Five trends shaping the U.S. labor market

The United States is facing a major labor shortage that’s restraining the speed of the economic recovery and pushing wages higher, and theories abound regarding what’s driving the staff shortage. We take a closer look.

Key takeaways

  • Record resignations and a persistently low labor force participation rate have sparked concerns about the health of the labor market, given its impact on inflation, growth, and productivity.
  • COVID-19 made certain trends in the labor market more observable and accelerated others—in many instances, these developments are structural in nature.
  • We should reassess established tools and frameworks used to understand the labor market because they may not fully capture important changes that have taken place in recent years.

A shrinking labor market?

Some call 2021 the year of the Great Resignation, a period during which a record number of U.S. workers said goodbye to work for good. It’s a trend that’s been picked up by the media and widely framed as a collective response to the pandemic. Readers were treated to moving profiles of individuals who left work to care for the young and the vulnerable and others who decided to call time on the rat race to embrace a simpler, more meaningful life. It’s an appealing narrative that appears to be supported by economic data.

U.S. workers are leaving their jobs at the fastest pace in 20 years (%)
Chart showing the rate at which U.S. workers are leaving their jobs in the following categories: overall quit rate, quit rate in the leisure and hospitality sector, and quit rate in the professional and business services sector, from 2000 to data available as of January 14, 2022. The chart shows that quit rates in all three categories are at their highest levels since January 2000.

Source: U.S. Bureau of Labor Statistics, Manulife Investment Management, as of January 14, 2022. The gray areas represent recessions.

More than 4.3 million workers left their positions in December, following the record 4.5 million set in November, bringing the tally of those who resigned from their roles in 2021 to nearly 47.5 million, which is roughly 12.5 million more than all of 2020.¹ This coincided with reports of a sustained labor shortage, thereby sparking concerns about the long-term health of the U.S. labor market. 

Some observers have been quick to note that resigning differs from leaving the workforce permanently. This is why economists have been focusing on the labor force participation rate (LFPR), which measures the percentage of the population that’s either working or actively looking for work, a metric that offers a more representative perspective of the U.S. labor market. That said, the LFPR fell more than five percentage points during the first wave of the COVID-19 outbreak, between February and April 2020, and has since only recouped just over half of what it lost, lending credence to those concerns.  

There’s been no shortage of research illustrating how the pandemic has dampened our desire to resume work—the fear of contracting COVID-19, stimulus checks, care responsibilities, and school closures—but labor supply remained stubbornly constrained even as some of these factors dissipated in the second half of 2021. While early retirement (those aged 55 and above) and falling immigration contributed to the situation, they’re only part of a bigger picture.

U.S. labor force participation rate has been declining since 2000 (%)
Chart of U.S. labor force participation rate from January 1951 to data available as of January 7, 2022. The chart shows that labor force participation rate in the United States has been declining gradually since 2000.

Source: U.S. Bureau of Labor Statistics, as of January 7, 2022. The gray areas represent recessions.

It would be overly simplistic to view recent developments in the labor market as a net new disruption brought about by the pandemic. Historical data suggests what we’re experiencing is a multidecade trend: The total LFPR for those over the age of 16 peaked in early 2000 and has been falling ever since. Similarly, the employment-to-population ratio peaked at 64.6% in March 2000 and currently sits at 59.5%. Perhaps the question that requires answering isn’t when U.S. workers will heed the call to return to work, but do we need to revisit the way we look at the labor market?

Our understanding of the concept of work has changed in the past few decades, including what we (as workers) expect to get out of it and how work should fit into our lives. Meanwhile, the unending drive toward increased productivity and efficiency has also informed our experience of work. Within this context, we highlight five trends (many of which predate COVID-19) that we believe will shape the labor market.

1 Job seekers versus employers: the balance of power has shifted

Persistent labor shortages can shift the balance of power between employers and workers, giving additional leverage to those who are able and willing to work, enabling them to demand better wages and perks such as flexible working hours and choice of location.

The law of supply and demand suggests that workers with the most bargaining power will be concentrated in sectors in which shortages are most acute and, in this instance, the honor goes to the leisure and hospitality segments. The media, thankfully, brought some much-needed levity to the troubling development by highlighting the lengths that employers are willing to go to hire staff, from generous hiring bonuses to pledges to invest in innovations to make a barista’s job easier to free canapes for aspiring waiters and waitresses. Curiously, while wage growth is highest in leisure and hospitality, the industry is still facing staffing shortages. What happened to our economic model, which basically states that higher wages attract more workers? Clearly, workers are looking for more.

The thirst and demand for higher wages and better working conditions isn’t new. This can be seen in the surge in the number of workers involved in major work stoppages since 2017 (understandably, data for 2020 is distorted by the pandemic). While we’re a long way from where we were in the 1970s, it’s obvious that the idea of collective bargaining might be gaining traction, and the pandemic has perhaps tipped the odds in the job seeker’s favor.

Number of workers involved in major stoppages (1975–2020)
Chart showing number of workers involved in major work stoppages annually since 1975, according to data available as of January 2022. The chart shows that the number of U.S. workers involved in major work stoppages jumped from roughly 25,000 in 2017 to more than 400,000 in both 2018 and 2019.

Source: U.S. Bureau of Labor Statistics, Manulife Investment Management, January 2022.

The longer workers can hold onto their bargaining power, the more they’re likely to reap the rewards, from higher pay to additional benefits. From an economic perspective, their bargaining power will also be relevant to longer-run inflationary dynamics. That said, there’s a risk that labor-dependent companies might change tack and address their staffing situation differently. Although we expect workers to continue to hold the upper hand in 2022, and perhaps in 2023, there’s an emerging trend that may place a cap on how long this could last: automation.

The rise in automation is a thematic trend that was in place before COVID-19 and that’s accelerated in the past two years: It’s a powerful force that will reshape the labor market. In the first nine months of 2021, companies in North America ordered 29,000 robots—a record number—to speed up production amid difficulties in hiring. Tellingly, robot manufacturers found themselves fielding orders from relatively unexpected parts of the economy. Fast-food restaurants and hotels, for example, turned to technology and robots to replace workers who were difficult to retain given the high-interaction nature of their roles (which heightens the risk of exposure to COVID-19). In our view, the offset between labor shortages and the speed and effectiveness that automation promises will become a critical component of the medium-term labor market dynamics, wages, and price pressures in the years ahead.

2 Changing work preferences

Flexible work arrangements or, more specifically, working from home (WFH), have become a defining feature of life for many of us in the past two years. No longer a perk that managers can use to occasionally incentivize staff, it became a necessary component of working during the pandemic. Like kids who have been introduced to candy, we now expect it, and we find it difficult to revert to life as it was before.

Redefining homework

By some estimates, WFH accounted for 5% of fully paid workdays in the United States before the pandemic—that quickly rose to 60% before stabilizing around the 40% mark. It’s impossible to know how much of the U.S. workforce will be able to WFH permanently, but there are suggestions that the numbers could ultimately land somewhere between 20% and 25%. We believe this will have a positive impact on LFPR, as a more flexible approach to work removes potential barriers to employment (e.g., care responsibilities, geography). 

Employed persons who worked from home on days worked (%)

(Averages for May to December, 2019 and 2020)

Bar chart showing percentage of workers in various industries (e.g., financial, education and health, manufacturing, and leisure and hospitality) who had worked from home during the eight-month period from May to December in 2019 and 2020. The chart shows that a significantly higher share of workers worked from home during the May to December period in 2020 than in 2019.

Source: U.S. Bureau of Labor Statistics, Manulife Investment Management, July 28, 2021.

Such a shift would undoubtedly have a far-reaching impact on the economy. While it’s difficult to foretell what’s going to happen and to what extent things will change, it wasn’t hard to see early on in the pandemic that the WFH trend would translate into growth opportunities for those in the business of creating software and hardware that make remote working possible. But where there are winners, there are also going to be losers, and we question whether the broad economic consensus has fully internalized what WFH means to the economy and to growth.

A recent study found that WFH could reduce consumer spending in major city centers by 5% to 10%, a development that could alter expected growth trajectories for major cities and regional towns. Equally important is how remote working might affect productivity. While it’s widely accepted that WFH has boosted productivity, it stands to reason that the actual impact on productivity will differ from industry to industry and role to role. It’s also important to recognize that WFH isn’t for everyone, regardless of whether it’s an option. Space and setting are key considerations, not to mention concerns (among some) that WFH could diminish prospects for promotion. Meanwhile, research has also shown that in some cases, remote workers were less productive. We could write several papers on WFH, but our point is that a range of economic indicators—from growth to productivity to housing markets—needs to be reevaluated in the context of a new way of working.

3 Deglobalization and the emphasis on supply chain sustainability

If there’s one thing we’ve learned about global trade in the past two years, it’s the fragility of the global supply chain. Lockdowns and port closures have led to shortages of all kinds, from semiconductors to toilet rolls, and highlighted the drawbacks of being overly dependent on global trade and the just-in-time mode of production.

That said, the slow march toward deglobalization began before the COVID-19 outbreak, crystalized perhaps by several events between 2016 and 2018, including Brexit and escalating trade tensions between the United States and China. A concept that’s closely associated with deglobalization is the idea of bringing jobs back home, an initiative that received a further boost when U.S. President Joe Biden signed two executive orders—one on supply chain sustainability and another relating to jobs─shortly after he took office in 2021.

Moving jobs back to the United States
The infographic on the left illustrates that more than 1,800 firms planned to reshore production or invest in the United States in 2021. The infographic on the right Infographic shows that the number of jobs likely to be created by reshoring initiatives in 2021 is expected to exceed 220,000.
Source: Reshoring Initiative, Barron’s, September 22, 2021.

According to a widely cited report, the United States was on track to add nearly 140,000 jobs in 2021 through reshoring alone; a related push to attract investments into the country added roughly 86,000 jobs to the tally. There’s reason to believe this trend will continue: A survey of U.S. manufacturing executives last year showed that a quarter of them planned to shift some parts of the production process back to the United States in addition to the reshoring activities that had taken place in the previous three years.

One thing to bear in mind, though, is that reshored U.S. wages will likely be higher than offshore wages, therefore creating an additional wage-cost pressure that could be inflationary. In our view, however, the bigger question is whether these reshored positions can be filled.

That said, the return of jobs and investment should be seen as a positive for the U.S. economy, but it highlights an issue that we had hinted at earlier—the gap between the jobs that are on the market and people who are actively seeking jobs. Research has suggested that the next generation of U.S. workers, the Zoomers (those born between 1997 and 2012), aren’t all that interested in frontline manufacturing work, viewing these positions as low-skilled and potentially low-paying jobs. Taking that into account, we can't help but wonder if reshoring would contribute to creating a bigger mismatch between labor demand and supply?

4 Mapping the disconnect between employers and job seekers

Many would agree that the much-discussed skills gap—the difference between the skills possessed by job seekers and the actual skills needed to perform their work effectively—is a key reason behind the current labor squeeze. Once again, it wouldn’t be right to pin the blame on the pandemic, as this is an issue that’s long troubled employers.

In 2016, a study revealed that 92% of U.S. employers thought that American workers weren’t as skilled as they needed to be. This finding was echoed in a recent survey, which noted that one in four small businesses identified labor quality as their biggest problem. That said, it’s fair to say that the COVID-19 outbreak also had a considerable impact on the kinds of skills needed for the jobs that are available.

"Employers, especially larger organizations, are increasingly relying on technology to help them recruit the best talent."

Identifying mismatches: skills, geography, and preferences

The pandemic has led to a sharp spike in demand for healthcare professionals, and hospitals around the country are struggling to find nurses to fill open positions, but these are specialized jobs that require months, if not years, of training. Similarly, the shift to online shopping has meant a surge in demand for truck drivers, but the job entails adopting a lifestyle that may not appeal to many—it’s a perfect example that illustrates the gap that can exist between open positions and the kind of jobs that job seekers want. Geography, obviously, is another issue: The open positions may not be where job seekers are located. Once again, it’s more complex than a simple trade-off between wages and leisure.

Finessing the automated hiring process

Employers, especially larger organizations, are increasingly relying on technology to help them recruit the best talent. This makes sense, given that an average job listing typically attracts around 250 applications; however, there’s growing concern that automated hiring processes might actually be an obstacle to effective hiring.

A study by Harvard Business School warned that commonly used automated resumé-scanning software could be rejecting millions of perfectly viable candidates as a result of using overly simplistic screening criteria. Criticisms have also been leveled at the adoption of asynchronous video interviews, where applicants’ responses to a predetermined set of questions are recorded through an automated process—candidates found these experiences impersonal, confusing, and exhausting. These negative experiences can be demotivating and discourage job seekers from continuing with their search. The potential problems with technology-assisted hiring don’t stop there: The New York City Council recently passed a bill to crack down on AI-assisted hiring due to rising concerns about hidden biases within these programs. The issue isn’t necessarily new, but with rising adoption, greater scrutiny is needed. 

5 The evolution of gig workers

It’s difficult to quantify the number of gig workers there are in the United States due to the flexible and often nonpermanent nature of gig work. That said, the latest data available from the U.S. Federal Reserve corroborates key studies, suggesting that at least one in four adults spends a few hours a month engaging in gig work and, among them, nearly one in ten is a full-time gig worker. 

How many workers are a part of the gig economy?
Infographic showing that more than one in four persons has engaged in gig work in some capacity, and roughly one in ten people is a full-time gig worker in the United States, based on data published by the U.S. Federal Reserve in May 2021.

Source: U.S. Federal Reserve, May 2021.

The pandemic highlighted the vulnerability of this sizable part of the economy, which is mostly made up of workers from a lower-income group. The inherent irony here is that while the many gig workers who deliver food items to consumers and important supplies to hospitals during lockdowns were recognized as essential frontline workers, they remain the most likely to be let go when demand ebbs—an experience endured by many of their peers who worked in the services sector. Much of this relates to an ongoing debate about how these workers should be categorized: Are they independent contractors or employees?

Pressure to protect gig workers’ right to be classified as employees—and therefore gain access to benefits such as healthcare, sick pay, and better wages—is rising at the local, state, and federal levels. This pits policymakers against many app-based disruptors (and, in some cases, voters) that have since become industry titans.

It’s likely that California’s experience with Proposition 22 will be replicated this year across the country given the stakes involved. Gig work-centered firms are keen to demonstrate to investors that they have a viable business model, while policymakers are expected to ensure that workers are treated fairly and paid in an equitable manner. How this unfolds could have a material impact on the financial markets and the U.S. economy going forward.

Pressure to protect gig workers’ right to be classified as employees is rising at the local, state, and federal levels.

The evolving gig economy poses a different kind of challenge to economists. Despite its growing importance to the overall economy, traditional employment measures aren’t fully capturing the value of gig work. The Federal Reserve Bank of Boston published an interesting paper in 2016 suggesting that both the U.S. employment rate and participation rate in 2015 would have been higher if all informal workers were classified as being employed. Arguably, the implications on key economic data such as productivity and GDP growth could also be significant. Perhaps the gig economy can best be characterized as one of the biggest known unknowns in terms of metrics that can be used to gauge economic growth.  

Seeing the bigger picture

As tempting as it might be to frame recent developments in the labor market as a result of COVID-19, it’s important to remember that much of it predates the pandemic. The bulk of what we’re witnessing is structural in nature and, for the most part, has been decades in the making. Crucially, society’s attitude toward work is changing.

It’s a shift that goes far beyond how and where we perform our work; it also goes beyond our traditional thinking about where and how workers choose to work. This change is taking place amid our growing reliance on technology to do work that was previously performed by humans, including the very act of recruiting. It’s a potent mix that we believe will have an important impact on productivity and growth, which is becoming harder to measure because the tools that we’re using may be nearing expiry.

At this point, it’s become even more important for us to adopt a critical mindset and to continue questioning established conventions—it’s the only way we can get closer to understanding change and seeing the bigger picture.

1 U.S. Bureau of Labor Statistics, as of February 1, 2022.
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Frances Donald

Frances Donald, 

Global Chief Economist and Strategist, Multi-Asset Solutions Team

Manulife Investment Management

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Alex Grassino

Alex Grassino, 

Head of Macro Strategy, North America, Multi-Asset Solutions Team

Manulife Investment Management

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Erica Camilleri

Erica Camilleri, 

Global Macro Analyst, Multi-Asset Solutions Team

Manulife Investment Management

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