Which Workers Left the Labor Force Post-COVID Recession and Why?: Filing, Tax Credit Take-Up, and Labor Force Engagement by Occupation

The COVID-19 pandemic caused a sharp initial rise in unemployment, followed by an unexpectedly tight labor market. Using a panel of tax data containing newly assembled information on worker occupation, we document persistent labor force exit, especially among low-income and low-skill workers. Low-skilled unmarried men are by far the most likely to exit, reinforcing recent concerns regarding the economic and social engagement of this group. Contrary to prevailing theories, we find little evidence that school closures, virus exposure, stimulus payments, or unemployment benefits explain these exits. Nor is the exit explained by additional upgrading of occupations or firm quality. Individuals who leave the labor force do not (on average) make up the missing income; however, self-employment income replaces roughly a quarter of the lost W-2 income. The facts suggest that the willingness to work for low pay decreased and preferences for leisure and job flexibility increased among a large set of workers who have found ways to get by with less income. These results have implications for tax policy, fiscal projections, and labor market dynamics in the post-pandemic economy.