(NEW YORK) — Recession fears have mounted in recent weeks, as inflation continues to strain household budgets and the Federal Reserve appears set to raise interest rates and further slow the economy.
As if blissfully unaware, however, the job market has thrived. Hiring last month exceeded expectations and defied warnings of a downturn.
But the good jobs news could ultimately imperil the economy. Wages last month grew a blistering 5.1% compared to a year earlier, offering welcome relief for workers but also sobering news for Fed officials fearful of runaway inflation driven by income gains.
In turn, a lesser known data point has drawn outsized attention: the share of the adult population not working or actively looking for work. If workers are in ample supply, it gives the labor market some slack and limits wage growth. However, workforce participation came in at 62.1% last month, markedly lower than the pre-pandemic level of 63.4%.
The scant supply of workers keeps the labor market taut and helps fuel rising wages, which risk exacerbating inflation and pushing the economy into a recession, economists told ABC News.
Americans “should be worried about it,” Stephanie Roth, a senior market economist at J.P. Morgan Private Bank, told ABC News. The firm predicts a recession as the most likely outcome for the economy, she said, adding that “a continued tight labor market and high wage inflation would be a key reason.”
The alarm raises a key question at the heart of the economy: How can millions of missing workers stay on the sidelines while affording to pay their bills?
Here’s how unemployed people have kept up their lives and why it matters:
Retirement rates increased
The top explanation for why so many people have stayed out of the workforce centers on people who retired during the pandemic, economists said.
Over the past three months, there were 3.6 million more Americans who had left the labor force and said they didn’t want a job, compared with the same period in 2019, Aaron Sojourner, an economist at the Upjohn Institute, told ABC News. Among those 3.6 million people, individuals aged 55 and above made up about 90%, he added.
A stock market tear during the pandemic ballooned the assets of some older Americans, allowing them to subsist without income. Meanwhile, the heightened risk of severe illness faced by older Americans amid the COVID outbreak left them fearful of exposure at the workplace, Sojourner said.
“They had their finances in a position that enabled them to make the choice to stay out,” he said.
A stock market downturn this year has buffeted that financial stronghold for retirees, however, said Roth, of J.P. Morgan. Still, the reluctance of many older Americans to reenter the workforce owes to the endurance of their pandemic-era savings and the difficulty in reverting back to a bygone lifestyle.
“Now they’ve settled into their lives in retirement and they’re less inclined to come back into the labor force,” Roth said.
Another financial lifeline for unemployed Americans is the stockpile of savings that many built during the pandemic, economists said.
The COVID era strengthened household savings as government stimulus and high-flying asset prices combined with a lockdown lifestyle that did away with expenses like travel and eating out.
U.S. households amassed about $2.3 trillion in savings in 2020 and 2021, a Federal Reserve study showed last month. Moreover, households in the lower half of income distribution were still holding a combined $350 billion in excess savings as of the middle of this year, the study found.
Those savings afforded workers the flexibility to make major changes like quitting their jobs and cutting expenses to afford the lost income, Jesse Wheeler, an economic analyst with the research firm Morning Consult, told ABC News.
“The lifestyle choices that people made during the pandemic to move to a different place, work a little less and enjoy time with family – those sorts of choices are sticky,” Wheeler said.
Recently, however, savings for many have dwindled, Wheeler said.
Last month, the personal savings rate fell to 2.3%, the lowest rate in nearly two decades, according to data from the Commerce Department.
With persistent inflation hovering near a 40-year high, shoppers have drawn on savings to preserve a steady level of consumption while weathering elevated prices, he added.
“Clearly, it’s not going to be sustainable over the long term,” Wheeler said. “People eventually need to pull back on spending or reenter the labor force to increase their earnings.”
Informal work and self-employment
Data reporting a shrunken workforce likely overlooks some Americans who’ve continued to work, especially at self-run businesses or informal jobs, economists said.
During the pandemic, new business applications soared and they have remained above pre-pandemic levels, Census Bureau data showed. The Bureau reported nearly 433,000 new business applications in October, a marked increase from 313,000 in December 2019. In July 2020, new business applications reached as high as 552,000.
The government survey that calculates monthly U.S. hiring may leave out some self-employed people, said Roth.
Some people working gig jobs describe themselves as employed while others don’t, said Wheeler, of Morning Consult.
Typically, people who work formal gig jobs in delivery or ridehail service describe themselves as employed in response to queries. However, people who rely on jobs like babysitting, house sitting or dog walking often do not call themselves employed, Wheeler said.
The increase in gig work across the economy likely accounts for some of those missing from the workforce, said Sojourner.
“There are slightly more people who see informal work as an option for how to sell some of their time and skills,” he said.
Relying on a spouse or other family for support
The savings boom and rise of remote work during the pandemic led some married households to drop from two incomes to one, and pushed some workers to move in with family members, allowing previously employed people to subsist on support from loved ones, economists said.
While this shift likely accounts for a small portion of those outside of the labor force and data remains limited, the phenomenon highlights a lifestyle change enjoyed by some who have prioritized childcare or other activities above work, they said.
“People have changed up their lifestyles, maybe moved to the suburbs or consolidated households, maybe switched from one income to two,” Wheeler said. “They’ve realized that they like that lifestyle better and don’t want to go back.”
For instance, the workforce participation rate for women aged 25-34 fell nearly 5 percentage points after the outset of the pandemic, according to data from the Bureau of Labor Statistics. While employment in that group has rebounded, it remains below pre-pandemic levels.
The choice to give up work for childcare made up a key obstacle for women during the pandemic. While the problem remains, it has largely eased, Roth said.
“I wouldn’t say it’s the most important driver of wage inflation today but it’s an important piece of the puzzle,” Roth said.
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