Worker shortage should ease in 2022 as COVID wanes. But many people have permanently

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Several obstacles have kept Christina Lugo out of the job market since the start of the COVID-19 pandemic.

The Houston-area resident, a former oil and gas industry recruiter who lost her job just before the health crisis, has been gearing up for a career change to loan officer. During the past two years, she has been relying on extra savings from stimulus checks and enhanced unemployment benefits to make ends meet. And she has been taking care of her 3-year-old son.

But Lugo, who is studying to get her loan officer license, has burned through her $15,000 in cash reserves. And she’s uncertain about who will care for her child, hoping that a dire shortage of child care workers will ease this year along with the health crisis.

“I really need a job,” Lugo, 37, says. “I’ve been working since I was 17.”

Millions of Americans who left the labor force in early 2020 are expected to stream back this year, assuming COVID-19’s raging omicron variant fades by March as anticipated, and U.S. vaccinations continue to rise. The development would help abate a worker shortage that has curtailed economic and job growth and shuttered restaurants and shops. It’s also handed workers unusual leverage. Record numbers of them have quit in recent months, typically to take higher-paying positions.

“I expect that by the end of the year, the labor market will look more like it did before the pandemic,” says economist Dante DeAntonio of Moody’s Analytics.

A closer look, however, reveals that while the shortage will almost certainly ease, it won’t go away, as many Americans likely stay out of the workforce – which includes people working and looking for jobs – for the longer term.

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To be sure, people hunkering down because of COVID-19 fears should resume their job searches as the pandemic becomes less formidable, DeAntonio says. The reopening of many schools, some of which shuttered again recently because of omicron, will allow many parents to go back to work.

And financial cushions last only so long.

But many Americans retired early during the health crisis and don’t plan to come back, surveys show. Child care worker shortages idling many parents aren’t likely to vanish in the near term. And many people have left industries like restaurants, retail, education and health care for less stressful fields or to become entrepreneurs or consultants. The shifts keep them in the workforce but worsen the staffing shortfalls in sectors already struggling to hire.

The mixed picture means job openings and quitting will likely drop from their recent peaks this year but remain elevated, DeAntonio says. But that will also keep workers in the driver’s seat to a large extent.

At the same time, a downsized workforce means an economy that grows more slowly, and generates fewer jobs in the long run. And bigger wage increases, while beneficial for workers, have been contributing to sharply rising inflation that squeezes low-income households, and that the Federal Reserve plans to fight with interest rate hikes this year.

Ghosting employers

Sarah Cano, co-owner of Rooforia, an Omaha, Nebraska-based roofing company, says she has been looking for about 80 laborers and five administrative workers for months. For a recent roofing opening, she received 46 applications. Four candidates agreed to interviews, but only one showed up.

“It’s still perplexing to me how people are continuing to get by without a job,” she says, adding that she assumed workers would have depleted their stimulus payments and other reserves.

For the administrative positions, Cano says, employees must be in the office at least a few days a week, a requirement that gives an advantage to rivals who let staffers work from home full time. She also can’t offer the pay and benefits doled out by larger firms.

While project bookings for 2022 are up 40% over last year, “We’re figuring out how we’re going to fulfill them,” Cano says. “We have more work than ever and less staff than ever.”

Fed Chair Jerome Powell has acknowledged that many who left the labor force are unlikely to return anytime soon. That means the U.S. is getting close to the Fed’s goal of full employment, an environment in which virtually anyone who wants a job has one. And that could lead to earlier and faster rate hikes.

Fewer people job hunting

Overall, the nation’s labor force has 2.3 million fewer people than it did before the pandemic, a deficit that was close to 8 million in April 2020, Labor Department figures show. The U.S. is likely to close that gap this year as nearly 3 million more people start working or looking for jobs, partly because of some rebound in immigration, says Moody’s Chief Economist Mark Zandi.

But that doesn’t account for growth in the working-age population. After figuring that in, the labor force at the end of 2022 will still be 1.7 million people shy of where it would have been if the pandemic hadn’t happened, Zandi says.

Put another way, 61.9% of Americans 16 and older were working or job hunting in December, up from a pandemic low of 60.2%, but still well below the 63.4% pre-pandemic level. Zandi expects that figure to rise to 62.8% by year-end. As baby boomers continue to retire, Zandi doesn’t expect the labor force participation rate to reach its pre-crisis mark for the foreseeable future.

Goldman Sachs has a bleaker view, reckoning the participation rate will top out at 62.1% at year-end. The good news, it says, is that nearly all prime-age workers – 25 to 54 – who left the labor force during the health crisis plan to return it in the next 12 months, based on an analysis of Labor data. But more than half of those who left are over 55 and the vast majority don’t plan to come back, Goldman says.

There are signs some workers are coming off the sidelines. The participation rate edged up from 61.7% in October. And 12.2% of people age 18 to 64 were actively and urgently looking for a job in November, up from 11.1% in October, according to a survey by job site Indeed.

Higher pay is enticing some. Wages and salaries rose 4.6% annually in the third quarter, according to Labor’s Employment Cost Index, the most on record dating back nearly two decades.

“That’s making it worth their while,” says Jim McCoy, senior vice president of talent solutions for staffing firm Manpower.

Here’s who’s out of the workforce but likely to come back this year. People with:

COVID-19 fears

Before omicron, about 1.6 million people said concern about the virus was their main reason for not working, according to Goldman. An easing pandemic, rising vaccinations and new antiviral drugs “should alleviate these concerns for some workers” but COVID-19-related worries will likely linger “in the medium term.”

Annette Smith, 55, of Tucson, Arizona, says she quit her job as a state customer service employee in June 2020 because she was ordered to return to the office despite her underlying health condition.

“I have lupus and was absolutely terrified of getting ill,” she says.

Smith’s husband, Ron, an aerospace engineer, was laid off around the same time but found a lower-paying position. The couple are paying the bills but “we don’t have any play money,” Smith says. They’ve cut out dining out, movies and concerts.

Smith would like to start looking for a job when “the (COVID-19) numbers start coming down (significantly)….It’s a little bit nuts right now.”

Responsibilities for school-age children

About half of the several million Americans not working because of child care duties were back in the labor force after many schools reopened in September, according to Goldman. Parents of younger children, however, face thornier issues (see below).

Unemployment-check cushions

Goldman traces as much as half the shortfall in the labor force to government aid, such enhanced unemployment benefits, which expired for millions of workers in September. A financial cushion, however, likely overlaps with other factors such as virus fears and child care duties, giving hesitant workers more wherewithal to stay out of work.

Americans had $2.6 trillion in extra savings in November because of government support and scaling back during the pandemic. But that’s down from $2.7 trillion in October, Zandi says. Low- and middle-income Americans, in particular, are expected to deplete their reserves early in the year, Zandi says.

Others will take longer to return or may not come back:

Early retirees

About 1.5 million of the 3.5 million baby boomers who retired during the pandemic did so sooner than planned, according to Pew Research. The Federal Reserve Bank of St. Louis puts the number of excess retirements as high as 2.4 million.

Many were laid off or worried about the virus, and the bull market has swollen their investments, allowing them to call it quits. Many of those laid off fear age discrimination if they come back, a concern that intensified during the health crisis, according to an AARP survey and Jen Schramm, the group’s senior strategy policy advisor.

Last summer, about 270,000 early retirees planned to return to work within a year, according to a Morning Consult poll. But that still would leave a large hole in the workforce.

“The big open question is what’s going to happen with older workers,” says Nick Bunker, head of economic research for Indeed’s hiring lab..

Those with very young children

Parents of toddlers and other young kids are having a tougher time finding affordable care, with the pandemic worsening a longer-term shortage of daycare workers. The industry laid off or furloughed 373,000 employees, or 36% of its workforce, as centers closed early in the health crisis, government figures show. Only about 70% of those jobs have come back, meaning child care is still missing 111,000 workers.

The main problem: Workers put in long hours doing demanding, though rewarding, work for low pay, says Cindy Lehnhoff, director of the National Child Care Association. The crunch has worsened because the sector must meet stricter standards as the field has expanded to include more education, she says.

“This problem will not go away on its own, with or without a pandemic,” she says of the worker shortage.

Career switchers, entrepreneurs

Twenty percent of workers who quit jobs last year were pursuing new careers, according to a survey by Joblist, which provides online tools to job seekers. One-third of employees left to launch businesses, says Digital.com, a consulting firm for small businesses.

Applications with the government to start up a business hit a record 5.4 million in 2021, a figure…