Larry Summers says the nation’s labor shortage is even worse than it looks and is likely to add “significantly to inflationary pressure in the United States for some time to come.”
The former Democratic Treasury secretary first warned about the danger of rising inflation last year after the government spent trillions of dollars on economic stimulus. Now, he says an acute shortage of workers could prolong the worst bout of U.S. inflation in 40 years.
His original warning, initially brushed off by the Biden White House and even many Wall Street
economists, sounds prescient today. The rate of U.S. inflation over the past year has surged to 7.5% from less than 1.5% a year ago.
In a new paper, Summers said the official 4% unemployment rate is probably too high and understates just how few people are available for work.
Other tools that can be used to judge the labor market suggest the unemployment rate could actually be below 2%, Summers and co-author Alex Domash wrote in their paper. They cite the record percentage of people quitting jobs and record number of job openings.
“Vacancy and quit rates currently experienced in the United States correspond to a degree of labor market tightness previously associated with sub-2% unemployment rates,” they wrote.
The lowest U.S. jobless rate on record is 2.5% in 1953.
The dearth of available labor combined with a growing economy is likely to keep upward pressure on wages that won’t relent anytime soon, Summers said. Businesses will have to pay more for labor and those costs will get passed onto customers in form of higher prices.
Until very recently, economists assumed millions of people who left or were fired from jobs at the start of the pandemic would eventually return to work and alleviate the shortage. An additional 3 million to to 5 million people would likely be working now had there been no pandemic at all, estimates suggest.
Yet Summers and Domash see little chance of all these people returning to work. They blame a host of factors for the shortfall of needed employees.
Here are what they say are the sources of a depressed supply of labor and how many potential workers are missing as a result:
Aging population: 1.3 million workers. The workforce is getting older.
Coronavirus health worries: 1.5 million workers. Lot of Americans with health conditions are too afraid to return to work or having lingering affects from prior Covid infections — what is known as “long Covid.”
Immigration restrictions: 1.4 million workers. Immigration fell sharply in 2020 and 2021 due to the pandemic and related restrictions imposed to contain the crisis.
Early retirement: 1.3 million workers. The number of people who retired from February 2020 and December 2021 was 1.3 million higher than what would have been expected absent a pandemic, the Summers paper found. Few are expected to rejoin the labor force.
Less incentive to work: 1 million workers. Higher government benefits, rising home and stock portfolios and a “shift in work-life preferences” have given some people less reason to work.
Covid-19 vaccine mandates: 400,000 workers. Some people left their jobs instead of complying with company vaccine mandates.