ANALYSIS-Fed's 'maximum employment' push may fall short in post-pandemic economy

REUTERS/Leah Millis

By Howard Schneider

WASHINGTON, April 26 (Reuters) - The Federal Reserve has promised to help restore the U.S. economy to "maximum employment," and is pointing to the months just before the coronavirus pandemic as the touchstone for what that might mean.

Yet early evidence from the reopening of the economy suggests the push to reach that goal may be elusive, or at best a more drawn-out process, as the labor market shifts away from the types of jobs lost in 2020, is potentially further transformed by massive infrastructure spending, and sees some workers quit job-seeking altogether.

Economists say they don't see troubling job bottlenecks in the near term. Some employers have complained about not being to find enough workers, though that problem is expected to ease as schools and childcare facilities reopen, allowing workers to return to their jobs, and the hard-hit hospitality and retail sectors start bulking up their workforces.

But they may also not be far off if the pandemic leads to an economy more reliant on technology and less on people in the service sector, and the Biden administration's spending plans boost demand for construction, family care and other areas where the unemployed have a different set of skills and, perhaps, preferences.

"There is no broad-based constraint when you have 8.5 million fewer jobs" than existed at the pandemic's onset, said Gregory Daco, chief U.S. economist at Oxford Economics. Daco expects the economy to add jobs at a fast clip this year, but he said hiring could slow as the occupational mix changes and more older people use the pandemic as a reason to retire.

"Yes, it will be an impediment to a full recovery and, yes, it will take longer," Daco said of the need for workers to shift skills and industries, and of possible limits to how far labor force participation will rise.


The Fed is not expected to change its policy guidance after its two-day meeting this week, though it is likely to give a rosier view of the employment situation in the wake of the 916,000 jobs added in March and expectations of further growth through the summer.

The policy statement and Fed Chief Jerome Powell's news conference after the meeting are expected to shine some light on whether the employment landscape has changed the U.S. central bank's plans to leave its key overnight interest rate near zero for an extended time and to continue buying $120 billion in bonds each month.

Huge shortfalls remain, though: Payroll jobs peaked at 152.5 million in February of last year, compared with 144.1 million last month. The share of adults working or looking for work, known as the labor force participation rate, hit a 7-year high of 63.4% in January 2020, reversing what seemed an embedded decline. It fell when the pandemic struck and was at 61.5% last month, representing nearly 4 million additional people not looking for work.

The best-case scenario is for the economy to snap back to those earlier conditions, though Fed policymakers say they will be patient and only dial back support if inflation surges in unanticipated ways. When the last U.S. recession ended in 2009, it took several years before the most positive trends took hold, and Fed officials will be reluctant to accept that won't happen again.

Yet even as rising COVID-19 vaccination rates promise a more fully open economy, a job market realignment appears underway. Hiring is shifting towards businesses that make and move goods, as well as to those in construction, pharmaceuticals and other fields that have done well during the pandemic and may be buoyed further by ongoing work from home, online shopping, and other trends.

Job postings in those sectors are up 50% or more compared to February 2020, while those for the hospitality and tourism trades remain 17% lower, according to hiring site Indeed.

Analysis of new job postings by analytics firm Chmura projects employment in retail, food service and accommodation will remain well below pre-pandemic levels at least through the end of this year.


If sidelined workers and new job seekers don't smoothly shift to the occupations demanded in the post-pandemic economy, it could limit what "maximum employment" turns out to be.

The constraint could reveal itself through a labor force participation rate not climbing back to prior levels. A recent New York Fed survey pointed that way, with a declining number of people expecting to work beyond the age of 67. A surprising return of older workers boosted labor force growth during the last economic expansion, but the reverse is possible now.

It could also show up in faster wage increases for some industries, particularly if the Biden administration's infrastructure spendingstretches the supply of skilled workers. Construction employment in March, for example, was only about 2% below its pre-pandemic level.

"There are still people on the sidelines that could come back. But are they in the right locations and with the right skills?" said Chmura Chief Executive Officer Christine Chmura. "Probably not. That will drive wages up."

Higher wages and a speedier return to full employment are part of the rationale for the White House-backed $2.3 trillion infrastructure package under consideration in Congress, and a key phase could be approaching.

Enhanced federal unemployment benefits end in September, which will likely push some people back into the job market; rising vaccinations should allow more of the economy to reopen this summer; and Congress will decide how much of President Joe Biden's program to authorize.

Billed as a "transformational" plan, the administration's infrastructure proposal acknowledges worker training will need to keep step, with tens of billions of dollars set aside for community college programs, apprenticeships, and efforts to shift displaced workers into new careers.

The Fed will be watching to see how it fits together.

"The economy that we're going back to is going to be different from the one that we had," Powell said in an interview with CBS' "60 Minutes" program earlier this month, adding that the changes "will make it challenging" for people who became unemployed during the pandemic to go back to work.

Shifting job demand

Labor market index Labor market index

Labor market index

Shifting job demand

(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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