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Will they, or won’t they return? Addressing the post pandemic labour force deficit

Economics Spotlight, May 2021

Deloitte’s forecast suggests that some people may be reluctant to return to the labour market. Employers may need to change their approach to address workers’ postpandemic concerns to navigate the labour market successfully.

COVID-19 saw a large chunk of the population drop out of the workforce. Many of them were asked to leave by their employers. But as discussions around the postpandemic world are increasingly making their way up on boardroom agendas, employers are asking a valid question—will workers be available when we need them? As of March, the labour force was almost 5 million people smaller than it would have been had there been no COVID-19 (that is, if the labour force participation rate had remained the same over the past year). Workers have left the labour force for a variety of reasons. Their occupation was risky. They had to care for children who were learning remotely. They were receiving enhanced unemployment benefits.1 Their business shut down, and with record high unemployment rates, there was no point in starting a job search. Each worker had their own reason for leaving the workforce. By March 2021, some of these workers had returned to the labour force. But many remain on the sidelines.

Employers might naturally want to know: Will these people ever answer our want ads again? The answer is, yes, but it may take some work on the part of employers. A large group of workers—the over-55s—includes some workers who retired and may never return to the labour force. But other workers, like those who needed to supervise children or take care of older relatives, will likely make their way back as schools and child and respite care reopen.

Never coming back?

Figure 1 compares Deloitte’s forecast of the labour force before COVID-19 to our most recent forecast. The year 2021 is likely to see the labour force bounce back from the large decline in 2020. However, our forecast remains as much as half a million lower through the entire forecast horizon.

There are three main reasons why we might now see a smaller labour force going forward: slower population growth, the withdrawal of older people from the labour force, and care issues. Some of their impact is likely to be temporary; slower population growth may weigh on the economy for some time, and the withdrawal of older people from the labour force may be permanent.

Slower population growth

The US State Department issued only 240,000 new immigrant visas of all types in fiscal year 2020, about half the 460,000 issued in fiscal year 2019.2 Foreign-born residents are slightly more likely to participate in the labour force. And Census data on the working-age population does show a small decline over the course of 2020. This is only a fraction of those 5 million missing workers. However, it’s also the most likely way that the United States can increase the growth rate of the labour force in the future should that become a policy goal. Immigration remains a contentious political issue. Therefore, a large upsurge soon is unlikely even as the economy recovers.

Another impact will occur a couple of decades from now, when a possible “COVID baby bust” might result in a lack of new, young labour-market entrants.3 That, however, is not a matter of immediate concern for companies struggling to figure out how to manage during this year’s likely postpandemic boom.

The childcare deficit

The pandemic illustrated how much the economy depends on schools (and day care for younger children) to allow people with children the ability to work. The labour force participation rate of people with children under 18 fell by one percentage point in 2020, representing about a million potential workers. Although schools are not primarily for child care, the pandemic demonstrated that the availability and productivity of many workers depend on children being in school.

The good news is that these workers are likely to return to work. Most school districts are planning to completely reopen for in-person classes in the fall of 2021, and summer camps and day cares will likely be open this summer as vaccinations increase and the COVID-19 caseload falls.4 This suggests that most, if not all, of those parents will be back in the labour force this year. The return of those who left the labour force to take care of relatives other than their children is more uncertain, and while we don’t have estimates of this group, it is likely to be small.

A retirement surge

About half of the decline in the labour force was accounted for by people over the age of 55 (figure 2). The participation rate for these older workers fell almost two percentage points. Although the 55+ cohort made up less than a quarter of the labour force in 2019, before COVID-19, the Bureau of Labor Statistics had been expecting this group to grow more rapidly than the population as a whole and to account for 63% of the total growth in the labour force between 2019 and 2029. COVID-19 has clearly reduced the participation of the current older workforce. What’s more, the continued worries about workplace safety may mean that future growth could also be curtailed.5

Moreover, recruiting older workers presents two problems for employers. First, older workers are more likely to have taken early (or perhaps even not-so-early) retirement. For workers with significant retirement investments (although less than half of older Americans have retirement accounts), the solid performance of financial markets over the pandemic period could strengthen the incentive to permanently leave the labour force.6 Employers may, despite this, be able to entice some of these workers to return to work. But it will take some effort and imagination on the part of recruiters to convince people to come out of retirement once they have gotten busy with grandchildren and hobbies.

Second, older workers are more likely to be affected by COVID-19, and they know it. They are, therefore, likely to be more sensitive than younger workers to risks associated with a return to work. That’s particularly true for the occupations that are likely to experience strong demand in the near term. Workers in leisure and hospitality and food service occupations—the industries that are likely to lead the rehiring binge this year—are more likely to work in risky conditions.7 Hiring managers who want to re-employ older workers will need to take those concerns into account to successfully entice older people back to work.

Much depends on employer behaviour

While we foresee a permanent decline in the labour force after COVID-19, employers can take steps to prove us wrong. For instance, organisations can look at newer ways of navigating the new labour market as opposed to those firms that insist on persisting with prepandemic methods. The pandemic has provided employers with some tools—through more effective remote work methods, for example—that can help improve the flexibility of work and reassure workers about their safety. Employers that are serious about meeting potential employees in the market and can successfully address their safety and productivity concerns have the opportunity to increase the worker pool. Businesses that fail to do this may well have to recruit from a smaller pool of workers—just as our forecast predicts.

 

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  1. Research has established that the enhanced unemployment benefits were unlikely to have had an effect on employment in the early part of the pandemic. See, for example, Nicolas Petrosky-Nadeau and Robert G. Valletta, “Did the $600 unemployment supplement discourage work?,” Federal Reserve Bank of San Francisco, September 21, 2020; Iona Marinescu, Daphne Skandalis, and Daniel Zhao, “The impact of federal pandemic unemployment compensation on job search and vacancy creation,” National Bureau of Economic Research Working Paper 28567, March 2021.

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  2. US Department of State, Report of the Visa Office 2019 and 2020, table III, accessed May 18, 2021.

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  3. Melissa S. Kearney and Phillip B. Levine, “Half a million fewer children? The coming Covid baby bust,” Brookings Institute, June 15, 2020.

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  4. Anna North, “5 reasons experts think kids will be in school full time this fall,” Vox, April 8, 2021.

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  5. Bureau of Labor Statistics, Employment projections, 2019–2029, table 3.1, accessed May 18, 2021.

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  6. However, only about half of older households even have retirement accounts, and the median value of those accounts (US$134,000 for households aged 55–64) is not large. So the stock market boom’s retirement incentive does not apply to most older workers).

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  7. Monali Samaddar et al., How risky is your industry? Industry risk when operating during the Covid-19 pandemic, Deloitte Insights, June 26, 2020.

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Cover image by: Tushar Barman

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