Trump’s Claims on the Economy and the Reality: A Comparison of Trump to Biden and Obama

Posted on August 21, 2024, 4:24 pm by aneconomicsense

“We had the greatest economy in the history of the world. We had never done anything like it. … Nobody had seen anything like it.”

Donald Trump, Republican National Convention, Milwaukee, July 18, 2024

A. Introduction

Donald Trump is fond of asserting that the US “had the greatest economy in the history of the world” while he was president. He claimed this when he accepted the nomination at the Republican National Convention (as quoted above); he claimed it when he debated President Biden in June; and it is a standard line repeated at his campaign rallies. He also asserts that this is all in sharp contrast to the economy he inherited from Obama and to where it is now under Biden. In a June 22 speech, for example, Trump said “Under Biden, the economy is in ruins.”

These assertions of Trump are not new. He was already repeatedly making this claim in 2018 – in the second year of his administration – asserting that the US was then enjoying “the greatest economy that we’ve had in our history” (or with similar wording). And he repeated it. The Washington Post Fact Checker recorded in their database that Trump made this claim in public fora at least 493 different times (from what they were able to find and verify) by the end of his term in January 2021.

Repetition does not make something true. And numerous fact-checkers have shown that the assertion is certainly not true (see, for example, here, here, and here, and for the 2018 statements here). But readers of this blog may nonetheless find a review of the actual data to be of interest, and in charts so that the extent to which Trump is simply making this up is clear.

The post will focus on Trump’s record compared to that of Obama’s second presidential term (immediately before Trump) and Biden’s presidential term (immediately after). The post will also show that even if you just focus on the first three years of his presidential term – thus excluding the economic collapse in his fourth year during the Covid crisis – Trump’s record is nothing special. The collapse in that fourth year was certainly severe, and with that included Trump’s record would have been one of the worst in US history. But Covid would have been difficult to manage even by the most capable of administrations. Trump’s was far from that, and that mismanagement had economic consequences, but Trump’s record is not exceptional even if you leave that fourth year out.

This post complements and basically updates a longer post on this blog from September 2020. That post compared Trump’s economic record not only to that of Obama but also to that of American presidents going back to Nixon/Ford. I will not repeat those comparisons here as they would not have changed. I will focus this post on just a few of the key comparisons, adding in the record of Biden.

B. The Record on Growth

The two charts at the top of this post show how Trump’s record compares to that of Obama and Biden in the two measures most commonly taken as indicators of economic performance – growth in national output (real GDP) and growth in total employment (jobs). This section will focus on Trump’s not-so-special record on growth, while the section following will focus on employment.

Trump has repeatedly asserted that economic growth while he was president surpassed that of any in history. This is not remotely true in comparison to growth under a number of post-World War II presidents. (Quarterly GDP statistics only began in 1947 so older comparisons are more difficult, but there were certainly many other cases further back as well.) Giving Trump the benefit of excluding the economic collapse in 2020 during the Covid crisis, real GDP grew at an annual rate of 2.8% over the first three years of Trump’s presidential term. But real GDP grew at an annual rate of 5.3% during the eight years of the Kennedy/Johnson presidency; at a rate of 3.7% during the Clinton presidency; 3.4% during Reagan; and 3.4% as well during the Carter presidency. The 2.8% during the first three years of Trump is not so historic. Carter’s economic record is often disparaged (inappropriately), but Carter’s record on GDP growth is significantly better than that of Trump – even when one leaves out the collapse in the fourth year of Trump’s presidency.

Nor is the Trump record on growth anything special compared to that of Biden or Obama. As seen in the chart at the top of this post, growth under Biden over the first three years of his presidency matched what Trump bragged about for that period (it was in fact very slightly higher for Biden). GDP growth then remained strong in the fourth year of Biden’s presidency instead of collapsing. Growth in the Obama presidential term immediately preceding Trump was also similar: sometimes a bit above and sometimes a bit below, and with no collapse in the fourth year. It was also similar in Obama’s first term once he had turned around the economy from the economic and financial collapse he inherited from the last year of the Bush presidency.

Trump’s repeated assertion that “we had the greatest economy in the history of the world” was a result – he claimed – of the tax cuts that Republicans rammed through Congress (with debate blocked) in December 2017. While the law did cut individual income tax rates to an extent (heavily weighted to benefit higher income groups), the centerpiece was a cut in the tax rate on corporate profits from 35% to just 21%. The argument made was that this dramatic slashing of taxes on corporate profits would lead the companies to invest more, and that this spur to investment would lead to faster growth in GDP benefiting everyone.

That did not happen. As we have already seen, real GDP did not grow faster under Trump than it had before (nor since under Biden). Nor, as one can see in the chart at the top of this post, was there any acceleration in the pace of GDP growth starting in 2018 when the new tax law went into effect in the second year of his presidential term (i.e. starting in Quarter 5 in the charts).

The promised acceleration in growth was supposed to be a consequence of a sustained spur to greater private investment from the far lower taxes on corporate profits. There is no evidence of that either:

The measure here is of fixed investment (i.e. excluding inventories), by the private sector (not government), in real terms (not nominal), and nonresidential (not in housing but rather in factories, machinery and equipment, office structures, and similar investments in support of production by private firms).

This private investment grew as fast or often faster under Obama (when the tax rate on corporate profits was 35%) as under Trump (when the tax rate was cut to just 21%). Growth under Biden has also been similar, even though the tax rate on corporate profits remains at 21%. This similar growth is, in fact, somewhat of a surprise, as the Fed raised interest rates sharply starting in March 2022 with the aim of slowing private investment and hence the economy in order to bring down inflation.

With the far lower corporate profit tax rates going into effect in the first quarter of 2018 and the Fed raising interest rates starting in the first quarter of 2022 – both cases in the fifth quarter of the Trump and Biden presidential terms respectively – a natural question is what happened to private investment in the periods following those changes? Rebasing real private non-residential fixed investment to 100 in the fourth quarter of the presidential terms, one has:

The paths followed by private investment under Biden (facing the higher interest rates of the Fed) and under Trump (following corporate profit taxes being slashed) were largely the same – with the path under Biden often a bit higher. They diverged only in the 12th quarter of each administration (the fourth quarter of 2019 for Trump, and the fourth quarter of 2023 for Biden). Under Trump, private investment fell in that quarter – well before Covid appeared – and then collapsed once Covid did appear. Under Biden, in contrast, it kept rising up until the most recent period for which we have data.

It is also worth noting that private investment during the similar period in Obama’s second term rose by even more than under Trump (and for a period faster than under Biden, although later it rose by more under Biden). This was despite a tax rate on corporate profits that was still at 35% when Obama was in office. There is no evidence the tax rate mattered. And although not shown in the chart here, private investment rose by far more in the similar period during Obama’s first term (although from a low base following the 2008 economic collapse).

With similar growth in such investment in all three presidential terms (leaving out the collapse in 2020), the conclusion one can draw is that taxes at such rates on corporate profits simply do not have a meaningful impact on investment decisions. Decisions on how much to invest and on what depend on other factors, with a tax rate on profits of 21% or of 35% not being central. Nor did the Fed’s higher interest rates matter all that much to investment during Biden’s term. With a strong economy under Biden, firms recognized that there were investment opportunities to exploit, and they did.

The far lower tax rate of 21% on corporate profits did, however, lead to a windfall gain for those who owned these companies. Far less was paid in such taxes. That is, the tax cuts did have distributional consequences. But they did not spur private investment nor overall growth. They did not lead to “the greatest economy in the history of the world”.

C. The Record on Employment

As seen in the chart at the top of this post, growth in total employment was higher under Obama than it was under Trump, and has been far higher under Biden – even if you restrict the comparison to the first three years of the respective presidential terms. In the face of this clear evidence in favor of Biden’s record, Trump has now started to assert that the growth in jobs under Biden was due to a “bounce back” in jobs following the collapse in the last year of his administration, or that they all went to new immigrants. But neither is true.

First, as one can see in the chart there has been strong growth in the number employed not only early in Biden’s administration but on a sustained basis throughout. And second, nor was the growth only in the employment of immigrants. The Bureau of Labor Statistics provides figures from its Current Population Survey (CPS) of households on the employment of those who were born in the US (the native-born) and those born abroad (the foreign-born). Leaving out the collapse in 2020, employment growth over the first three years of Trump’s presidential term of the native-born averaged 1.3% per year. During the first three years of the Biden presidential term, employment growth of the native-born averaged 1.8% per year. The growth in employment of the native-born was not zero under Biden – as Trump claims – but rather was faster under Biden than under Trump. While there is a good deal of noise in the CPS figures (which will be discussed below), these numbers do not provide support for Trump’s assertion.

There has also been concern expressed in the media with what was interpreted as a “disappointing” growth in employment in July. The BLS “Employment Situation” report for July, released on August 2, indicated that employment rose by an estimated 114,000 in the month. This is a good deal below the average in the 12 months leading up to July of 209,300 per month. But an increase of 114,000 net new jobs in the month is substantial. While there will often be large month-to-month fluctuations, one should not expect more on average going forward.

With the economy basically at full employment (the recent uptick in the unemployment rate – to a still low 4.3% – will be discussed below), the number employed cannot grow on a sustained basis faster than the labor force does. And the labor force will grow at a monthly pace dictated by growth in the adult civilian population (i.e. age 16 and over) and what share of that adult population chooses to participate in the labor force. The labor force participation rate in July was 62.7% and has been trending downward over the past several decades. While a number of factors are behind this, the primary one has been the aging of the population structure with the Baby Boom generation moving into their normal retirement years.

The BLS report (using figures obtained from the Census Bureau) indicates that the adult civilian population rose by an average of 136,800 per month in the 12 months leading up to July. At a labor force participation rate of 62.7%, the labor force would thus have increased by 85,800 per month. Without an increase in the labor force participation rate, employment cannot grow faster than this on a sustained basis going forward.

In the past 12 months, however, the BLS report for July indicates that the labor force in fact grew at an average pace of 109,700 per month. How was this possible? The reason is that although the labor force participation rate is on a long-term downward trend due to the aging population, there can be and have been fluctuations around this trend. And a small fluctuation can have a significant effect. The labor force participation rate one year ago in July 2023 was 62.6%, and thus the rate in fact rose by 0.1% from July 2023 to July 2024. If the labor force participation rate in July 2023 had in fact been 62.7%, then the labor force in July 2023 would have been 167,410,000 rather than the actual 167,113,000, and the increase over the 12 months leading to July 2024 would have averaged 84,900. Within round-off, this is the same as the 85,800 figure calculated in the preceding paragraph for a constant 62.7% labor force participation rate, (With more significant digits, the labor force participation rates were 62.589% and 62.696% respectively, and a constant 62.696% participation rate would have yielded the 85,800 figure for labor force growth.)

We should therefore not expect, going forward, that monthly employment will increase on a sustained basis by more than about 90,000 or so, or even less. It could be higher if the labor force participation rate increases (and a small change can have a major effect), but the trend over the past couple of decades has been downward – as noted already – due to the aging of the population. How then, was it possible for employment to have gone up by an average of 209,300 per month over the past year? And this was also a period where the estimated unemployment rate rose from 3.5% in July 2023 to 4.3% in July 2024, which “absorbed” a share of the increase in the labor force as well.

The reason for these not fully consistent numbers is that employment estimates come from the Current Employment Statistics (CES) survey of establishments where people are employed, while the labor force and unemployment estimates come from the different Current Population Survey (CPS) – a survey of households. The CES is a survey of nonfarm employers in both the private and public sectors, and covers 119,000 different establishments at 629,000 different worksites each month. The “sample” (if it can be called that) covers an estimated one-third of all employees.

The CPS, in contrast, is a survey of about 60,000 households each month. There will only generally be one or two members of the labor force in each household, so the share of the labor force covered will be far less than in the CES. If each household had two members in the labor force, for example, the total of 120,000 would be only 0.07% of the labor force – a sharp contrast to the one-third covered in the CES. There is therefore much more statistical noise in the CPS data. There are also definitional differences: The CPS will include not only those employed on farms but also the self-employed and those employed in households. Also, a person with two or more jobs will be counted as one person “employed” in the CPS. The CES, in contrast, counts the employees of a firm, and the employers will not know if the individual may be working at a second job as well. Thus a person working two jobs at two different firms will be counted as two “employees” in the CES.

These definitional differences are not major, however, and in part offset each other. An earlier post on this blog looked at these differences in detail, and how, in an earlier period (2018/2019) there was a substantial deviation in the employment growth figures between the estimates in the CES and the CPS. This was the case even with the figures adjusted (to the extent possible) to the same definition of “employment” in each. There is a similar deviation between the employment estimates in the CES and in the CPS currently, with this accounting for a strong growth in employment as estimated by the CES (of 209,300 net new jobs each month over the past year) even though the labor force has grown -according to the CPS – by a more modest 109,700 per month over this period.

The labor market remains tight, however, even with the rise in the estimated unemployment rate to 4.3% in July:

The unemployment rate fell rapidly under Biden, following the chaos of 2020. It was at a rate of 3.9% or less for over two years (27 months), despite the efforts by the Fed to slow the economy by raising interest rates. The unemployment rate was also 3.9% or less for a period under Trump (for 20 months). But as one sees in the chart, during the first three years of Trump’s term it basically followed the same downward path as it had under Obama. It then shot up in March 2020 when the nation was caught unprepared for Covid. As with the other key economic indicators (the growth in GDP, in employment, and in private investment), the paths followed by the economy during the first three years of Trump’s term were basically the same as – although usually not quite as good as – the paths set during Obama’s presidency. They all then collapsed in Trump’s fourth year.

Any unemployment rate near 4%, and indeed near 5%, is traditionally seen as low. Economists have defined the concept of the “Non-Accelerating Inflation Rate of Unemployment” (NAIRU) as the rate of unemployment that can be sustained without being so low that inflation will start to rise. While one can question how robust this concept is (as will be discussed below), the NAIRU rate of unemployment has generally been estimated (for example by the staff at the Federal Reserve Board) to be between 5 and 6%. An unemployment rate of 4.3% is well below this. While the unemployment rate has gone up some in recent months, it is still extremely low.

D. The Record on Real Living Standards

Ultimately, what matters is not the growth in overall output (GDP) or in employment, but rather in real living standards. Many have asserted that because of recent inflation, living standards have gone down during Biden’s presidential term. This is not true, as we will see below. But first we will look at inflation.

Inflation rose significantly early in Biden’s presidential term. The pace moderated in mid-2022, but until recently prices continued to rise:

Inflation was less during Trump’s term in office but was even lower under Obama. Indeed, consumer price inflation has been low since around 1997, during Clinton’s presidency, until the jump in 2021. Why did that happen?

The rise in 2021 can be attributed to both demand and supply factors. On the demand side, both Trump and Biden supported and signed into law a series of genuinely huge fiscal packages to provide relief and support during the Covid crisis. The packages were popular – especially the checks sent to most Americans (up to a relatively high income ceiling) that between the various packages totaled $3,200 per person. But the overall cost for all the various programs supported was $5.7 trillion. That is huge. The funds were spent mostly over the two years of 2020 (under Trump) and 2021 (under Biden), and $5.7 trillion was the equivalent of 12.8% of GDP over those two years. Or, as another comparison, the total paid in individual income taxes in the US in the single year of FY2023 was “only” $2.2 trillion.

While there was this very substantial income support provided through the series of Covid relief packages, households were limited in how much they could spend – out of both these income transfers and their regular incomes – in 2020 due to the Covid pandemic. One went out only when necessary, and kept only to shopping that was necessary. This carried over into early 2021. But people could become more active as the Biden administration rolled out the massive vaccination campaign in the first half of 2021. People then had a backlog of items to buy as well as the means to do so from what had been saved in 2020 and early 2021. Demand rose sharply, and indeed Personal Consumption Expenditures in the GDP accounts rose by more in 2021 (by 8.4%) than in any year since 1946 (when it rose by 12.4%, and for similar reasons).

But at the same time, supply was constrained. Supply chains had been sharply disrupted in 2020 worldwide due to Covid, and took some time to return to normal. There was then the additional shock from the Russian invasion of Ukraine in February 2022, leading oil and many other commodity prices to spike.

Supply chains did, however, return more or less to normal early in the summer of 2022. And as they did, one saw a sudden and sharp reduction in pressures on prices, in particular on the prices of goods that can be traded:

This chart shows the annualized inflation rates for 6-month rolling periods (ending on the dates shown) for the overall CPI, for the shelter component of the CPI, and for the CPI excluding shelter. The overall inflation rate rose from an annualized rate of 3.2% in the six months ending in January 2021 (the end of Trump’s term) to a peak of 10.4% in the six months ending in June 2022. It then fell remarkably fast, to an annualized rate of just 2.6% in the six months ending in December 2022.

This sudden drop in the inflation rate is seen even more clearly in the CPI index of prices for everything but shelter: The annualized rate fell from 12.4% in the first half of 2022 (the six months ending in June) to a negative 0.2% rate in the second half of 2022 (the six months ending in December). Why? There was not a sudden collapse in consumer or other demand. Rather, supply chains finally normalized in the summer of 2022, and this shifted pricing behavior. When markets are supply constrained (as they were with the supply chain problems), firms can and will raise prices as competitors cannot step in and supply what the purchaser wants – they are all supply constrained. But as the supply chains normalized, pricing returned to its normal condition where higher demand can be met by higher production – whether by the firm itself or, if it is unwilling, by its competitors. It is similar to a phase change in conditions.

Shelter is different. It covers all living accommodations (whether owned or rented), and as has been discussed in earlier posts on this blog (see here and here), the cost of shelter is special in the way it is estimated for the CPI. It is also important, with a weight of 36% in the overall CPI index (and 45% in the core CPI index, where the core index excludes food and energy). The data for the shelter component of the CPI comes from changes observed in the rents paid by those who rent their accommodation, and rental contracts are normally set for a year. Hence, rental rates (and therefore the prices of the shelter component of the CPI) respond only with a lag. One can see that in the chart above, with the peak in the inflation rate for shelter well after the peak in the inflation rate for the rest of the CPI.

Since mid-2022, the rate of inflation as measured by the overall CPI has generally been in the range of 3 to 4% annualized. Increases in the cost of shelter have kept it relatively high and above the Fed’s target of about 2% per annum. But as seen in the chart, it has recently come down – falling to an annualized rate of 2.5% in the six months ending in July. For everything but shelter, the rate in the six months ending in July was only 1.4%.

One question that some might raise is whether the very tight labor markets – with an unemployment rate that was 4% or less until two months ago – might have led to the inflation observed. The answer is no. As noted above, inflation in all but shelter fell suddenly in mid-2022, falling from a rate of 12.4% in the first half of the year to a negative 0.2% in the second half, even though the unemployment rate was extremely low at 4% or less throughout (and only 3.5 or 3.6% in all of the second half of 2022). Unemployment has remained low since while inflation has come down. If the cause was tight labor markets, then the rate of inflation would have gone up rather than down.

Similarly, inflation as measured by the CPI was not high in 2018 nor in 2019 when labor markets were almost as tight during Trump’s presidency – with overall inflation then between 2 and 3% on an annual basis. Nor did inflation go up during the similarly tight labor market of 1999 and 2000 during the Clinton presidency: CPI inflation was generally in the 1 1/2 to 3 1/2 % range during that period. All this calls into question the NAIRU concept, with its estimate that an unemployment rate below somewhere in the 5 to 6% range will lead to pressures that will raise the rate of inflation.

Managing inflation coming out of the chaos of 2020 was certainly difficult. Inflation spiked in most countries of the world following the Covid crisis, reaching a peak in 2022. But the rate of inflation has since come down as supply conditions normalized. That does not mean that the absolute level of prices came down, only that they were no longer increasing at some high rate. Wages and other sources of income will then adjust to the new price levels, and what matters in the end is whether real levels of consumption improve or not. And they have:

The chart shows the paths followed for per capita real levels of personal consumption expenditures, as measured in the GDP accounts, during the presidential terms of Trump, Biden, and the second term of Obama. The path followed under Trump was basically the same as that followed under Obama – until the collapse in the last year of Trump’s term. The path followed under Biden has been substantially higher than either. It was boosted in his first year as the successful vaccination campaign allowed people to return to their normal lives. They could then purchase items with not only their then current incomes, but also with the savings they had built up in 2020. But even if one excludes that first year, the growth under Biden has been similar to that under Obama and under Trump up to the collapse in Trump’s fourth year.

Once again, there is no basis for Trump’s claim of the “greatest economy”.

E. Summary and Conclusion

The economy during Trump’s presidency was certainly not “the greatest in the history of the world”. Nor was it even if you leave out the disastrous fourth year of his presidency. Covid would have been difficult to manage even by the most capable of administrations, and Trump’s was far from that. Instead of preparing for the shock this highly contagious disease would bring, Trump’s response was to insist – repeatedly – “it’s going to go away”.

Trump’s economic record was certainly nothing special. Real GDP grew as fast or faster under Obama and Biden as it had under Trump. Trump insisted that growth would be – and was – spurred by the tax cuts that he signed into law in late 2017 that slashed the tax on corporate profits. But there is no indication of this in the data. Nor is there even any indication that private investment rose as a result of the lower taxes.

Employment has grown far faster under Biden than it had under Trump, and also grew faster in Obama’s second term – even leaving out Trump’s disastrous fourth year. Unemployment fell during the first three years of Trump’s term in office (before sky-rocketing in his fourth year), but here it just followed a very similar path to that under Obama. For this, as with GDP and employment growth, perhaps the biggest accomplishment of Trump’s first three years in office was that he did not mess up the path that had been set under Obama. And unemployment has been even lower under Biden.

Inflation was certainly higher in 2021 as the US came out of the Covid crisis. Supply chains were still snarled, but there was pent-up demand from consumers who had had to avoid shopping in 2020 due to Covid and who also benefited from a truly huge set of Covid relief packages passed under both Trump and Biden. Supply chains then normalized in mid-2022, sharply reducing pricing pressures for goods other than shelter. Due in part to lags in how rental rates for housing are set (as they are normally fixed for a year) and then estimated by the BLS, the cost of the shelter component of the CPI came down more slowly than the cost of the rest of the CPI. This kept inflation as measured higher than what the Fed aims for, although recently (in the last half year) it has come down again. Most anticipate that the Fed will soon start to cut interest rates from their current high levels. The inflationary episode resulting from the Covid crisis appears to be coming to an end.

There is thus no justification for the claim by Trump that “we had the greatest economy in the history of the world”. Yet he has repeatedly asserted it, both now and when he was president. Why? Stephanie Grisham, who served in the Trump administration as press secretary and in other senior positions, and who had been – by her own description – personally close to Trump, explained it well in a speech she made on August 20 to the Democratic National Convention. She noted that Trump used to tell her: “It doesn’t matter what you say, Stephanie. Say it enough, and people will believe you.”

Many do appear to believe that the economy was exceptionally strong when Trump was president: that it was “the greatest in history”. But that is certainly not true. Facts matter; reality matters; and a president needs to know that they matter.

The Unemployment Rate, the Growth in Employment, and Productivity

Posted on February 8, 2023, 2:53 pm by aneconomicsense

A. Introduction

The January jobs report (more properly the “Employment Situation” report) released by the Bureau of Labor Statistics (BLS) on February 3, was extraordinarily – and surprisingly – strong. The unemployment rate fell to 3.4% – the lowest it has been since May 1969 more than a half-century ago. And despite the low unemployment rate, the number of “new jobs created” (also a misnomer – it is actually the net increase in non-farm payroll employment) was a surprising 517,000. But it was not only this. The regular annual revisions undertaken each January to reflect revised population controls and weights for the employment estimates led this year to significantly higher labor force and employment estimates. With the new industry weights, the increase in the estimated number of those employed in 2022 (the number of `”new jobs”) rose to 4.8 million. The earlier estimate had been 4.5 million.

All this is an extraordinarily strong jobs report. However, one should not go too far. It is important to understand what lies behind these estimates, as well as some of the implications. For example, strong growth in the total number employed while GDP growth is more modest implies that productivity (GDP per person employed) went down. That could be a concern, except that when viewed in the context of the last several years we will see that productivity growth has in fact been rather good.

This post will first examine the new figures on unemployment and then on employment growth. We will then look at the change in productivity – both in the recent past and from a longer-term perspective.

B. The Unemployment Rate and Its (Non)-Impact on Inflation

The unemployment rate in January fell to 3.4%. This is the lowest it has been since May 1969. And if it falls a notch further to 3.3% in some upcoming month, it will have fallen to the lowest since 1953.

A 3.4% unemployment rate is certainly low. But what is more significant is that the unemployment rate has been almost as low for most of the past year. It fell to just 3.6% in March 2022, and until last month varied within the narrow range of 3.5 to 3.7% – hitting the 3.5% rate several times. It is now at 3.4%, but what is most significant is that it has been at 3.7% or less for almost a year.

One needs to recognize that the unemployment rate is derived from a survey of a sample of households (implemented by the Census Bureau) called the Current Population Survey (CPS). The CPS sample includes approximately 60,000 households each month, in a rotating panel, and from this they derive estimates on the labor force participation rate, the unemployment rate, and much more. It complements the Current Employment Statistics (CES) survey, which covers a much larger sample of 122,000 businesses and government agencies representing 666,000 individual worksites (with each employing many workers). Hence employment figures are generally taken from the CES as there will be less statistical noise. But the employers surveyed for the CES cannot know how many workers are unemployed (they will only know how many workers are employed by them), so the smaller CPS needs to be used for that. (A brief explanation of the CPS and CES is provided by the BLS as a “Technical Note” included in each of the monthly Employment Situation reports.)

Due to the size of the sample, the estimated unemployment rate is actually only known within an error limit of +/- 0.2 percentage points, using a 90% confidence interval. That is, simply due to the statistical noise a change in the unemployment rate of 0.1 percentage point from one month to the next should not be considered statistically significant, and 10% of the time even a 0.2 percentage point change may have just been a consequence of the statistical variation. However, repeated observations over several months in a row of an unemployment rate at some level will be a measurement one can have much more confidence in. That can no longer be a consequence of simply statistical noise. Thus one should not place too much weight on the January change in the unemployment rate to 3.4% from 3.5% the month before. But the fact that the unemployment rate has consistently been within the relatively narrow – and extremely low – range of 3.4 to 3.7% since March 2022 is highly significant.

An unemployment rate anywhere close to a range of 3.4 to 3.7% is also far below the rate at which economists used to believe would be possible without the rate of inflation accelerating – i.e. without inflation going higher and higher. This was given the acronym name of “NAIRU” (for Non-Accelerating Inflation Rate of Unemployment). It was held that at an unemployment rate of less than the NAIRU rate, the rate of inflation would rise from whatever pace it was at to something higher. This was viewed as unsustainable, and hence the proper goal of economic policy was, in this view, to manage macro conditions so that the unemployment rate would never fall below the NAIRU rate. That rate was also sometimes called the “full employment rate of unemployment”.

The question then is what the NAIRU rate might be. While different economists came up with different estimates, estimates generally fell within the range of 5 to 6%. An unemployment rate of less than this would then (under this theory) lead to a rise in inflation.

But that did not happen. The unemployment rate fell to below 5% in 2016, and inflation remained low. It fell to below 4% in 2018 and inflation remained low. It fell to 3.5% in 2019 and into early 2020 and inflation remained low.

With the once again very strong labor market – with unemployment hitting 3.4% – has this now changed? The rate of inflation did rise in 2021 and into 2022. But if one looks at this chart, one sees that the timing is wrong: Inflation rose earlier – in 2021 – when the unemployment rate was still well over 6% early in the year. Furthermore, nominal wages only rose later:

Inflation (measured here by the consumer price index – the CPI – for all goods and services) can be volatile, but the upward trend began already in the second half of 2020 (although in part this was initially due to a recovery in prices from depressed levels earlier in 2020 due to the Covid crisis). The chart shows the rates in terms of 3-month rolling averages (at annual equivalent rates and in arrears, so the figure for a January, say, would be for the months of November through January). The pace of change in nominal wages (also as 3-month rolling averages and at annual rates) did not start to rise until mid-2021. The increase in nominal wages appears to be more in response to the prior increase in prices – as firms found it profitable to employ more workers in an economy that grew strongly in 2021 – rather than a cause of those higher prices. This is consistent with the view that the inflation was primarily due to demand-pull, rather than cost-push, factors.

[Technical Note: The figures on changes in the nominal wage come from data assembled by the Federal Reserve Bank of Atlanta, drawing on data that can be obtained in the underlying micro-data files of the CPS. The rotating panel of households in the CPS are interviewed for four months, not interviewed for the next eight months, and then interviewed again for four months. New households are added each month and then removed after month 16 for them. This allows the researchers to match individuals with their reported wages to what they had earned 12 months before. It also allows them to examine the wage changes broken down by individual characteristics – such as age, gender, race, education level, occupation, where they are in the income distribution, and more – as these are all recorded in the CPS. It is all very interesting, and worth visiting their website where they make it easy to see the impact on the measured changes in wages of many of these different factors.

The matching of wage changes by individuals also provides a much more reliable index than the commonly cited changes in average wages provided in the monthly Employment Situation report. The latter comes from what employers report in the CES survey on the average wages they are paying. Those averages will be affected by compositional effects. For example, the reported average wages will often jump at the start of an economic downturn – such as it did in 2020 – as the less experienced and lower-wage workers are generally laid off first. This leaves a greater share of more highly paid workers, which will lead the reported average wage to rise even though the economy had entered into a downturn.]

Not only did the rise in inflation precede the more modest increase in the pace at which nominal wages rose, but since mid-2022 the rate of inflation has come down while the job market has, if anything, become tighter. The unemployment rate, as noted above, has been in the 3.4 to 3.7% range since March 2022, and is now at 3.4%. Despite this, the three-month average increase in the seasonally adjusted CPI fell from 11.0% (at an annual rate) in the three months ending in June 2022, to just 1.8% in the three months ending in December. If a tight labor market was driving inflation, one would have expected inflation to have kept going up rather than fall – and certainly not to fall by such a degree.

Furthermore, growth in nominal wages fell slightly from a peak of over 6.7% in the three months ending in June and also July 2022 (at an annual rate), to 6.1% as of December. One would have expected the pace of change in wages to have continued to go up, rather than start to ease.

It is still early to be definitive on any of this. Trends could change again. Importantly, a significant part of the sharp fall in inflation in the second half of 2022 (when measured by the full CPI) was due to a fall in the prices of oil and other energy products. However, while more recent, there are also early indications that core inflation (where food and energy prices are left out) is also falling. In terms of the core CPI (again the seasonally adjusted index), the pace of inflation fell from a peak of 7.9% (at an annual rate) in the three months ending in June 2022, to just 3.1% in the three months ending in December.

That measure of inflation – the core CPI, which is often taken to be a better measure of underlying inflationary trends than the overall CPI as food and energy prices are volatile and go down as well as up – is now falling despite unemployment at the lowest rate it has been in more than a half-century. If a tight labor market was driving inflation, then one would expect the pace of inflation to be rising, not falling.

C. Employment Growth

The January jobs report was also noteworthy for its figures on employment growth. Nonfarm payroll employment rose by 517,000 – far higher than most expected. It is not that an increase in employment of a half million in a month is unprecedented. It is rather that there was such an increase even though the unemployment rate was already at an extremely low 3.5% in the prior month. (And while nonfarm payroll employment excludes those working in agriculture, that number is now small at only 1.4% of the labor force – based on estimates from the CPS and including those in agriculture who are self-employed. It also excludes the self-employed outside of agriculture – a more substantial 5.6% of the labor force according to the CPS – but still not that large. In terms of changes in the numbers from one period to the next, the impact on the employment estimates will be small.)

In addition, the January report also reflected revisions – undertaken every January – where new weights are used to generalize from what is found in the sample in the CES of firms and other entities (such as government agencies) that employ workers to what is estimated for the economy as a whole. The re-weighting is based on a comprehensive count of payroll jobs in March of the year, with this then used to revise the estimates for all of the year (2022 in this case).

Due to the new weights, the increase in the number of jobs in the economy rose from the earlier estimate of 4.5 million in 2022 (i.e. from December 2021 to December 2022) to 4.8 million. Between January 2022 and January 2023 the increase was an estimated 5.0 million additional jobs. That is, between January 2022 and January 2023, the number employed increased by an average of 414,000 per month.

The 4.8 million growth in the number employed in 2022 was remarkable not only because it is a big number, but also because it came after the even stronger growth in employment in 2021. Employment grew by 7.3 million in 2021. In absolute terms, the 4.8 million figure in 2022 is higher than that of any year (other than 2021) in the statistics going back to when they started to be collected in the present form in 1939 (using BLS data). Such a comparison is more than a bit unfair, of course, as the US economy has been growing and there are far more people employed now than decades ago. But taking 2021 and 2022 together, the percentage growth over the two years – at 8.5% – was exceeded since 1951 only by greater increases in 1977-78 (10.2%), in 1965-66 (9.7%), and in 1964-65 (8.7% – that is, there was strong growth in the three straight years of 1964, 1965, and 1966). Joe Biden was right when he said job growth in the first two years of his presidency (of 12.1 million) was greater than that of any other president, but it is not really a fair comparison as the economy is now larger. But even in percentage terms, his record is excellent.

But such growth in the number employed cannot continue much longer. To put this in perspective, the total adult population in the US (as reflected in the CPS, and with the new population controls) rose by only 1.8 million between January 2022 and January 2023, or 150,000 per month on average. And the labor force figure, as estimated in the CPS, grew by only 1.3 million over that period, or 111,000 per month. One cannot keep adding 414,000 per month to the number employed (as we saw in the year to January 2022) when the labor force is only growing by 111,000 per month, when the unemployment rate is already at a historical low of 3.4%.

[Note that one cannot simply subtract the January 2022 figures reported from the new January 2023 figures, since in the CPS they do not go back and revise the previous year figures to reflect the new population controls. But they do show what the impact would have been on the December 2022 figures, and I assumed that they would have had the same impact on the January 2023 numbers. The impacts should be similar. One can then do the subtractions on a consistent basis.]

An increase in the number employed of an estimated 414,000 per month when the labor force was growing by only an estimated 111,000 per month was possible in 2022 in part because the unemployment rate came down (from 4.0% in January 2022 to 3.4% in January 2023), and in part because the labor force participation rate went up slightly (from 62.2% in January 2022 to 62.4% in January 2023).

But also a factor is that these are surveys from two different sources (households for the CPS and firms and other employers for the CES), and the sample estimates will not always be fully consistent with each other. As was discussed in an earlier post on this blog, the estimates can differ from each other sometimes for significant periods of time. However and importantly, over the long term the two estimates will eventually have to approach each other. The population estimates used for the CPS will yield (for a given labor force participation rate) figures on the labor force, and hence growth in the adult population will yield figures on growth in the labor force. For a given unemployment rate, the number employed – within the bounds of the statistical estimates – cannot grow faster than this.

With the unemployment rate now at 3.4%, one should not expect much if any further fall. Indeed, the general expectation (and the more or less openly stated hope of the Fed) is that it will start to rise. It is possible that the labor force participation rate will rise, but changes in this are generally pretty slow, driven mostly by demographics and social factors (the share of people aging into the normal age of retirement; the share of the young entering into the labor force given their decisions on whether and for how long to enroll in colleges and universities; decisions by households on whether one or both spouses will work; and similarly).

While there will be uncertainty in what will happen to the unemployment rate and the labor force participation rate, for given levels of each of these, employment cannot grow any faster than the labor force does. (Indeed it is slightly less: At an unemployment rate of 3.4%, employment will only grow at 96.6% of what the labor force grows by.) With the labor force growing by 111,000 per month in the year ending in January 2023 (with this already reflecting a small increase in the labor force participation rate from 62.2% to 62.4%), it will not be possible for the monthly increase in employment to grow by much more than this.

Looking forward, one should not, therefore, expect growth in the number employed to be sustained at a level that is anywhere close to the 517,000 we had in January. There will be month to month fluctuations, but one should not expect an average increase over several months that would be much in excess of the 111,000 figure for the growth in the labor force seen in the year ending in January 2023.

D. Productivity

Politicians like strong job growth. It is indeed popular. But the flip side of this is that while the number employed grew rapidly in 2021 (by 3.2% December to December), GDP growth was less (1.0% from the fourth quarter of 2021 to the fourth quarter of 2022, based on the most recent estimates). With the number employed growing faster than GDP, the mathematical consequence is that GDP per person employed went down. That is: Productivity fell in the year.

Higher productivity is ultimately what allows for higher living standards. Falling productivity would thus be a problem. However, in the context of the last several years, productivity growth has in fact been pretty good:

We are once again seeing the consequences of the highly unusual circumstances surrounding the Covid crisis. With the onset of a downturn, firms will lay off workers. But they may often lay off more workers than their output falls. This might be because of uncertainty on how much the demand for whatever they make will fall in the downturn (and they will wish to be careful and if anything to overcompensate, given the difficulty of obtaining finance in a downturn and the very real possibility of bankruptcy); or because special government programs during the downturn reduce the cost to them and their workers of these layoffs (for example through the common response of extending unemployment benefits and making them more generous); or because the first workers being laid off are the least productive ones (possibly because they are relatively new and do not yet have as much experience as others working there) so that they end up with a workforce which is on average more productive. Or, and very likely, it could be a combination of all three factors. It looks very much like Schumpeter’s “creative destruction”.

The consequence is that productivity can in fact jump up in a downturn. One sees such a clear jump in the chart in 2020, at the time of the sharp collapse due to the Covid crisis. One also sees it in 2008-09, with the financial and economic collapse in the last year of the Bush administration and then the turnaround that began in mid-2009. In terms of the numbers: Real GDP fell by 1.3% between the first quarter of 2020 and the third quarter of 2020 (in absolute terms – not annualized). But employment over this period fell by 7.4%. As a result, productivity (real GDP per person employed) jumped by 6.6% in this half year. In 2008/2009, real GDP was basically flat between the last quarter of 2008 and the last quarter of 2009 – rising by just 0.1% But employment over this period fell by 4.1%, leading to an increase in productivity of 4.4%.

Following these brief periods where businesses are scrambling to survive the downturn by producing more (or perhaps not too much less) with many fewer workers, firms then enter into a more normal period where, as the economy recovers, they are able to sell more of their product. They hire additional workers who are, by definition, less experienced in the work of that firm than their existing workforce. The new workers might also be less capable or have a less applicable skill mix. Productivity may then level off or even go down. The latter situation is in particular likely when the economy recovers quickly and firms scramble to keep up with the increased demand for their product.

The latter fits well with what we saw in 2021. GDP in 2021 rose by 5.9%, the highest of any year since 1984. And the Personal Consumption component of GDP rose by 8.3% in 2021, the highest of any year since 1946. This was spurred by the series of Covid relief packages passed in 2020 (under Trump) and in 2021 (under Biden), which totaled $5.7 trillion in the two years, or 12.8% of GDP of 2020 and 2021 together. Personal savings rose to an unprecedented level as a share of GDP (other than during World War II, with data that go back to 1929), which then supported the strong growth in personal consumption in 2021. This is consistent with a demand-led inflation that got underway in late 2020 or early 2021 (discussed above) – a risk of inflation that Larry Summers had warned of in early February 2021 when Biden’s $1.9 trillion Covid package was first proposed (and eventually passed, largely as proposed).

But what matters to long-term living standards is not so much the changes in average productivity in the periods surrounding economic downturns, but rather the trends in productivity growth over time. A ten-year moving average is a useful metric:

The chart shows rolling ten-year averages starting from 1947/57 through to 2012/22 of the growth in GDP, in employment, and in productivity (GDP per person employed). Productivity growth was relatively high at about 2% per annum in the 1950s and through most of the 1960s. But it then started to fall in the 1970s to less than 1% a year before recovering and returning to about 2% a year in the ten-year period ending in 2004. It then fell to roughly 0.8% a year since about 2017 (in terms of the ten-year averages), with some sharp fluctuations around that rate associated with the 2020 Covid crisis. As of the end of 2022, the most recent ten-year average growth rate for productivity was 0.80%.

This has important implications for GDP growth might be going forward. The labor force grew by 0.8% in 2022 (the adult population grew by 0.7%). With unemployment close to a record low, employment will not be able to grow faster than the labor force – as discussed above. And the labor force cannot grow faster than the adult population unless labor force participation rates increase. But while there major disruptions in labor force participation in 2020 and 2021 surrounding the Covid crisis – with its lockdowns, economic collapse and then recovery, as well as health concerns affecting many – labor force participation largely returned to previous patterns in 2022. Labor force participation rates have been slowly trending downwards since the late 1990s, and while it is possible this pattern might be reversed, it is difficult to see why it would. There might well be short-term fluctuations for a period of a few years, but longer-term patterns are driven mostly by demographics (the age structure of the population) and social customs (e.g. whether women decide to enter into the paid labor force).

What follows from this is that if the labor force continues to grow at 0.8% a year (as it did in 2022 – and it grew only at a lower rate of 0.6% a year in the ten-year period ending in 2022), and productivity grows at 0.8% a year (as it did in the ten-year period ending in 2022), then GDP can at most grow at 1.6% a year on average. This would be disappointing to many. While there certainly can be and will be significant year to year variation around such a trend, faster growth would require either higher productivity growth or more entering into the labor force.

E. Summary and Conclusion

The January jobs report was strong. The unemployment rate is now at the lowest it has been in more than a half-century, and the number employed grew by more than a half million – a very high figure when the unemployment rate is so low. While these are still preliminary figures and are subject to change as additional data become available, they present a picture of an extremely strong labor market.

The fall in the unemployment rate by one notch to 3.4% from the previous 3.5% should not, in itself, be taken too seriously. That is well within the normal statistical error for this figure. But what is indeed significant is that the unemployment rate has been within the narrow range of just 3.4 to 3.7% since March 2022. That is low. And it was in this low range during a period (in the second half of 2022) when inflation was coming down. While changes in the price of oil have been a major factor in driving the inflation rate in 2022, the core rate of inflation (which excludes energy prices as well as those for food) has also started to come down. The rate of change in nominal wages did start to grow in mid-2021, but this appears more to be a consequence of the rising prices rather than a cause of them. And there has been a slight reduction in the pace of change in wages in recent months.

One does not see in this any evidence that a tight labor market with extremely low unemployment (the lowest in more than a half-century), has led to higher inflation. The opposite has happened. Inflation has come down at precisely the time the labor market has been the tightest.

GDP grew rapidly in 2021, but then slowed to a more modest 1.0% rate in 2022 (from fourth quarter to fourth quarter). Coupled with rapid employment growth in the year, productivity (as measured by GDP per employed person) fell. However, this appears more to be a continued reaction to changes surrounding the disruptions resulting from the 2020 Covid crisis. During that crisis, GDP fell but employment fell by much more, leading to a jump in productivity despite the downturn. As the economy recovered and the situation normalized, workers were hired to bring workforces back to desired levels. Viewed in a longer timeframe, productivity growth has been similar to what it has now been since the mid-2010s.

That productivity growth is not especially high. It was 0.8% at an annual rate in the most recent ten-year average. Coupled with a labor force that grew at 0.8% in 2022, and going forward might grow by even less (it grew at 0.6% a year in the ten-year period ending in 2022), the ceiling on GDP growth would be 1.6% a year, or less. That is not high, but expectations need to adjust.

That is also a ceiling on what GDP growth might be. Many expect that there very well could be a recession either later in 2023 or in 2024. Much will depend on whether the government will be able to respond appropriately if the economy appears to be heading into a downturn. But with Republicans now in control of the House of Representatives, and threatening to force the US Treasury into default on the nation’s public debt if their demands for drastic spending cuts are not met, one cannot be optimistic that the government will be allowed to respond appropriately.

The Great Resignation Has Been Greatly Exaggerated

Posted on March 29, 2022, 10:54 pm by aneconomicsense

I would like to acknowledge and thank Mr. Steve Hipple, Economist at the Bureau of Labor Statistics, for his generous assistance in assembling the data used in this post from the public-use micro data files of the Current Population Survey. This post would not have been possible without his help.

A. Introduction

There has been much discussion in recent months about workers resigning from their jobs at record high levels. This has often been attributed to workers reassessing their lives and deciding their jobs are simply not worth it. A new name has even been coined for this: the “Great Resignation”.

But while resignations have indeed been high, two quite distinct matters have often been confounded. One is workers resigning from a position in order to move to a new, more attractive and usually higher-paying, position with a different employer. The other is workers resigning from a position with no intention to take a new job, but rather to leave the labor force and do something else. The former reflects a reshuffling in the economy, with workers moving to positions where they will likely be better paid and more productive. This should raise the overall productivity of the economy. The latter (those leaving the labor force) would reduce the overall capacity of the economy, if significant. But as we will see below, while quits from jobs in order to move to a new job is, indeed, at record high levels, the number quitting in order to drop out of the labor force is at this point quite modest, and likely also to prove temporary. While the Covid pandemic led to a major shock in the labor market, previous trends in labor market participation rates are reasserting themselves.

This post will look at the data on each of these two issues – both important but also both quite different. It will start with the figures on turnover in the labor market, and present these figures in the context of the net number of new jobs being created. Quits are high, but hiring is also at record highs. Workers are quitting their jobs largely to switch to more attractive jobs.

While far more modest, some workers have, however, left the labor market. The second part of this post will look at the reasons given by those not in the labor force for why they are not, and how this has changed from before the pandemic hit. This is based on original data assembled from the public use micro data files of the Current Population Survey (CPS). While publicly accessible by scholars and researchers, these figures are not presented in the regular monthly reports of the Bureau of Labor Statistics on the CPS. This data will hopefully serve to better inform the discussion on what has been termed by some as the “Great Resignation”.

We will see that the changes in the number of US adults deciding whether or not to participate in the labor force are now modest compared to pre-pandemic trends, and are mostly accounted for by older workers deciding to retire earlier than what would have been expected, on average, under previous patterns. But to the extent some worker decides to retire now, a year or two earlier than when they had earlier planned, there will then be one less worker retiring a year or two from now. That is, there will not be a long-term impact, and one should expect to see a return to previous trends. And so far, that is precisely what we have been seeing.

B. Quits, Job Openings, and Net New Jobs

The number of workers quitting their jobs each month has indeed risen – and to the highest levels of at least two decades (the data do not go back further). But the number of workers being hired each month to fill open positions has also increased – to even higher levels. And despite the record pace of hiring, the number of open jobs employers are seeking to fill has grown to especially high levels.

The figures are shown in this chart:

The data come from the Job Openings and Labor Turnover Surveys (JOLTS) of the Bureau of Labor Statistics (BLS), a monthly survey of employers (although with reports that lag one month compared to the more closely watched monthly BLS report titled “The Employment Situation”, with its figures on such estimates as the unemployment rate and on the net number of new jobs in the economy). The JOLTS surveys are relatively recent, with data going back only to December 2000, in contrast to the CPS, which goes back to 1948. The chart here is shown in terms of the absolute number of workers or jobs in each group.

[Side Note: One might sometimes see a chart similar to this but shown in terms of rates: Hires and Quits shown as a percentage share of the number employed, and Job Openings as a percentage share of the number employed plus the number of job openings. However, for the relatively short period here (21 years) the patterns in the two presentations look very much the same,]

The number of “Hires” are the number of workers added to the payroll in the given month, according to this survey of employers. Employers are also asked how many workers left the payroll (“Total Separations”) and whether they were workers who left voluntarily (“Quits”), were laid off or discharged involuntarily (“Layoffs & Discharges”), or left for some other reason (“Other Separations”). The BLS includes in the Other Separations category those who left to go into retirement, or due to a new disability, or due to deaths. Hence quits are only one reason for workers leaving their jobs, although its share has been growing: Layoffs & Discharges have been falling, while the number in the “Other Separations” category has been flat and relatively low. (These latter two categories were not included in the chart to reduce the clutter.)

Hires and the various categories of separations are all flows, measured by the BLS over the course of a full month (and then seasonally adjusted, which among other effects will compensate for the different number of days in different months). The “Job Openings” estimate, in contrast, is a stock, reporting the number of open job positions the employer is actively seeking to fill as of the last business day of each month. Its scale on the chart therefore should not be taken as directly comparable to the number of Hires or Quits on the chart, which are flows over the course of a one-month period. While they happen to be similar in number, one could have reported the number of Hires or Quits over, say, a two-month period (in which case they would have been about twice as much). One needs to remember that stocks and flows are different.

As the chart shows, open jobs that employers are seeking to fill (“Job Openings”) have grown sharply over the last year. While the monthly rate of hires has also grown – to record levels – the hiring could not keep up. And with more workers being hired and actively recruited to fill the open job positions, it should not be at all surprising that the number of workers quitting their old jobs to take a new job – a job that is more attractive to them that probably also pays more – has also been increasing. Thus there are resignations, but not to leave the labor force. Rather, workers are resigning to switch to a new, more attractive, job.

Such “churn” in the labor market is a good thing. Not only are workers moving to what is for them a more attractive (and likely higher-paying) job, but the productivity of the economy as a whole will also go up as a result. Employers are able to pay more to attract the workers to these jobs because the workers hired into those jobs will likely be producing more than they had in their old jobs.

How do we know that the quits were largely in order to move to a new job? It is clear from the magnitudes. The number of quits in the JOLTS data from March 2020 through February 2022 totaled over 85 million over the two-year period. And this does not even include those quitting in order to retire (they are included in the “other” category in JOLTS). Yet as will be discussed in the next section below, the labor force in February 2022 totaled only about 2.7 million less as of February 2022 than what would have been the case had the pre-pandemic shares of participation in the labor force continued. And close to three-quarters of that 2.7 million reduction was due to workers entering into retirement at somewhat greater rates than was the pattern before. This is nowhere close to the 85 million quits over the period.

One can also compare the monthly averages for the labor turnover figures with the net figures for new jobs:

The chart shows the average monthly figures for 2021, all from the BLS (either from JOLTS or the CPS). January figures are excluded as the BLS changes each January the population controls it receives from the Census Bureau for its CPS figures, without revising earlier estimates. This can lead to an abrupt one-month change in January, making it not comparable to the changes found in other months.

The first three columns show the average monthly growth in 2021 in the adult population (117,000), in the labor force (192,000), and in the number of net new jobs (547,000). Over the long term, the labor force cannot grow faster than the adult population, but it did in 2021 as the labor force participation rate rose in 2021 following the turmoil of 2020. And the net number of new jobs could grow faster in 2021 than the increase in the labor force as the number of unemployed fell rapidly in this first year of the Biden administration. But the economy is now at full employment, and unemployment will not be able to fall much further. Thus over the longer-term one cannot expect the net number of new jobs to grow faster than the increase in the labor force, and one cannot expect the labor force to grow faster than the adult population (and indeed normally by substantially less, as not all adults choose to be part of the labor force).

In contrast to the figures seen in the first three columns, the average monthly number of workers hired is far higher. So is the number of separations, and it is the relatively small difference between the number of workers hired into positions and those separated from them for whatever reason that equals the number of net new jobs in the economy. The separations in 2021 mostly came from quits (70% of the total), with smaller numbers from layoffs or discharges and from the “other” category (where, as noted before, the BLS includes those choosing to quit due to retirement).

All this is consistent with a very strong labor market. Workers are indeed resigning, but this is largely due to the opportunity to move to a more attractive, better paying, open job. As we will discuss in the next section, relatively few are resigning to leave the labor force altogether.

C. The Extent to Which the Labor Force Fell, and the Factors Behind It

As of February 2022, there were 592,000 fewer US residents in the labor force (in the seasonally adjusted figures) than there were in February 2020, just before the lockdowns due to Covid began. This is not much: Just 0.4% of the labor force. But it is not a fair comparison. The adult population grew over those two years, and thus one would expect that in normal circumstances, the labor force would also have grown. The question is by how much. For this one needs to construct some counter-factual scenario of what the labor force would have been (in normal circumstances) and compare that to what it in fact was (given the consequences of Covid) to see how much of a change there was. Is there evidence here for a “Great Resignation”, of people leaving the labor force in high numbers?

A simple and reasonable counterfactual would be to assume the labor force (in a breakdown by individual groups based on gender and age) would have grown in the absence of the crisis at the same rate as their population. Population growth is determined by long-term demographics. That is, in this scenario it is assumed that the rates at which those in the individual demographic groups chose to be part of the labor force (the labor force participation rate) would have remained the same as what they were in February 2020. Similarly, the rates of those choosing not to be part of the labor force would be the same as in February 2020 (it will simply be one minus the labor force participation rates), and similarly for the reasons given for not participating in the labor force (e.g. retirement, home or family care, full-time students, disability, and so on). One can then compare changes in the labor force and in the numbers not in the labor force (by the reasons given for this), under a scenario where the participation rates in February 2022 were the same as they were in February 2020, to what they actually were in February 2022.

The households surveyed in the monthly CPS are asked, when they respond that they are not employed and have not been actively seeking a job, the major reason for why they are not in the labor force. However, the BLS monthly report on the findings of that month’s CPS survey does not report these reasons. The monthly report is already pretty long. However, one can obtain these results from the CPS public-use micro data files on the CPS. The results reported here come from those files (and were assembled by Mr. Steve Hipple of the BLS for this post).

The basic results for the whole population, and for men and all women separately, are summarized in this chart:

Had the participation rates remained the same as in February 2020, there would have been an extra almost 2.7 million workers in the labor force in February 2022. The labor force would have been 1.6% higher than what it was. While significant, I would not see this as qualifying as a “Great Resignation”.

[Technical note: The calculations for those in the labor force and those not in the labor force (by reason) were worked out first for the most basic groups examined: men and women, each in three different age groups of ages 16 to 24, 25 to 54, and 55 and above, for a total of six groups. The aggregations for all men or all women, for both men and women in each age group, and for everyone together, were then calculated by summing over the relevant groups.]

Almost three-quarters of the 2.7 million reduction (2.0 million, or 73% of the total) reflected a higher share of adults choosing to retire. This is consistent with the story that with the disruption in the last two years, coupled also with significant income supplements being provided to most households through the various Covid relief measures passed by Congress during the administrations of both Trump and Biden, a significant number of workers decided to retire earlier than they had previously planned. It might be a year or two earlier, or possibly longer. The implications of this are important, as it implies that the changes in the labor force will be temporary rather than permanent. One more person retiring now, earlier than they had previously planned, means there will be one less person retiring at whatever that future date was to have been.

The second most important reason for leaving the labor force was to take care of home or family, with this accounting for 582,000 workers – 22% of the total reduction in the labor force in the scenario being examined. This is also understandable in the context of the Covid crisis. Many workers had to leave the labor force during the midst of the crisis to take care of school-age children when the schools were closed, but almost all schools are now once again open (albeit with some occasional disruption due to Covid outbreaks). There might also have been a need to take care of family members who became sick during the crisis with Covid itself, and that might still have been a factor in February 2022 (as the Omicron wave subsided). To the extent this has been Covid driven, these effects should also prove to be temporary as the Covid crisis recedes.

There are, in addition, a list of other possible reasons given in the CPS survey for not participating in the labor force (such as full-time studies as a student, disability, illness, and a catch-all “other” category). In the aggregate the difference these made in the scenario being examined was small: only 138,000 – or only 5% of the total reduction in the labor force in this scenario.

In terms of the gender breakdown, more women than men left the labor force in the given scenario (1.7 million women vs. 1.0 million men) even though the share of the labor force made up of women (47% in 2022) is less than the share made up of men (53%). The shares of this due to more entering retirement or for taking care of home or family are broadly similar between men and women, which is perhaps surprising. Indeed, the share reporting that they are not in the labor force due to home or family care was somewhat higher for men (25.2% of their total) than for women (19.4%), but it is not clear whether such differences should be considered significant. The underlying data comes from surveys, there will be statistical noise, and these figures are all based on changes between what the February 2022 levels were and what they would have been in a scenario where we assume the February 2020 participation patterns had remained.

The figures broken down by age group were:

The largest single cause leading to lower participation in the labor force (in the scenario where prior patterns would have remained) was an increase in the share of retirees among those aged 55 and above. This accounted for 1.5 million workers, which was 3.9% of adults in this age group. Surprisingly (at least to me) was that there was essentially no difference in this age group of those who were not in the labor force due to home or family care.

Among prime-age workers (ages 25 to 54) there were roughly similar shares among those no longer in the labor force who gave as their reason retirement or for home or family care. The total number no longer in the labor force (relative to the scenario being examined) was also relatively small for this 25 to 54 age group, at just 0.9% of the population in the age group. The share no longer in the labor force in the group aged 55 and above was substantially higher, at 3.1% of the population of that age group. This is as one would expect when the primary factor behind those leaving the labor force was early retirement.

The share of the youngest age group (ages 16 to 24) no longer in the labor force fell by 2.6%, but primarily here for reasons lumped into the “all other” category. The largest single factor here was full-time studies, but this accounted for just 144,000 of the 414,000 (about 35%) in this “all other” category. One should also note that while there is a small number in the “retired” category (19,000), this is probably just a reflection of the fact this is a survey. Respondents do not always fully understand the nature of the questions or may have been in some unusual circumstance that does not fit in well with any of the listed possible responses.

Graphically, how much of a difference has it made? Not much. In terms of the labor force participation rates, one has for men and for women, as well as overall:

And by age group, as well as overall:

The “X” on each category shows where the labor force participation rates would be had the February 2020 rates (for the underlying groups of men or women by each age group) continued to hold. There was certainly a large shock to the system at the start of the pandemic, with the lockdowns that suddenly became necessary in March 2020. There was then a partial bounceback, followed by a leveling off but with a continued but slow recovery to the earlier patterns of participation rates. While still not fully back to what they were, the difference is now relatively modest.

This return to previous patterns in the participation rates is likely also to continue. With the single most important factor (almost three-quarters of the total) being people retiring earlier than what they had planned (or to be more precise, earlier than in the observed pattern in prior years, before the pandemic), the labor force numbers should be expected to return to their previous path in a few years. As noted before, if some worker retires a year or two earlier than they had earlier planned, then there will be one less retirement in a year or two (as that worker is already retired). This is consistent with the observed slow return to previous labor force participation rates.

D. Conclusion

The number of workers quitting their jobs has been high. But the quits are not a reflection of workers dropping out of the labor force. Rather, quits have been high as workers quit one job to move to another job – more attractive and likely better paying. Hires have also been exceptionally high. And despite the high rate of hiring, employers could not keep up and the number of open jobs they have been seeking to fill has grown. While some workers have left the labor force during the disruptions of the Covid pandemic, about three-quarters of this (as of February 2022) stemmed from a somewhat higher share of workers choosing to retire. But unless there has been a permanent change in retirement patterns (and there is no indication that there has been), decisions during the pandemic to retire earlier than previously planned will be self-correcting.

The high level of quits reflects, rather, an extremely strong labor market. Indeed, the number of net new jobs created in 2021, the first year of the Biden administration, came to 6.7 million – the highest in any one year in US history. (To be fair one should also note that the fall in the number of jobs in the US in 2020, the last year of the Trump administration, was also the highest in US history. Thus the Biden record was made possible by the low starting point.) With this strong labor market, workers have more of an opportunity to move to jobs that can make better use of their talents. And they have taken advantage of this opportunity, which will be a boost both to the workers and to productivity in the economy as a whole.

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Tag Archives: job creation

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