The state’s labor shortage is a problem we can’t afford to ignore

The number of people working or looking for a job has fallen by 105,000 since peaking in mid-2019.

Unemployment in Massachusetts dipped to 3.3 percent in December, the lowest rate since March 2020.Spencer Platt/Getty

Massachusetts employers are hiring, and boosting wages to do so. Unemployment ticked down last month to 3.3 percent, its lowest since March 2020 – i.e., before COVID turned the economy upside down.

But even with two open jobs for each unemployed resident, more people are exiting the workforce than are getting in, according to December data released on Friday by the state and the US Labor Department.

Specifically, the state’s labor pool — defined as the number of workers with a job or looking for one — has been getting smaller for years even as the number of jobs has just about rebounded to its pre-COVID high. There were 105,000 fewer available workers last month than at the peak in June 2019.

The labor force participation rate, or the percentage of adults who are in the workforce, dipped last month to 65.1 percent. Excluding the darkest days of the pandemic, that’s the smallest percentage since 2016.

I’ve been harping on this issue for a while. Worried that my fixation was misplaced, I checked with economists on whether we should be concerned by the shrinking labor pool.

Their answer: We should.

The drop in labor force participation is being driven by retiring baby boomers, and most of those older Americans would have called it quits even if there had been no pandemic, according to Mark Zandi, chief economist at Moody’s Analytics. Health fears, the lack of affordable child care, and other COVID disruptions contributed to the decline, but those factors are waning, he said.

The demographic trend — older workers retiring and fewer younger people reaching working age — will cause problems down the road.

“The US faces a chronic labor shortage over the next decade or so as the baby boom generation continues to leave the labor force and foreign immigration is limited, unless there is a significant change in immigration law,” Zandi said.

In the short term, employers have been raising wages to attract new hires, especially to fill the lower-paying service jobs that have gone begging since COVID restrictions were lifted. That’s good for workers.

But if pay climbs too fast, it might fan an inflation rate that is already too hot and wiped out wage gains last year. It’s an economic Catch-22.

The Federal Reserve has responded by aggressively boosting interest rates. Officials are trying to slow the economy, and reduce demand for workers, by making it more costly for consumers and businesses to borrow money.

Even if the Fed is successful in tamping down inflation without triggering a deep recession, a lot of people will probably lose their jobs. That would ease the labor shortage for a year or two.

But over the long term, the country needs to expand the workforce. Allowing more immigration would help, said Eric Rosengren, an economist and former president of the Federal Reserve Bank of Boston. So would greater access to child care and a stronger public health system.

“However, the aging of the workforce is a trend that will make it more difficult to improve labor supply,” he said.