John Courtney | President
Updated Jan. 28, 2022

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With fewer than seven unemployed job seekers for every 10 job openings,^[1] America’s major labor shortage continues, and there’s a lot riding on when it will end. Its toll on our economy is multi-faceted: business closings, shortages of raw materials and finished goods, weaker GDP, lower tax revenues and higher prices.

Though it’s hard to predict exactly when workers will return to work, an examination of labor market data gives reason for hope about how the first half of 2022 may trend. Here’s why.

Examining the Drivers of the Shortage

The Great Resignation. Undoubtedly, the pandemic has affected workers’ feelings about work. As unemployment soared during the early pandemic, monthly quits fell from 2.3% to just 1.7% of the workforce. When unemployment tumbled in mid-2021, however, quits surged. The Great Resignation was underway, and in November, monthly quits^[2] reached a record 4.5 million, or 3% of the workforce.

In part, that spike may reflect a bounce-back from the dramatic drop in quits during the early months of the pandemic—when economic fears were at their highest and many workers may have been hesitant to seek new positions.

Viewing the trend on an annual basis, the chart on the right shows quits falling from 27.9% of workers in 2019 to 25.4% in 2020 and bouncing up to 32.6% in 2021 (assuming December 2021 matches November’s 3.0% mark).

The Great Sabbatical. A second, less obvious driver of the labor shortage might best be called the “Great Sabbatical.” Many workers furloughed early in the pandemic have simply not returned. Undoubtedly, quite a few have retired as part of the continuing Baby Boomer trend. But others appear have taken time off for a host of other reasons—health, family, work-life balance or other concerns. These workers may be considered on a sabbatical of sorts. They aren’t counted in the quit rate because they were laid off.

Workers’ reluctance to return can be seen in a stubbornly low labor force participation rate, which remains down 1.5% from pre-pandemic levels. The total number of people not in the labor force has grown by 4.8 million since the start of the pandemic.

Other signs of this reluctance can be seen in the length of time it’s taking unemployed job seekers to land a job compared to the job market opportunities.

In November, the ratio of unemployed job seekers to job openings reached its lowest level in the 20-year history of the statistic, with fewer than seven unemployed job seekers for every 10 job openings (blue line in the chart).

Despite this phenomenon of more jobs than job seekers—which existed for most of 2021—the average duration of unemployment in 2021 was 29 weeks (orange line in the chart), up nearly 33% compared to pre-pandemic 2019.

In past economic cycles, the duration of unemployment dropped as jobs became more readily available (as reflected by relatively more job openings per job seeker). But as the chart shows, that historic correlation reversed in 2021. Despite a great job market, unemployed workers are taking longer to return to work than in similar past job markets.

The long-term unemployment level (i.e. those out of work for over six months) provides additional perspective: At 2 million workers, long-term unemployment in November was nearly double its pre-pandemic level (1.1 million). Unfortunately, most of these workers become stuck and are slow to return to work. Research shows the likelihood of landing a job in a given month drops sharply after a worker has been unemployed for two months and continues to drop over time.

Factors Underpinning the Great Resignation and the Great Sabbatical

Experts in human resources and labor market psychology have explored the causes of workers quitting or being laid-off and then staying out of work. Commonly-cited reasons include:

• Reconsidering life priorities: With a heightened sense of their mortality, many are considering new careers or early retirement
• Burnout: Stretched by labor shortages, some have decided they need a break; for example, front line workers in health care, retail and hospitality and other sectors
• Optimism that job opportunities are plentiful and will be available when they’re ready to return
• Worries about the health risk of Covid to themselves or their family
• Conditioned to a new lifestyle: Some who’ve been unemployed for a long time have adapted their lifestyle, and perhaps budget, to not working
• Depressed and stressed-out: Feeling overwhelmed by the many disruptions of the pandemic. Studies show a correlation between unemployment and increased rates of depression, suicide, alcohol and drug abuse and child and spouse abuse

Of course, most unemployed workers’ attitudes are also strongly influenced by their finances. Here’s where we encounter a defining idiosyncrasy of the recent downturn: Unlike other recessions, the pandemic recession left many workers with more money than they had before – in some cases even after benefit payments ended, due to their saving some “excess” benefits. 

• Pandemic payments: Governments have provided substantially increased and extended unemployment benefits, stimulus payments and an enhanced child tax credit
• Pandemic-reduced expenses: Many Americans saw their costs decrease during the pandemic, including lower travel, entertainment and dining expenses, lower housing costs through rent abatement and mortgage forbearances, and well as student loan forbearances and reductions
• Home values: Surging home prices have left homeowners with high equity and a greater feeling of financial security  
• Investment gains: Unlike the Great Recession, record highs in the stock market have provided significant increases in wealth for those with investments. The same 401k’s that became “201k’s” during the Great Recession may feel more like “801k’s” today^[3], giving workers more confidence to retire or take a break from work. 

Unlike prior recessions, the national savings rate increased dramatically during the pandemic. According to Moody’s Analytics, by the end of September 2021, American households had amassed $2.7 trillion in extra savings beyond what they’d have had the Covid pandemic never happened. That dynamic may be shifting, however: By October 2021, the personal savings rate fell below its level before the pandemic. 

How Much Longer Until Workers Come Back?

Moving forward into 2022, the extent to which these novel financial dynamics ebb and flow will shape how long workers can afford not to work. While Covid remains an ongoing wild card, some data suggest many will start returning soon, and a growing number of analysts share that view.

Though the exact timing will vary among individuals, income and accrued savings will be critical factors for all of them.

Many laid-off Americans at lower income levels received unemployment benefits that were greater than their pre-pandemic, pre-layoff working income. When you add three stimulus payments, it was sufficient for some to have a pool of savings that would allow them to spend at pre-pandemic levels, even after unemployment benefits ended or tapered.

However, many of those households may find their extra money is about to run out, which means they’re likely to return to work in the coming weeks and months. Indeed, according to data from the JPMorgan Chase Institute, checking account balances have plummeted over the past few months.

Let’s consider two hypothetical examples of families working in industries with the greatest labor shortages. Both examples assume the families did not spend above their pre-pandemic income level. While it does not account for inflationary price increases in 2021, the analysis conservatively omits potential additional savings from:

• Lower travel, transportation, entertainment, restaurant and other expenses
• Lower student loan expenses due to a suspension of payments that extends into 2022
• Increased child tax credits
• Tax-free treatment of $10,000 of unemployment benefits
• Child care savings when one parent continues to remain unemployed

Example 1: Below Median Income Family ($63,000/year)

The chart below shows a family of two parents and two dependent children in California or New York (the unemployment insurance (UI) benefits are similar). We assume each parent earned the same amount of money and that their combined income was $63,000 in CY 2019, or an average of $5,250 per month.

If both parents were laid off at the end of March 2020 and remained unemployed for 17 months (that is, through the start of September 2021), they would have received $105,000 in combined unemployment insurance benefits and stimulus payments. This would be enough to maintain their income level during those 17 months ($88,600) and leave them with $16,200 of extra cash compared to their prior earnings from work over a similar 17-month period. At that time, if one parent went back to work, the other could remain out of work with the extra UI and stimulus cash maintaining the same standard of living they had at the start of the pandemic through mid-February 2022.

If the pandemic allowed these stay-at-home parents to also save on prior childcare expenses (we’ll conservatively assume a total of $10,000 over 17 months^[4]), the same family could have saved enough to have one parent remain out of work until mid-summer of 2022. And if they also had housing savings through rent abatement or a Covid mortgage forbearance (assuming $900 per month for 17 months), one parent could remain on the sidelines until perhaps the end of 2022.

Example 2: Above Median Income Family ($100,000/year)

In December, Federal Reserve Chairman Jerome Powell suggested workforce participation rates may be lower due to greater savings and the greater wealth that came from rising stock prices and home values. He suggested some dual-income families may have only returned one earner back to work. For workers at higher income levels with investments and real estate, increased wealth may be extending their participation in the Great Sabbatical.

While circumstances could vary widely at this income level, if the same family of four in Example 1 instead earned a combined $100,000 per year prior to the pandemic, their experience could look something like the graphic below. In this example, we assume that their finances include:

• Unemployment insurance: $116,000
• Stimulus payments: $11,400
• Childcare savings: $10,000
• Housing savings: $32,400 (broken into two parts in the graphic below) from an 18-month COVID forbearance of an $1,800 monthly mortgage payment
• The ability to tap $13,500 from home equity and/or investments
  

In this example, both parents could remain out of the workforce for 17 months, with one parent then returning to work. If this family tapped rising investments and home equity, as many Americans did, they could have an additional cushion. If they tapped $13,500, they would have until summer 2022 before the second parent would need to go back to work.

What Can Employers Do?

For workers who’ve managed to accrue savings sufficient to remain out of the workforce into 2022, employers have a number of tools at their disposal to encourage them to come back. Many of the same tools are also effective in slowing the rate of employees quitting. Some can be expensive, while others only require more creativity and a purposeful focus on culture and well-being.

Popular strategies include:

• Higher Pay: Maintaining competitive rates and using signing bonuses where cost-effective as a means to keep wages in check but also recognize the current market conditions
• Enhanced Benefits: Health insurance, college, 401k, sabbatical, more paid time off, equity, prizes, food, gifts, emotional support, etc.
• Remote Work / Flexibility Options: Including work location, hours, hybrid schedule and promotion of work-life balance
• Meaningful Work: Providing clarity on mission and employees’ contributions to it, as well as helping workers navigate to roles they love and where they will thrive
• Greater Appreciation: Can be through a program or ad hoc from manager
• Career Development: Helping managers retain workers through improved leadership and management skills and helping employees by focusing on their career path, emotional intelligence, skill-building and performance

What Can States and Congress Do?

From the start of the pandemic through today, state agency leaders and teams have dedicated countless stressful hours for months on end to handle an unthinkable volume of UI claims and ensure our nation’s UI safety net held up to the demands. Meanwhile workforce agencies have been working hard to continue to adapt to the new demands of a constantly changing environment. Both continue to be critical players in the next evolution of engaging and equipping workers to move more quickly back into the workforce.

1. Work Search Activity. It’s time to modernize state work search policies. Just as the world of work has shifted during the pandemic, so has the world of work search. Now more than ever, job seekers are conducting their work search online with virtual job search activities, such as career literacy learning, assessments, networking through social media, using automated job board leads and viewing and applying for jobs.

These activities are not only valuable, they can be verifiable. That can help solve a major overpayment issue arising from states’ inability to accurately and efficiently monitor and enforce work search requirements. With fully verifiable activities, states can also combat fraud that was rampant during the pandemic: Fraudsters are much less likely to complete job search workshops and assessments and apply for jobs than valid claimants. And if they do complete the activities, who knows—maybe they’ll land a legitimate job.

By sharpening work search requirements and injecting them early into the process, UI and workforce agencies engage one of the largest captive audiences of unemployed workers that exists in our economy. Even at January 8th’s low rate of 230,000 UI initial claims^[5]  per week, nearly 12 million workers per year will have filed and been exposed to workforce agency offers of help. 

Applying December’s time to land a job for such claimants, these 12 million workers would remain unemployed for nearly seven months, despite a record number of available openings. If UI and workforce agencies succeed in lowering duration, they could help lower unemployment by filling perhaps as many as 2 to 3 million job openings.

2. Sharpened RESEA Strategies. As Reemployment Services and Eligibility Assessment (RESEA) funding expands from $200 million in FY 2021 to $750 million in FY 2027, states are exploring ways they can optimize the program. One increasingly popular idea is to not only use virtual counseling when appropriate, but to provide other RESEA and reemployment activities online as well.

As funding allows more claimants to be served by RESEA, states should consider timing the first and second RESEA meetings for maximum impact. Many claimants find jobs on their own in the first month after filing their claim. Many more can do so if required to engage with modern self-serve job search systems that provide  job search learning, activities and tools. For states leveraging these modern self-serve solutions at the start of a claim, timing an initial RESEA meeting just after capable claimants have landed jobs—say, between four and seven weeks—avoids allocating resources to those who need less help, while engaging those who need more help at a point when it can be more impactful.

States implementing a second RESEA meeting might consider doing so late enough for claimants to implement what they’ve learned in their first meeting, and early enough to maintain the momentum gained from an expert’s encouragement and guidance. The second RESEA meeting may be most effective two to four weeks after the first one.

The modernization of scheduling and notification methodology has also proven effective in increasing claimant “show” rates. Some states have increased RESEA show rates by nearly a third with simple email reminders. Others improved attendance by more than half with online self-scheduling tools.

3. Career Literacy. With job seekers reporting their job search skills at a D+ average, it’s no wonder so many end up settling for jobs that aren’t a great match, only to subsequently quit—both before and during the pandemic.

Fortunately, studies have shown these gaps can be narrowed significantly through job search skills workshops, education and tools. For many state unemployment agencies, these types of resources are readily available via systems used by their sister workforce agencies—systems that can facilitate making these activities trackable.

4. On-the-Job Training. We now have nearly twice as many long-term unemployed as we did before the pandemic. But the official measures only count those who’ve been out of work and looking for a job for six months or more. They do not count those who’ve dropped out of the labor force and are no longer searching for work – a figure which has grown by almost five million compared with pre-pandemic levels.

Recognizing the need to help those who may be stuck, New Jersey introduced its Return and Earn program, which provides a $500 incentive for workers to return to work as well as a subsidy for employers that train and hire those workers. The program is funded with federal ARPA money.

The worker incentive offsets some of the dynamics driving the Great Sabbatical, while the employer subsidy recognizes that employers may need help hiring and training workers who’ve had lengthy pauses between jobs or those who are changing careers.

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John Courtney is President of the American Institute for Full Employment. For the past 25 years, the Institute’s team of consultants has worked with 25 states and Congress to develop evidence-based reemployment solutions in unemployment insurance, welfare and workforce programs. To learn more or apply for a free assessment of your state’s reemployment programs, including RESEA, contact us at info@fullemployment.org.

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¹November 2021 Unemployed Persons per Job Opening, U.S. DOL Bureau of Labor Statistics Situation Report, January 4, 2022.
²The “Quit Rate” measures the number of voluntary terminations divided by total employment.
³The Dow Jones Industrial Average grew from roughly 18,000 to 36,000 between 2006 and the start of 2022, and by almost 20% during the pandemic alone.
⁴The $10,000 figure is calculated by assuming no child care was needed during the 2020 and 2021 summer school breaks in California. Rates are based on national data from “The Cost of Child Care During the Coronavirus Pandemic” calculator by Center for American Progress. Rates for two children are calculated by adding the weekly rate for one child and the weekly rate for the second child with a national average sibling discount of 10%.
⁵This analysis uses initial claims rather than first payments, because states typically see twice as many applicants as the number of claimants ultimately receiving a first payment. In the third quarter of 2021, the ratio was closer to three times as many applicants as paid claimants. While fraud accounts for some of the difference, there are many sincere applicants who nonetheless fall short of specific requirements but still need a job. Focusing early can significantly increase the number of workers states can engage, as even those ultimately eligible may be motivated to comply with claim requirements until they know whether their claim will be accepted. Studies show those who complete a certain amount of activity tend to voluntarily complete more than required, suggesting a work search habit could be sparked by engagement in a filer’s first week of a claim.