribution still have $350 billion in excess savings by the middle of this year.
Jesse Wheeler, an economic analyst at research firm Morning Consult, told ABC News that the austerity gave workers the flexibility to make big changes, such as layoffs and cutting costs to cover lost income.
“The lifestyle choices that people make during a pandemic to move to a different place, work a little less and spend time with family — those kinds of choices are sticky,” Wheeler said.
However, many have had savings recently, Wheeler said.
The personal savings rate fell to 2.3% last month, the lowest in nearly two decades, according to data from the Commerce Department.
With sustained inflation at a 40-year high, shoppers used savings to maintain a steady level of consumption while enduring higher prices.
“Obviously, it’s not going to be sustainable over the long term,” Wheeler said. “People will eventually have to scale back their spending or re-enter the labor force to boost their earnings.”
Informal work and self-employment
Economists say data on the shrinking labor force ignores some Americans, particularly those who continue to work in self-employed businesses or informal jobs.
According to Census Bureau data, new business filings increased during the pandemic and remained above pre-pandemic levels. The bureau reported nearly 433,000 new business filings in October, a marked increase from 313,000 in December 2019. In July 2020, the number of new business applications reached 552,000.
A government survey that counts monthly employment in the U.S. may leave out some self-employed workers, Roth said.
Morning Consult’s Wheeler said some people who work gig jobs describe themselves as busy, while others don’t.
Typically, people who work official gigs at a delivery or ride-hailing service describe themselves as employed in response to inquiries. However, people who rely on jobs like babysitting, house sitting or dog walking often don’t call themselves employed, Wheeler said.
Sojourner said the increase in gig jobs in the economy likely accounts for some of what’s missing from the workforce.
“There are a few more who see informal work as an option to sell some of their time and skills,” he said.
Relying on a spouse or other family for support
Economists said the austerity boom and the rise of remote work during the pandemic pushed some married households down to two incomes and prompted some workers to move in with family members, allowing previously employed people to make ends meet with the support of loved ones.
Although this change likely represents a small fraction of those outside the labor force and data remain limited, this phenomenon highlights the lifestyle change of some individuals who prioritize childcare or other activities over and above work.
“People have changed their lifestyles, maybe they’ve moved to the suburbs or combined households, maybe they’ve gone from one income to two,” Wheeler said. “They realized they liked this lifestyle better and didn’t want to go back.”
For example, according to data from the Bureau of Labor Statistics, the labor force participation rate for women aged 25-34 has fallen by about 5 percentage points since the start of the pandemic. Although employment in this group has recovered, it remains below pre-pandemic levels.
The choice to give up work for childcare has been a major barrier for women during the pandemic. Although the problem remains, it has eased considerably, Roth said.
“I wouldn’t say it’s the most important driver of wage inflation today, but it’s an important piece of the puzzle,” Roth said.