U.S. labor market — 55 is the new 65

Putnam Fixed Income Team, 07/15/21


  • Many older workers abandoned the labor market due to job scarcity, unemployment benefits, and Covid-19.
  • Employment of adults age 45 to 54 stagnates as self-employed numbers rise and applications for new businesses surge.
  • The Fed’s dot plot signals two rate increases in 2023, reflecting changes in the labor market and the economy.
Recent growth in employment has been lower than expected in the United States. There was broad-based recovery in the labor market across different age groups when the economy initially reopened in the second quarter of 2020. But the labor force participation rate has stagnated and started to diverge.

Shifts among older workers

Employment growth in the 55+ age group has been meager since the initial bounce after the economy reopened. This is significant because job growth for adults age 55 and older was on an uptrend before the pandemic. Currently, these individuals are more likely to transition to retirement amid a lackluster work environment, being among the most disincentivized by stimulus checks and the expanded unemployment benefits. They can sit it out by collecting benefits as they approach retirement age, and a strong housing market allows many to downsize and lock in the capital gains. As a result, we believe many people in this age group are not likely to return to the labor force.

Covid-19 has disproportionately affected older individuals, with deaths of those 60+ accounting for approximately 87.4% of all deaths due to Covid-19 in the United States since the start of the pandemic, according to data from Health Equity Tracker, which was developed by the Satcher Health Leadership Institute at Morehouse School of Medicine. Labor market participation for women age 55–64, for example, did not change a lot. But there was a notable drop in the participation of men in this age category. Long-lasting complications from Covid-19 might also be a factor.

shifts in labor market participation

The drop in participation rates was more significant for adults age 65 and older. The participation rate for people in retirement and, hence, those collecting Social Security benefits had risen in 2018 and 2019 amid a strong labor market. The current participation rates are not too different from the average of the last decade. Healthy individuals can return to the job market as unemployment benefits expire and wages rise. However, some of the changes induced by the pandemic can hinder job participation. Soon after the start of the pandemic and work-at-home policies, there was a large migration within the United States. People moved not only to cheaper places, but also to places closer to their families. Some people over 65 became caregivers and are not likely to return to the labor market for a long time, if ever.

Starting new businesses

Employment across the prime-working-age population has varied since the recovery started. While there has been job growth in the 25–34 and 35–44 age groups, employment for those age 45–54 has stagnated since September 2020. This stagnation among adults age 45–54 is puzzling. The pandemic may have accelerated the downward trend in employment among this age group. Employment among men in this age bracket fell as the economy accelerated. This may be due to disability; long-haul Covid-19 symptoms have made people eligible for disability benefits.

It is possible that people age 45–54 are disproportionately leaving the labor market for an undetermined period to start their own business. New business applications have surged during the pandemic, and the number of self-employed rose over the last few months. Given the structural changes caused by the pandemic, some individuals may be dropping out of the labor force to launch start-ups. This is more likely when household balance sheets are healthy and there is ample fiscal support. Retail sales represented most of the new business applications, and this could be due to rising demand for non-store retail activity.

The Fed’s gamble on rates

The Fed is aware of the changes in the labor market. Fed officials have noted that step-up demand for labor has started to put upward pressure on wages. As the labor market tightened with a limited supply of workers, the central bank has quietly moved away from talk of the number of jobs lost since the pandemic started to discussion on the number of people unemployed. There is a subtle difference between these two narratives. The number of unemployed is much smaller than the total job losses since a sizable number of people have left the labor force.

The Fed seems to think the labor market participation rate can remain relatively low in the near term and rise later in the cycle. Reflecting these changes in the labor market and the economy, the Fed’s dot plot — which summarizes the Federal Open Market Committee’s (FOMC) policy rate projections — moved higher in June. The median dot plot now implies two rate hikes in 2023 compared with zero per the March dot plot. The Fed’s plan is not bulletproof, though. Their projections seem to assume the slowdown in payroll gains is temporary. If the job recovery doesn’t accelerate in the fall and there is wage inflation, the divide within the Fed could get wider. If various measures of inflation stay elevated, the Fed is likely to go ahead with its tightening plans. We believe that only a major slowdown in activity can change their minds.

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