Why jobs are plentiful while workers are scarce

Almost two years after the pandemic upended labour markets, job openings are plentiful in many advanced economies, yet workers have not fully returned.

This gap, in which the employment rate is below its pre-Covid level, is playing out in the United States and the United Kingdom. Despite tight labour markets, as reflected in high vacancy-to-unemployment ratios and job quits, the employment recovery remains incomplete and below pre-pandemic levels in both countries. Now with a possible cooling effect on labour markets caused by the Omicron wave, this trend could be longer than expected.

New IMF staff research uses granular data on employment and vacancies in the US and the UK to assess four commonly held explanations:

— The effect of generous income support on willingness to seek and take up jobs.

— A mismatch between the types of jobs that are available and the willingness of people to fill them.

— Mothers of young children exiting the work force amid continued disruptions to school and childcare.

— Older workers withdrawing from the labour force.

We found that lower participation among older workers not returning to work is the common thread, and matters most. Mismatch plays a secondary role. The fall in female participation is unique to the US, but quantitatively important.

If the broader trend of plentiful jobs and not enough workers continues, it can have major implications for growth, inequality, and inflation. A continued sluggish employment recovery amid sustained labour demand could constrain economic growth while fueling wage increases. While higher wages would be good news for workers, they could further fuel inflation.

Income support programmes

The first possible explanation is that income support programmes during the pandemic allowed workers to be picky, slowing job applications, acceptances and, ultimately, the employment recovery.

However, preliminary evidence reviewed in our paper, including from the recent phasing out of the US federal unemployment insurance supplement, suggests the early removal of Covid-related unemployment benefits had only a modest and temporary effect on getting people back to work.

Mismatch

A second candidate explanation is an increase in the mismatch between the industries and occupations in which the jobless are searching and those with abundant vacancies. Jobs that require in-person interactions, such as in restaurants, hotels and entertainment, have been hit exceptionally hard, while “teleworkable” jobs fared substantially better. Others, like delivery services, even boomed. Could it be that workers who lost jobs in hard-hit industries and occupations struggled to transition into new opportunities, leading to mismatch?

The short answer is yes, but this is just one part of the story. We find that the employment loss due to mismatch during the crisis has been modest and, to our surprise, smaller than during the Global Financial Crisis. We estimate that, as of early last fall, mismatch explains only about 18 percent and 11 percent of the outstanding employment gap versus pre-Covid levels in the US and the UK, respectively.

To minimise the risk of scarring to employment, addressing the pandemic remains key, so workers are fully able to return to the labour market. So are well-designed training programs to reduce risks of mismatch, and — particularly in the US — expanded childcare and preschool opportunities.