Wilmington Trust has published a report of its annual capital markets assumptions, this year putting a spotlight on several macroeconomic trends that have been either caused by or significantly accelerated by the coronavirus pandemic.

Among these themes is the emergence of a historically tight labor market—wherein the number of job openings far outpaces the number of available workers. According to Wilmington Trust’s market experts, this trend is “badly out of sync with the overall economic cycle,” which in other ways appears very promising. As the report spells out, this severe labor market shortage, more than any other economic factor, is accounting for a massive breakdown in the normally well-oiled global supply chain.

Consumers and economists alike can see disruptions at every node of the supply chain, from production to transportation and distribution, and these are straining businesses globally. A more subtle factor at play, the report suggests, is the way labor participation—and how firms deal with global resource disorder—will likely determine the path for inflation, which is “the critical consideration” for investors, employers and economies as a whole in 2022.

“By nearly any measure, the U.S. labor market is sending the customary signals of an economy deep in the deceleration phase,” the report explains. “Job openings are at record highs, fast food and retail outfits are offering hiring bonuses, and large corporations from retail to banking have substantially raised their minimum wages. These clear signs of labor market tightness are perhaps counterintuitive given the relative youth of the economic recovery—not yet two years young—coupled with the monumental scale of job losses during the pandemic.”

Wilmington Trust’s analysis concludes there are multiple forces impeding the return of workers and, to varying degrees, the firm expects these forces to abate in 2022 and conditions to ease. In its analysts’ view, the main drivers holding back labor force participation are accelerated retirements, broad skills mismatches, workers making serious and potentially durable lifestyle reassessments, and the lingering effects of the pandemic.

As the report explains, the labor market in an economy that is emerging from a recession or depression typically lags the economic and market recovery.

“For example, in the previous cycle, the economy bottomed out in June 2009, but the labor market kept worsening for more than six months,” the report notes. “Job losses continued until March 2010 and the unemployment rate did not decline significantly until the summer, a full year after the recession ended. [Likewise,] the unemployment rate peaks for the 1990 and 2001 recession periods came long after the recessions had ended.”

Wilmington Trust calls this “a familiar and reliable dynamic,” as employers are reticent to hire until the recovery is well-established. As such, in a “normal cycle,” it takes years for the unemployment rate to grind lower and for wage pressures to build.

It does not take a skilled economist to recognize that this cycle is different. The unemployment rate fell to 4.2% as of November, and there are reasons to believe the official unemployment rate is even understating the degree of tightness in the labor market, due to low participation. These factors imply that, not only has the labor market never been this tight, but never before has a tight labor market happened this quickly after a downturn. In hard numbers, government data shows the overall labor force is down by 2.4 million workers as of November, and much of the decline, especially for the upper age brackets, is likely permanent, according to Wilmington Trust.

“The long-anticipated retirement of Baby Boomers is a structural phenomenon, but it has been hastened by cyclical forces, including financial markets,” the report suggests. “Ironically, the rapid recovery of equity markets (and, by extension, retirement accounts) worked hand-in-hand with COVID fatigue to quicken the retirement of the largest U.S. generation. … Once financial markets recovered, retirement accelerated.”

This dynamic has created a vacuum, the report explains, and many employers are seeing mid-level employees either moving up quickly or being hired away by competitors. The vacuum is also horizontal across sectors, the report finds, with former restaurant staffers, for example, being scooped up to work in other industries, creating novel challenges for refilling positions.

“We expect markets and retirement accounts to perform well in 2022, so we do not anticipate that recent retirees will rush back in,” the report says. “But a host of factors could entice some to return, including a period of market weakness, higher wages or a realization that retirement funds will prove insufficient.”

Ultimately, with the demand for talent so far outstripping supply, and a third of U.S. workers considering a job change in the next year, employers are being forced to pay more attention than ever to their workers’ expectations and desires, as well as their emotional and physical well-being in the workplace. Together, these trends are redefining the workplace benefits market.

The full text of the Wilmington Trust report is available here.