Working Paper

Pandemic labor force participation and net worth fluctuations

Abstract: The U.S. labor force participation rate (LFPR) experienced a record drop during the early pandemic. While it has since recovered to 62.2% as of December 2022, it was still 1.41 pp below its pre-pandemic peak. This gap is explained mostly by a permanent decline in the LFPR for workers older than 55. This paper argues that wealth effects driven by the historically high returns in major asset classes such as stocks and housing may have influenced these trends. Combining an estimated model of wealth effects on labor supply with micro data on balance sheet composition, we show that changes in net worth caused by realized returns explain half of the drop in LFPR in the 2020-21 period and over 80% of "excess retirements'' during the same period.

Keywords: COVID-19; labor force participation; retirement; returns on wealth;

JEL Classification: J21; J26; D31;

https://doi.org/10.20955/wp.2023.010

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2023-05-01

Number: 2023-010