We often see news stories that explain that business owners can’t find enough employees.

In June, President Biden announced a plan for a simple solution. According to reports at the time, he placed the solution squarely on employers: “Pay them more,” Mr. Biden said in a stage whisper for dramatic effect.

“They (businesses) are going to have to compete and pay people a decent wage.”

This sounds easy enough if we don’t consider higher operating costs, supply chain issues and profit margins. But even if we ignore those real-world concerns, more money isn’t going to fix the problem.

Economists at the Federal Reserve identified a worker shortage, and more money isn’t the entire solution.

The labor force participation rate — the number of people willing to work — fell from 63.4% in January 2020 to 61.6% in the most recent data. If the participation rate was at pre-pandemic levels, there would be about 4.2 million more people in the workforce.

While some left the workforce to care for children or family members, others retired.

Early Retirement Contributed to Worker Shortages

Retirees represent a significant and growing portion of the population as baby boomers born between 1946 through 1964 exit the workforce. While the number of retirees would have increased under normal conditions, the pandemic accelerated the trend. This is shown in the chart below.

Fed economists extrapolated the existing trend and compared that to the actual number of retirees. The gap between those two lines explains why higher wages won’t be enough to solve the worker shortage.

There are 2.4 million more retirees than there would have been without the pandemic. That’s 57% of the 4.2 million who left the workforce since the beginning of 2020.

While some retirees may be lured back to part-time jobs, the shortfall of millions of workers presents a challenge to the economy. It means wages will continue to grow and so will inflation, as prices move higher to match and even exceed the gains in wages.

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Michael Carr is the editor of True Options Masters, One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.

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