Those missing workers are not only making the “help wanted” signals persist, they are actually making it more difficult to tame sky-high inflation levels.
The number of older Americans over the age of 65 is not only growing and reaching retirement age, they are also not returning to the workforce in the numbers seen before the COVID-19 pandemic. This has important implications, not only for issues such as worker shortages, wages and employee leverage, but also for current and future levels of inflation. according to a recent report from Blackrock.
“Aging has worsened labor shortages, increasing the cost of taming inflation,” Blackrock analysts report.
From 1995 to February 2020, the labor force participation rate among people over the age of 65 had actually risen, Diane Swonk, chief economist at KPM extensiontells Fortune. But when the pandemic hit, their participation rate dropped for a variety of reasons, including that this demographic was more vulnerable to the virus, Swok says.
Although the labor force participation rate has recovered from the nosedive it took at the onset of the COVID-19 pandemic, there is still a persistent shortage of workers. And a good part of that comes from older workers not reentering the workforce. Routine retirements took 1.3 million Americans (ages 64 and older) out of the workforce as of October 2022, Blackrock reports. Another 630,000 left due to early retirements.
The current labor force participation rate gap is mainly due to “excess retirements” or outgoings above and beyond what would have been expected from aging alone, Fed Chair Jay Powell spotted during an appearance on Wednesday. These excess retirements are estimated to account for more than 2 million of the 3.5 million people missing from the workforce.
“Older workers are still retiring at higher rates, and retirees don’t appear to be reentering the workforce in sufficient numbers to significantly reduce the total number of overretirees,” Powell says.
That perhaps wouldn’t be a problem, except there aren’t enough young workers to fully replace the huge number of baby boomers who are retiring and exiting the workforce for good, Swonk says.
“There really is this kind of collision of aging demographic events that has been accelerated by the pandemic, further undermining our ability to grow the early age workforce,” says Swonk. “Without major reforms, we won’t be able to fill the void left by those changes.”
That shortage creates a shrinking workforce where employers have raised wages to attract and retain the employees they need, as well as simply forgoing desired staffing levels. And the Federal Reserve’s interest rate hikes alone are unlikely to solve constraints like labor shortages, Blackrock analysts predict.
“An aging population will hurt the ability of the US economy to grow without creating long-term inflation,” the analysts write. “Economic activity will have to operate at a lower level to avoid persistent wage and price inflation, especially in the labour-intensive services sector.”
While the Fed reported early in the pandemic that supply chain issues and pandemic-related conditions — not wages — were contributing to rising prices, that changed as inflation persisted, Powell said Wednesday . “Over time, however, inflation has spread widely in the economy. And while I would still argue that the inflation we’re seeing now is not primarily related to wages, we think wage increases are likely to be a very big part of the future story.”
There are also additional costs associated with aging baby boomers, including cost-of-living adjustments like that Social Security will be implemented next year. Essentially, more than 66 million people will receive an 8.7% raise, notes Swonk. “It ups the ante on the Fed at a time when they’re already in trouble,” he says, adding that this likely translates into a pretty significant increase in demand when the Fed is trying to cool it.
Unfortunately, there aren’t many easy or short-term solutions that address the demographic challenges to labor force participation rates. The biggest game-changing solution is immigration reform, but there has been little desire at the federal level to overhaul US immigration policy to provide more workers. Legal immigration plummeted in 2020 and 2021, and while it’s picking up again, it’s still not enough.
“From the geopolitical tensions we face to climate change, extreme weather events, aging populations and tighter borders, all of these are making the world more prone to inflation even after [the Fed] slay this inflation dragon. Which means we’re not returning to the hushed, tepid world trying to recover from a financial crisis we were in in the 2010s, but a much more boom-bust cycle punctuated by inflation and interest rate hikes,” says Swonk .