Quite a few experts think the US economy will enter recession soon. If so, someone forgot to tell the labor market.

Historically low unemployment, brisk hiring activity, rising wages, and many employers still unable to find enough workers aren’t typical recession signals.

Now, it’s also true economies tend to grow until they don’t. This could all change quickly. But I think the bigger problem is a continued worker shortage that holds back growth.

Let’s look at some data. How many more people are actually available to work?

A good way to measure this is the “employment-population ratio,” the percentage of working-age people who presently have jobs. This reduces the ambiguity in other statistics like the unemployment rate. EPOP (as the cool kids call it) doesn’t depend on whether someone is “looking” for work. They’re still in the population regardless.

We can further narrow EPOP by age. Zooming in to “prime age” people ages 25‒54 captures the core population that’s either working or potentially available to work. A bit like core inflation indexes, it excludes the extra-volatile segments to highlight major trends.

Here’s a chart showing prime age EPOP for the last 10 years.

Source: FRED

The prime age EPOP ratio peaked just above 80% before the COVID recession and is now back near that same level again. Could it go higher still? Maybe, but in modern times it never has. Here’s the same data going back to 1948.

Source: FRED

The highest prime age EPOP on record was 81.9% in April 2000. But this chart shows something else interesting. Notice how EPOP climbed steadily (except during recessions) from 1948‒2000. Since then, it’s bumped against the 80% level three times. That zone looks like some kind of natural barrier.

This makes sense. It’s unlikely we’ll ever see 100% of the age 25‒54 population all working at the same time. Some are always caring for young children or elderly relatives, independently wealthy, or otherwise unwilling/unable to work. That means we probably can’t count on EPOP going much higher from here. The US labor supply is tapped out.

Supply Constraints

Another possible source of more workers is working-age population growth. Unfortunately, the country is barely producing enough children to maintain the current population. And even if that changed tomorrow, it wouldn’t help for years.

Source: Macrotrends

What about immigration? EPOP already includes everyone within US borders, regardless of citizenship. Any additional immigrant workers would have to come from new immigration.

Could we admit more workers from abroad? Probably, but we aren’t. The current immigration system is badly broken. As this Cato Institute report explains, the idea people can get in if they just “get in line” is mistaken. Cato found over 99% of the people who want to immigrate legally can’t get through our Byzantine maze of requirements, and there’s no political will to change it.

That means immigration, legal or not, won’t solve the labor shortage. The numbers just aren’t sufficient.

If more labor supply isn’t in the cards, could something reduce labor demand? Maybe. The latest artificial intelligence systems have the potential to replace many desk-style jobs. But it will take some time for employers to learn how to use AI and implement it widely. Any job impact won’t show up for a few more years.

What about a recession? They’re pretty reliable job-killers. The next one might restore some balance. But the large and growing retiree population will keep needing help from younger cohorts. That kind of demand is less sensitive to economic cycles.

Source: Our World in Data

If labor supply doesn’t grow and labor demand doesn’t shrink, math says the current shortage will continue and even intensify.

Union Labels

This puts today’s workers in the driver’s seat—sometimes literally. The Teamster’s Union is negotiating a new deal right now for United Parcel Service drivers, whose contract expires next month. West Coast port workers just got a new contract, too. Nurses, teachers, and other groups are staging local strikes for better pay and working conditions, and often winning.

It’s not coincidence union activity is rising around the country. A tight labor supply in many sectors gives workers more power; collective bargaining lets them apply that leverage more efficiently.

Most private-sector employers haven’t seen such activity since the 1970s. Many don’t like it, either. Companies like Starbucks (SBUX) are vigorously resisting efforts to organize their workers.

These fights are counterproductive. Both sides should realize they need each other. Companies need workers to produce revenue. Workers need profitable companies to provide good wages and benefits. They should be able to meet in the middle.

The problem is managers haven’t needed to meet in the middle until recently. They could always find replacement workers. Now they can’t. That’s frustrating.

Meanwhile workers have long felt, often correctly, employers were giving them the short end of the stick. That’s frustrating, too.

Everyone would benefit by not treating this as an either/or situation. It’s possible to have profitable companies that both reward shareholders and pay workers well.

And the way things are going, those companies will be the only ones that survive.

See you at the top,

Patrick Watson
@PatrickW

P.S. If you like my letters, you’ll love reading Over My Shoulder with serious economic analysis from my global network, at a surprisingly affordable price. Click here to learn more.

• employment
• jobs
• labor
• labor shortage
• recession