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See you in September: A critical U.S. labor market test

Commentary by Josh Hirt, Vanguard senior U.S. economist

We’ve all been looking forward to moving past the pandemic, maybe none more so than the millions of U.S. workers who lost their jobs when it hit.

Initial progress in the wake of the pandemic was encouraging. More than half the jobs lost near its outset came back between May and August 2020, meaning about 14 million jobs were regained.1 But the pace since then has slowed even as economic activity has expanded, raising concerns about permanent scarring in the labor market that could keep unemployment high and dampen economic growth.

That’s a possibility, but it’s not Vanguard’s base-case scenario. We see a number of forces aligning that should spur a strong upswing in employment in coming months and pave the way for a full labor market recovery by mid-2022.


The stage is set for stronger job gains

Provided that the COVID-19 Delta variant doesn’t require interventions that change the trajectory of economic recovery, we anticipate monthly new U.S. jobs to average about 650,000 through the rest of 2021. Several factors contribute to our optimistic outlook, including the prospect of the U.S. economy reopening at full steam. (We discuss our outlook in forthcoming research on the reopening, inflation, and the Federal Reserve.) Vaccination rates by September should near their peak, which could persuade some people who were uncomfortable with face-to-face interactions or being in offices to return to work. Schools are set to reopen with in-person classes, making more stay-at-home parents available to take jobs.

Then there’s the looming expiration of enhanced unemployment benefits and CARES Act unemployment coverage for workers not traditionally covered by unemployment insurance. In all, that will result in about nine million unemployed workers losing benefits by the end of September, which could drive more people back into the workforce.

An increase in workers will be good news for employers as job openings reached a record high 9.2 million in May 2021.1 An outsized share are in the leisure and hospitality industry, which was hit hard by COVID-driven government restrictions and consumer reluctance. Demand in this sector may not return to pre-pandemic levels even after the economy fully reopens, but as the sector has struggled to find workers, employment is still down by 2.2 million from its level in February 2020 before lockdowns started.1 Competition among employers has become fierce, resulting in solid wage gains in the industry. Average hourly earnings were up in June 2021 about 7% year over year, and that could entice people who have left the industry to come back.1

A tightening labor market might also encourage some recent retirees to change their minds. Although the aging of the American workforce has for some time been driving up the number of people reaching retirement, COVID led a wave of baby boomers—whether because of layoffs or concerns about catching the virus—to retire sooner than they might have planned. By our estimates, 1.6 million more workers retired in 2020 than we had forecast pre-COVID. If jobs are plentiful and pandemic fears abate, not all those retirements are likely to be permanent.


An acceleration in job creation should bring full U.S. employment closer

Note: Employment figures represent end-of-month, seasonally adjusted nonfarm jobs as defined by the U.S. Bureau of Labor Statistics.
Sources: U.S. Bureau of Labor Statistics and Vanguard calculations as of July 2, 2021.


Our positive outlook is predicated on a significant acceleration in the labor market recovery in coming months. If the labor supply improves and demand remains solid, the unemployment rate could fall significantly to near 4% by year-end and about 3.5% by the second half of 2022, bringing the economy back to full employment.

On the other hand, if we’re wrong and the labor market doesn’t pass this critical test of closing the shortfall in job gains, it could mean we’ve underestimated some longer-lasting or even permanent changes wrought by the pandemic. That would be a negative signal for the broader U.S. and global economic recovery.


1 Source: U.S. Bureau of Labor Statistics.


I’d like to thank Vanguard economist Adam Schickling for his invaluable contributions to this commentary.


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