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Bumpy recovery ahead for US job market as industries face lingering shortages

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Service-based U.S. industries remain the most affected by labor shortages.

Photo credit: Luis Alvarez via Getty Images

Companies across U.S. industries are still facing labor shortages as COVID-19 restrictions ease. The second half of 2021 could see a rough recovery even as economists expect July's jobs report to show the highest employment increase since August 2020.

Economists polled by data firm Econoday expect the July nonfarm payrolls report, due out Aug. 6, to show the U.S. added 900,000 new jobs in July. That would be an uptick from previous months, though the economy still lags pre-pandemic employment levels by millions of jobs. Recent gains have also fallen below the Federal Reserve's goal of 1 million jobs per month as the central bank considers when and how to pull back its ongoing economic support.

Lingering COVID-19 concerns, childcare issues, enhanced unemployment benefits and people rethinking what they want out of a job are contributing to the employment shortfall even as employers raise wages and offer incentives to try to entice workers.

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"The return to a pre-COVID environment won't happen overnight, and we should be prepared for labor demand and labor supply to be bumpy in the second half of the year as the economy gradually returns to a new post-pandemic normal," said Gregory Daco, chief U.S. economist for Oxford Economics.

The drop in employment has hit businesses across sectors, and service-based industries — leisure, hospitality, education and healthcare — remain among the most affected. Those sectors will likely take longer to recover as the pandemic continues to challenge their operations, according to experts.

Still catching up

In the week ending July 10, about 13.2 million people were receiving some sort of unemployment benefits, including more than 9 million receiving assistance through pandemic-related programs, according to government data. The U.S. added 850,000 nonfarm payroll jobs in June, up from 583,000 jobs in May, according to the Bureau of Labor Statistics. June's unemployment rate was 5.9%, well above the 3.5% rate in February 2020.

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Economists expect a small uptick in the labor participation rate — the percentage of Americans aged 16 or older who are working or looking for work — to 61.7% in July from 61.6% in June. That rate is only slightly higher than 61.4% a year ago and still lags the February 2020 level of 63.4%, according to government data.

The stagnant labor force participation rate reflects persistent labor supply constraints, according to Oxford Economics' Daco.

"We believe it will probably take another few months for these constraints to meaningfully dissipate," Daco said.

The semiconductor chip shortage continues to constrain factory hiring, Daco said. The sector gained 15,000 jobs in June but remains impacted by the global chip shortage, which is curbing production capacity.

The bright side

Even though there are still hurdles in regaining pre-pandemic employment numbers, the uptick in hiring over the past two months and the smaller gain in job openings in May suggests things are not meaningfully getting worse, said Shannon Seery, an economist with Wells Fargo Corporate and Investment Banking. Restaffing will take time, and the fall could bring changes as more students return to in-person classes, more COVID-19 restrictions are eased, and enhanced unemployment benefits run out.

"In the meantime, labor shortages are bidding up wages and non-wage incentives, adding to the current inflationary environment," Seery said.

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Average hourly earnings for U.S. workers rose by 10 cents in June to $30.40, following increases of 13 cents in May and 20 cents in April, according to government data. Economists expect a similar jump of about 0.3% in July compared to June, according to Econoday. Wages have jumped during the pandemic as employers turned to higher pay to make up for hiring shortfalls, though those gains have slowed recently.

June marked the strongest increase in new jobs since August 2020 and represented a pick-up in the pace of job gains, Seery said. If July's growth meets expectations, it would mark an ever stronger gain.

"While worker shortages remain a problem, we expect constraints continued to ease and things moved in the right direction [in July]," Seery said, adding that labor constraints should improve further in the following months.

However, the sectors impacted most by the pandemic, including those requiring face-to-face interactions, "have the biggest climb to get back towards normal," according to Aaron Sojourner, a labor economist and associate professor at the University of Minnesota's Carlson School of Management. Leisure and hospitality employment remains more than 2 million jobs below its pre-pandemic level, while there were about 1 million fewer education and health services jobs in June compared to January 2020, according to the Labor Department.

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Companies brought back previous employees once lockdowns ended and sectors such as restaurants, entertainment and travel reopened, but they must now seek employment gains through new hires, Sojourner said.

"This requires a two-sided learning and trust-building process," Sojourner said, adding that potential employers and workers must learn and evaluate their options. "It takes time and effort."