COVID-19 fears, stimulus preventing millions from returning to work, BofA says

The U.S. economy is poised to take off in coming months as it rebounds from the coronavirus pandemic, but the recovery faces a new challenge in an apparent labor market shortage. 

Employers are reporting difficulty in onboarding new workers, even though the nation's unemployment rate is at 6% and some 9.7 million Americans say they are actively looking for a job, according to Labor Department data. 

But a Bank of America analyst note estimated that 4.6 million workers exited the labor force during the pandemic. More than half of those workers will not rejoin the labor force until the end of the year, the team led by Joseph Song said in a note to clients. 

One reason is that fears of catching COVID-19 and the more contagious variants are still high among many Americans, Song said. He predicted those concerns would subside over the summer amid increased vaccination rates and declining COVID-19 cases. 

Song also blamed the sweetened unemployment benefits provided to workers during the pandemic. The Biden administration's $1.9 trillion relief package expanded jobless aid by $300 a week through September; Americans who earned less than $32,000 before the crisis began would be better of in the near-term collecting those benefits rather than working, Song said.

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"Low-wage workers currently have a disincentive to work due to generous UI benefits, which may be contributing to the labor supply shortage," he said. "Both of those dynamics should be largely sorted out by September and could encourage more workers to return to the labor market." 

Bank of America predicted that 2.5 million Americans will rejoin the workforce by the fall, but predicted that the remaining 2.1 people may be slower to go back to work – or may never rejoin the labor market at all. Another 700,000 Americans, meanwhile, are expected to have left the workforce due to a mismatch between their skillset and that required by the job.  

The predicament could cause the unemployment rate to fall faster than expected, the economists said, and may also lead to faster wage growth as businesses pay more to fill open positions. But there is a "high risk" that the labor force participation rate never fully recovers, Song warned.

Federal Reserve Chairman Jerome Powell addressed the issue on Wednesday following the central bank's two-day policy-setting meeting, predicting that the seeming bottleneck in the labor market will end in the coming months. 

"My guess is we'll come back to this economy where we have equilibrium between labor supply and labor demand," Powell said. "It may take some months, though." 

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Powell suggested that would-be workers may be applying for jobs despite lacking the necessary skill set. He also said there could be geographical differences. Another reason for the disparity, Powell said, is that schools aren't open yet – meaning that some people who want to return to the workforce can't because they're still at home taking care of their child. Powell also indicated that some Americans are afraid to return to work due to concerns they may be infected with COVID-19.

"Clearly there's something going on out there, as many companies are reporting labor shortages," he said. "We don't see wages moving up yet, and presumably we would see that in a really tight labor market. We may well start to see that."

While business leaders have been quick to blame the expanded unemployment insurance benefits, Powell said it was unclear whether the boosted federal benefits were affecting workers' hesitancy to return to their jobs.

"I do also think that unemployment insurance benefits will run out in September," he said. "So to the extent that's a factor – which is not clear – it will not be a factor fairly soon."