Abstract

To better understand the tight post-pandemic labor market in the US, we decompose the decline in aggregate hours worked into extensive margin changes (fewer people working) and intensive margin changes (workers working fewer hours). Although the preexisting trend of lower labor force participation, especially by young men without a bachelor's degree, accounts for some of the decline in aggregate hours, the intensive margin accounts for more than half of the decline between 2019 and 2022. The decline in hours among workers was larger for men than women. Among men, the decline was larger for those with a bachelor's degree than those with less education, for prime-age workers than older workers, and also for those who already worked long hours and had high earnings. The reduction in workers' hours can explain why the labor market is even tighter than what is expected at the current levels of unemployment and labor force participation.

Dain Lee and Jinhyeok Park are PhD candidates at Washington University in St. Louis. Yongseok Shin is a professor of economics at Washington University in St. Louis and a research fellow at the Federal Reserve Bank of St. Louis. The authors thank Juan Sánchez and an anonymous referee for constructive suggestions. They benefited from conversations with Justin Lahart, Megan Leonhardt, and Courtney Vinopal, and are grateful to Michael Hume for prompting them to address the divergent hours patterns between the Current Population Survey and the Current Employment Statistics.

Introduction

Throughout 2022, US labor markets remained stubbornly tight despite the Federal Reserve raising interest rates rapidly in an effort to cool demand and tame inflation. The latest unemployment rate stood at 3.4 percent as of April 2023. The demand for workers is still unusually strong, with the vacancy rate at 5.8 percent in March 2023, although it has fallen from the historically high levels of 2022. The tightness of the labor market has often been attributed to the decline in the labor force participation rate (see the references in Section 2.3. Indeed, the participation rate as of April 2023 is 0.7 percentage points below its pre-pandemic level in early 2020. But is this the whole story?

The aggregate hours worked of an economy can fall because fewer people work (extensive margin) or because those who work reduce their hours (intensive margin). In this article, we decompose the change in aggregate hours worked since 2007 into extensive  and intensive margin changes and compare their relative importance. 

Our main findings are as follows. First, the negative impact of the 2007-08 Great Recession on aggregate hours worked and the ensuing slow recovery through 2019 materialized almost exclusively along the extensive margin. However, of the 3 percent decline in annual hours worked per person (including those who do not work) between 2019 and 2022, more than half is accounted for by the intensive margin. That is, focusing only on the extensive margin (lower employment and participation rates) will underestimate the total decline in labor supply by more than half. 

Second, the decline in labor force participation is a continuation of a trend that existed before the pandemic. The most striking fact is the lower participation of young male cohorts without a bachelor's degree, whose participation rate is up to 7 percentage points below that of older cohorts at the same age. The Great Recession seems to be casting a very long shadow, even on those who were in their teens when it happened.
 
Third, the decline in hours worked per worker (excluding those who do not work) between 2019 and 2022 was larger for men than for women. Among male workers, the decline was larger for those with a bachelor's degree than those with less education and for prime-age workers than older workers. Furthermore, the hours declined by more for workers who already worked longer hours and had higher earnings.

Finally, circumstantial and direct evidence indicates that the hours reduction among workers is voluntary. In addition, although the reduction may have been caused by the pandemic situation, it is expected to persist.

Two labor market phenomena were popularized following the pandemic: the Great Resignation in 2021 and Quiet Quitting in 2022, both of which appear in the title of this article. Although some of the people who quit as part of the Great Resignation did exit from the labor force (extensive margin), many others simply found a new job, possibly with an employer offering more flexible work arrangements and less demanding hours (intensive margin) as well as better pay. Those who engage in quiet quitting do not actually quit or leave the labor force but instead stop placing excessive value on work and seek better work-life balance, including fewer hours (intensive margin). Our analysis helps us understand the role of both phenomena in the tightening of the labor market.

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