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Post: Mystery Economic Theater: A U.S. labor shortage is planting the seeds for lots of layoffs. Here’s how

Why are there so few workers for so many open jobs? It’s one of the biggest mysteries about the U.S. economy and helps explain why a big labor shortage is adding to high inflation.

The share of people in the labor force fell again in October and remains more than a percentage point below its pre-pandemic peak.

That might not sound like much, but it is. The smaller percentage of people who are part of the labor force suggests some 1 million to 2 million people who normally would be working are not.

Since there’s not enough workers to go around, businesses have to pay more to retain or attract workers. Wages are rising at the fastest pace since the early 1980s and adding to the Federal Reserve’s worry about inflation.

“We’re getting, really, nothing in labor supply now,” Fed Chairman Jerome Powell said on Wednesday after the central bank raised a key interest rate again.

The numbers tell the story.

The so-called labor-force participation rate dipped to 62.2% in October, a few ticks below the pandemic high. And it’s still well below the pre-crisis level of 63.4%.

Just what does this mean? Only 62.2 of every 100 able-bodied Americans 16 or older are working or looking for work.

See: U.S. job creation slowed to 261,000 in October — but it’s still too strong for the Fed

By now, the Fed and most private-sector economists had expected more people to enter or re-enter the labor force. Had they done so, companies would find it easier to hire and they wouldn’t have to raise their pay quite as much.

Where are all the missing workers?

Well, it’s not workers in their prime who have kids and families. The share of workers from 25 to 54 has returned close to pre-crisis levels.

The shortfall is mostly among the young and old.

“Two notable exceptions are 20-24 and 65+ year olds,” wrote money market economist Thomas Simons of Jefferies LLC in a note to clients.

Explanations abound. For one thing, several million Americans who were near or at retirement age have, well, retired from the labor force, Fed and other studies show.

Nor do they appear to have any plans to come back — either because they are too worried about the coronavirus or they have enough retirement savings to get by.

The other group whose presence in the labor force is still well below pre-pandemic levels are young people ages 20 to 24 who normally would be just starting out in their careers.

Economists are at a loss to explain why that is the case.

Whatever the case, the overall rate of participation has stalled out after steadily recovering from a 49-year low in 2020 during the original coronavirus outbreak.

If those people don’t come back, economists say, the labor shortage is likely to persist for months if not years to come.

While businesses would like to fill millions of open jobs, the working-age population is growing just 50,000 to 100,000 a month, economists estimate.

“Until [participation] fully recovers, shortages of qualified workers will remain a problem,” said chief economist Joshua Shapiro of MFR Inc.

That’s not good news for the Fed — or the broader economy.

While rising wages did not ignite the worst inflationary episode in four decades, they represent more tinder for a fire the central bank is determined to extinguish. The central bank wants hiring to slow and unemployment to rise to ease the upward pressure on wages.

The main way the Fed does that is by jacking up interest rates. Higher rates prompt consumers to cut spending, depress demand for goods and services and spur businesses to lay off workers who are no longer needed.

The shortage of labor, it could turn out, might be the spark the results in an eventual surplus of labor. Companies could end up laying off lots of workers if the economy sinks into another recession.

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