Betsey Stevenson, Former Labor Department Chief Economist, joined Yahoo Finance Live to discuss the state of the labor market and her outlook heading into 2022.

Video Transcript

BRIAN SOZZI: We're going to talk more jobs here. Let's bring in Betsey Stevenson, a professor of public policy and economics at the University of Michigan. She also served as a member of the Council of Economic Advisor under President Barack Obama. Betsey, always nice to see you. So as we look back on the labor market this year, what has surprised you?

BETSEY STEVENSON: Well I think a lot of things have surprised me. But in one sentence, what surprised me is how quickly we really have recovered. And that is the glass half full story. But I mean, you just heard a description of just a enormous demand for workers. And a lot of people didn't see that coming. If you talked to people when this pandemic first started, they were worried that employers would be looking to automate and to replace workers with technology because technology doesn't get COVID.

And in fact, what we've seen is just record job openings. If we filled every single job opening that's out there right now, we'd have employment that was not just well above where we were pre-pandemic, but well above what anyone predicted pre-pandemic. So that recovery and employers wanting to hire workers is there. The challenge is that we still have just a lot of uncertainty going on in the labor market. A lot of what economists talk about is churn, people who are exiting jobs more frequently than they used to, exiting the labor market more frequently than they used to, entering jobs and entering the labor market more frequently.

So that's just a lot of turmoil that's going on underneath that good news story.

EMILY MCCORMICK: Betsey, this is Emily here. You talked about the near-record number of vacancies we're seeing across the economy right now. Why aren't workers coming back faster?

BETSEY STEVENSON: Well I think it's not really about workers not coming back faster. If you look underneath the data, one of the things is that we still have an elevated rate at which people are leaving the labor market. So every single month, millions of people enter the labor market, and millions of people exit the labor market. Now things just aren't going right in their family, or the job, they lost their job, and they didn't see another one. So they left the labor market. We're still seeing elevated exits among some people, particularly lower educated workers.

So workers without a college degree are still exiting at very high rates. And I think one of the things we want to do is slow the exit rate down, not just speed up the entrance rate. You were focused on the entrance rate. Now where should we be focused on the entrance rate? Well, it turns out that's one of the big problems we have with older workers. So some researchers have shown that we didn't actually see a big increase in the number of older workers retiring. What we've seen is a big decrease in un-retirement.

In a normal economy, people retire, and they change their mind, and they take on some other kind of job. What we've seen with COVID is older workers are not reentering the labor market. They're not coming back. And I think that is because of the risk of the virus is keeping some workers, particularly older workers, from wanting to come back into the labor market.

I think one of the reasons we're seeing still that high rate of exits is not just about workers not wanting to work, but the rate at which they're actually losing their jobs. Any time somebody loses their job, they're at a high risk of leaving the labor market. And we are still seeing that high rate of jobs letting workers go because of all the turmoil underneath the economy due to COVID. So restaurants just figuring out they can't make it, or hotels not getting the customers that they need, or retail stores realizing that they were doing better online. They end up letting a lot of workers go. And those workers are at a higher risk of exiting.

BRIAN SOZZI: And Betsey, isn't the other problem here, we have not addressed the core issue of child care. And I'll use a family member as example. She had to leave the workforce and care to her three young kids during the pandemic. And now because of that, or just the fact she's no longer working, her path to the workforce is not exactly clear right now. How does this get solved?

BETSEY STEVENSON: Yeah, well there is a little bit of a chicken and the egg problem here because we don't have all of the childcare workers back. And in fact, we're still missing roughly one in 10 child childcare workers. We're also actually missing a lot of nursing home workers. So it's not just childcare. It's also care for adults who need care or elder care. And what we have is people who are providing this care at home. And because they're providing the care at home, they're at an increased risk of not being able to take on another job or do paid labor.

And so do we-- we got to hire people to be able to do those kinds of jobs if we want people to go back to other kinds of jobs. But we are having a hard time attracting workers into caregiving settings because caregiving jobs became riskier. They do come with a much higher risk of COVID now. And those have been our jobs that are lowest paying. And the lowest paying jobs are where we're seeing the biggest wage gains right now. So if you look at who is winning in the battle between increasing wages and inflation, lower wage workers are winning in that battle because that's who are getting the biggest wage gains.

That can be a problem though for families who are paying for child care and they just don't have what it takes to be able to pay for that more expensive child care that comes with paying a child care worker say, $15, $16, $17 an hour instead of $12 an hour. So you've got to pay the childcare workers more. But how do you pay the childcare workers more without charging the families more? You charge the families more. And then it can be hard to go back to work because you literally can't afford to work because of that high cost of child care.

And I think that's why you need a policy solution to the rising cost of care.

EMILY MCCORMICK: Betsey, speaking of wage gains you were mentioning earlier, we last saw average hourly earnings up 4.8% on a year over year basis in November. Is this pace going higher? And do you see wage increases feeding into continued inflation as we look ahead to next year?

BETSEY STEVENSON: Well I don't think that-- some people are worried that a shortage of workers is pushing up wages, which ultimately ends up pushing up prices. That's not really the wage price spiral though. I think one of the things people really worry about is everybody goes to their boss, and everybody says, look. Prices are up. I want a 4% raise. Otherwise, you're giving me a real pay cut, which is true. So I understand why they're making that request. And then if everybody gets that wage increase from their boss, you can start to see that pushing through more normalized, higher inflation than, say 2%.

But that's not what we're seeing in the data right now. What we're seeing is some workers are getting a raise and others are not. And the ones who are getting a raise tend to be the lowest wage workers, so those in the bottom 40% of the income distribution. And we're also seeing it coming from people who are changing jobs. So we're seeing the people who are moving to new jobs, to better jobs are seeing the big wage gains. And we're seeing people, particularly in the middle end and closer to the top, who are just sticking at their old job, are not getting as big of a pay increase.

So there's a little bit of redistribution going on there.

BRIAN SOZZI: Point well taken. Betsey Stevenson, professor of public policy of economics at the University of Michigan. Always appreciate you sharing some jobs analysis with us. Emily McCormick, always good to see you as--