Employment gap may weigh on growth and spur inflation in the US and UK, IMF says

Generous income support, mismatch and the withdrawal of women and older people from the workforce contribute to a lag in labour market recovery

Prospective employees are interviewed during a job fair in Huntington Park, California. Businesses are having a hard time finding enough workers to fill available positions. AFP

About two years since the coronavirus pandemic upended labour markets globally, job openings are plentiful in many advanced economies, yet workers have not fully returned, according to the International Monetary Fund.

This gap, in which the employment rate is below the pre-Covid levels, is playing out in the US and Britain, the Washington-based lender said on Wednesday.

In the US and UK, the recent labour market puzzle can be partly explained by a mismatch, the pandemic’s effect on women [in the US] and older workers leaving the workforce, it said.

“If the broader trend of plentiful jobs and not enough workers continues, it can have major implications for growth, inequality and inflation,” said Carlo Pizzinelli, co-author of the white paper and an economist in the fund’s regional studies division.

If the broader trend of plentiful jobs and not enough workers continues, it can have major implications for growth, inequality and inflation
Carlo Pizzinelli, IMF economist

“A continued sluggish employment recovery amid sustained labour demand could constrain economic growth while fuelling wage increases.”

Global unemployment is expected to remain above pre-coronavirus levels until at least 2023 as the pandemic continues to weigh heavily on global labour markets, according to a report by the International Labour Organisation this week.

The shortfall in working hours was equal to 52 million full-time jobs this year, the report said. The previous full-year estimate in May 2021 projected a deficit equal to 26 million full-time jobs.

Generous income support programmes launched by governments during the pandemic allowed workers to be picky, slowing job applications, acceptances and, ultimately, the employment recovery, the IMF said.

But preliminary evidence, including that from the recent phasing out of the US federal unemployment insurance supplement, suggests the early removal of Covid-related unemployment benefits had only a modest and temporary effect on getting people back to work, said Ippei Shibata, an economist in the fund’s research department.

There has also been an increase in the mismatch between the industries and occupations in which the jobless are searching, and those with abundant vacancies, according to the lender.

“However, the employment loss due to mismatch during the crisis has been modest and smaller than during the global financial crisis,” Mr Shibata said.

“We estimate that, as of early last autumn, mismatch explains only about 18 per cent and 11 per cent of the outstanding employment gap versus pre-Covid levels in the US and the UK, respectively.”

Prolonged school closures and scarcity of childcare services put an extra burden on mothers of young children, pushing many to leave the labour force, the IMF said.

The excess employment contraction for mothers of children younger than 5 years old compared with other women accounted for about 16 per cent of the total US employment gap with respect to pre-Covid levels as of October 2021, according to the fund.

“Meanwhile, in the UK, employment fell less for females than for males,” Mr Pizzinelli said. “A potential explanation is that in the UK, nurseries remained open throughout the pandemic, easing the trade-off between work and childcare for mothers of young children.”


A flood of older workers from the labour force is also contributing to a lag in employment recovery in both the US and the UK, according to the fund.

For some, this may reflect health concerns related to the pandemic. Others may have reconsidered their need to work when housing and financial asset prices grew substantially, the lender said.

“As of September, the rise in inactivity among workers aged 55 and up accounted for around 35 per cent of the outstanding employment gap versus pre-pandemic levels in both economies,” Mr Pizzinelli said.

“It is unclear how many of those who retired or quit may eventually return to the labour force.”

Cumulatively, mismatch and the withdrawal of women and older workers from the labour force may account for about 70 per cent of the US employment gap compared with pre-Covid levels, the IMF said.

The employment loss due to mismatch during the crisis has been modest and smaller than during the global financial crisis
Ippei Shibata, IMF economist

In the UK, about 10 per cent of the employment gap can be attributed to mismatch and 35 per cent to older workers’ withdrawal from the labour force, it said.

“Further, the outflow of foreign workers after Brexit – accelerated by the pandemic – entailed a progressive fall in the number of jobseekers willing and able to fill open vacancies,” Mr Shibata said.

If a larger number of older workers permanently retire and a lack of cheaper childcare and pre-school opportunities continue to keep some women with young children at home, the pandemic could leave persistent employment scars, notably in the US, according to the IMF.

US and UK vacancies are highest among low-skill occupations, and employment in these jobs remains below pre-2020 levels. The rise in resignations is also greatest among low-skilled jobs, the lender said.

“To minimise the risk of scarring to employment, addressing the pandemic remains key, so workers are fully able to return to the labour market. So are well-designed training programmes to reduce risks of mismatch, and – particularly in the US – expanded childcare and pre-school opportunities,” the IMF said.

Updated: January 19, 2022, 3:00 PM