The labor market remains extremely tight in the US which often means fewer people are working. In this case, however, workers usually choose to work less hours. In particular, men with higher incomes chose to cut their working hours perhaps because the pandemic made them reassess their priorities. That could signal a broader trend toward better work-life balance as more and more workers adjust their work lives to make the same decision.
Last year, the Federal Reserve rapidly raised interest rates to control inflation. As a result, inflationary pressure began to decrease, and the economy showed signs of softening in recent months. However, the labor market remains stable – or “out of balance” according to Fed officials. Basically, the demand for labor is greater than the supply of labor. But why? The answer, according to my research, is not primarily that fewer people are working. It is that those who work choose to work fewer hours.
Explaining the tight labor market
The latest figures show employers added more than 517,000 jobs to the payroll in January, seasonally adjusted – nearly three times the average forecast of 187,000. The unemployment rate fell to 3.4%, the lowest level in 50 years. Meanwhile, there will be almost two job openings for every unemployed worker through December 2022.
How has the labor market remained so tight, despite the Fed’s efforts to slow the economy? Economists point to a shrinking workforce. The labor force participation rate is 0.9 percentage points lower today than on the eve of the pandemic. In other words, almost 1% of working-age Americans were working before the pandemic but not now. That reflects not only Covid-induced early retirement but also a long-term trend that existed even before the pandemic. However, my research with colleagues shows that fewer people working is not even half the story.
Fewer workers or less time?
Labor supply has two parts: the number of workers and the number of working hours per worker. Economists tend to focus on the number of workers, and my research shows that they are generally right to do so, because labor supply usually adjusts by that margin. As a general rule, the labor market is tighter or looser because more or fewer people are working or looking for jobs.
However, the recovery from the pandemic is an exception. Total hours worked in the US will fall from 2019 to 2022 – the equivalent of 33 fewer hours a year per person. Our estimate (described in more detail in the paper) is that fewer people working account for 15 of them, while the rest is due to workers reducing their hours.
So working Americans are underemployed, on average – but which ones? The reduction in work hours is more pronounced among men aged 25-55 with a bachelor’s degree. And high-earning men reduced their hours the most: for example, the top 10% of male workers by income (those earning more than $140,000 per year) reduced their work hours by one hours and a half a week, from 44.7 hours. in 2019 to 43.2 hours per week in 2022. In contrast, the bottom 10% of male wage earners (those earning less than $22,000 per year) worked more hours, 23.4 hours per week in 2022, compared to 22.6 in 2019. Those working long hours reduced their hours the most. The top 10% of male workers by working hours logged at least 50 hours per week in 2022. This is a lot of hours, but in 2019 the cutoff for being in the top 10% of men that laborer working hours is 55 hours a week.
Why do high-earning men work fewer hours
Why do workers reduce working hours? The first question is whether it is voluntary or involuntary. Due to the excessive demand for workers, it is unlikely that workers are forced to cut their hours. It is also unlikely that these workers will not be able to work as much as they would like due to Covid-related illness or childcare issues. For one, the decline in hours came between 2021 and 2022, after the recovery between 2020 and 2021, so it coincided with the disruptive effect of the end of the pandemic. For another, the hours fall the most for prime-age men, who are less affected by the disease than older workers and spend less time than women on childcare. In other words, if illness or child care were the main drivers of less working time, we would expect to find older workers and older women decreasing their hours more than age-matched men. Indeed, other survey data showed that workers’ desired working hours declined, providing direct evidence that the reduction in hours was voluntary.
What do workers do in their free time? The latest available numbers from the American Time Use Survey provide an indication. It appears that married men are the ones who have reduced their work hours the most, and they spend more time socializing and relaxing.
These findings suggest that the experience of the pandemic prompted people to re-evaluate their life priorities and recalibrate their work-life balance in the direction of less time in work. Perhaps this reassessment is specific to high-income men but it is more likely that it is a wider consequence of the pandemic, but people with high incomes are the easiest to adjust their hours to this new preference .
If this is the case, reduced hours may represent a permanent shift, keeping labor supply low and the labor market tight, sustaining the bargaining power of workers to choose less hours.
What are the wider implications? I see two longer term gains for workers. First, a better work-life balance can help workers improve their mental and physical health, which may allow them to be happier and possibly more productive, even, and work at an older age. ages if they want. Second, while men who work long hours reduce their hours, women, who typically work fewer hours and do more non-market work due to social norms, may choose to career paths that used to demand long hours, developing gender inequality especially at the upper end of the income distribution.
For employers, these findings reaffirm that workers, especially high-skills, value flexible work arrangements. To recruit and retain talent, it helps to offer flexibility, including remote work options. Businesses also need to re-examine their workflow and eliminate wasteful activities (for example, pointless meetings), to help workers make the most of their reduced, flexible time.
Finally, the reduction in hours per worker has important implications for monetary policy. The reduction in hours per worker and therefore the supply of labor means that the natural rate of unemployment may be lower than commonly thought. That means curbing inflation may not require unemployment to rise as much as some economists think. However, our better understanding of why the labor market is out of balance does not change the fact that a tight labor market will continue to put upward pressure on wages and therefore the price level, which complicating the Fed’s fight against inflation.