Is the Tight Labor Market Due to Fewer Workers — or Fewer Hours Worked?

Over the past year, the Federal Reserve has rapidly increased interest rates to bring inflation under control. As a result, inflationary pressure has begun to ease, and the economy has shown signs of softening in recent months. However, the labor market remains strong — or “out of balance” according to Fed officials. Basically, demand for labor is outstripping labor supply. But why? The answer, according to my research, is not primarily that fewer people are working. It’s that those who do work are choosing to work fewer hours.

Explaining the tight labor market

The latest numbers show that employers added more than 517,000 jobs to payroll in January, seasonally adjusted — nearly three times the average forecast of 187,000. The unemployment rate ticked down to 3.4% , its lowest level in 50 years. Meanwhile, there are nearly two job openings for each unemployed worker as of December 2022.

How does the labor market remain so tight, despite the Fed’s efforts to slow the economy? Economists have pointed to the shrinking pool of workers. 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 pre-pandemic but aren’t now. That reflects not only Covid-induced early retirement but also a longer-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 fewer hours?

The supply of labor has two parts: the number of workers and the number of work hours per worker. Economists tend to focus on the number of workers, and my research shows that they are usually right to do so, as labor supply mostly adjusts along that margin. As a general rule, the labor market is tighter or looser because more or fewer people are employed or looking for jobs.

However, the recovery from the pandemic has been an exception. Total hours worked in the U.S. fell from 2019 to 2022 — by the equivalent of 33 fewer hours a year per person. Our estimate (described in more detail in the paper) is that fewer people working accounted for 15 of these, while the rest was due to workers reducing their hours.

So employed Americans are working less, on average — but which ones? The reduction in work hours was more pronounced among men ages 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 earnings (making more than $140,000 per year) reduced their work hours by an hour-and-a-half a week, from 44.7 hours in 2019 to 43.2 hours per week in 2022. By contrast, the bottom 10% of male workers by earnings (making less than $22,000 per year) worked more hours, 23.4 hours per week in 2022, compared with 22.6 in 2019. Those who worked long hours reduced their hours the most. The top 10% of male workers by work hours logged at least 50 hours per week in 2022. This is a lot of hours, but in 2019 the cutoff to be in the top 10% of male workers by hours worked was 55 hours a week.

Why high earning men worked fewer hours

Why did workers reduce work hours? The first question is whether it was voluntary or involuntary. Given the excess demand for workers, it is unlikely that workers were forced to cut back on their hours. It is also unlikely that these workers were not able to work as much as they wanted because of Covid-related illness or child care issues. For one, the drop in hours came between 2021 and 2022, after the recovery between 2020 and 2021, so it coincided with the disruptive impact of the pandemic abating. For another, the hours fell the most for prime-age men, who are less affected by illness than older workers and spend less time than women on child care. Put another way, if illness or child care were the primary drivers of fewer hours worked, we would expect to see older workers and prime age women decreasing their hours more so than prime age men. In fact, other survey data showed that workers’ desired hours of work declined, providing direct evidence that the hours reduction was voluntary.

What did workers do with the time freed up from work? The latest available figures from the American Time Use Survey provide a clue. It turns out married men are the ones that reduced their work hours the most, and they spent more time socializing and relaxing.

These findings suggest that the pandemic experience led people to reassess their life priorities and recalibrate their work-life balance in the direction of fewer work hours. Maybe this reassessment was specific to high-earning men but more likely it was a wider consequence of the pandemic, but high-earning men were most able to quickly adjust their hours to this new preference.

If this is the case, the hours reduction may represent a permanent shift, keeping the labor supply low and the labor market tight, which will sustain workers’ bargaining power to opt for fewer hours.

What are the broader implications? I see two longer-term gains for workers. First, a better work-life balance will help workers improve their mental and physical health, which may allow them to be happier and possibly more productive, even, and to work into older ages if they so choose. Second, as men working long hours reduce their hours, women, who typically work fewer hours and do more non-market work due to societal norms, may choose career paths that used to demand long hours, improving gender inequality especially at the top end of the earnings distribution.

For employers, these findings re-affirm that workers, especially high-skill ones, value flexible work arrangements. To recruit and retain talent, it will help to offer flexibility, including remote work options. Businesses should also re-evaluate their workflow and remove wasteful activities (for example, pointless meetings), to help workers make the most out of their reduced, flexible hours.

Finally, the reduction in hours per worker has important implications for monetary policy. The reduced hours per worker and hence labor supply imply that the natural rate of unemployment may be lower than commonly thought. That means taming inflation may not require unemployment to rise as much as some policymakers think. However, our better understanding of why the labor market is out of balance doesn’t change the fact that the tight labor market will continue to put upward pressure on wage and hence price level, complicating the Fed’s fight against inflation.