Omicron Variant Looms Over January Jobs Report

But some economists think payrolls declined because of illnesses among workers without paid sick leave. A drop in employment would snap a yearlong string of job gains that occurred amid widespread reopenings and strong spending from consumers armed with government stimulus and pent-up savings.

The payrolls number comes from a Labor Department survey of businesses. A separate survey of households released in Friday’s report determines the unemployment rate. Economists expect the jobless rate to reflect minimal damage from Omicron because of how the survey counts absent workers. They expect that the unemployment rate held steady at 3.9% in January, a historically low level.

“The January employment report will be a temporary setback for the labor market,” said Sarah House, senior economist at Wells Fargo. “It really has been impacted by Omicron and therefore isn’t giving us the full story of where the labor market is heading over the coming months.”

Many economists are projecting the labor market will bounce back later this year, as the virus subsides. Workers who were sick will be able to return to their jobs, and employers eager to hire will have fewer disruptions to confront, they say. Plus, there are numerous signs the labor market remains tight, from elevated job openings and worker turnover to low numbers of unemployment claims.

Still, the pandemic has triggered higher inflation, challenging policy makers and their efforts to support growth. The Federal Reserve signaled it would begin steadily raising interest rates in mid-March to bring down inflation.

Economists expect economic growth and job growth to cool this year, as many of the factors that buoyed spending in 2021—including reopenings, fiscal stimulus and vaccinations—disappear.

The economy will be more reliant on a resurgence in supply. A pickup in labor-force participation, or the number of people working or searching for work, is expected to be a key driver behind job growth this year. The labor-force participation rate fell sharply at the beginning of the pandemic and, at 61.9% in December, remains well below the pre-pandemic level of 63.4%.

Omicron is affecting the economy through a different mechanism than previous virus waves, which triggered government restrictions on business and a pullback in consumer demand. By comparison, Omicron sent millions of sick workers into quarantine, exacerbating labor shortages at restaurants, airlines and public-transit systems.

Some economists estimate that in January’s jobs report as many as 5 million workers could be counted as employed but absent from work because of sickness, up from 1.7 million workers in December. Employee absences are adding to companies’ pandemic-related challenges, including roiled supply chains.

Being a plant manager is the toughest job at paint supplier PPG Industries, chief executive Michael McGarry said in a fourth-quarter earnings call on January 21.

“They wake up in the morning, check their phone to see how many people call off sick, and then they get to work,” he said. “Before they even have a morning meeting, they’ve had to overcome a number of issues.”

Those include dealing with delays in the receipt of raw materials and other supply-chain disruptions, such as truckers not picking up finished products, Mr. McGarry said.

The total number of shifts worked by people at U.S. businesses decreased 5.1% in January, according to the payroll-services company Ultimate Kronos Group. The decline in workforce activity is the largest since the pandemic began. The surging Omicron wave hit the retail, hospitality and food-service sectors hardest. Shift volume in those industries declined about 7% in January from December.

There are signs that the labor-market squeeze from Omicron is easing. Jobless claims fell to 238,000 last week after surging to nearly 300,000 in mid-January. Workers in many major cities are starting to re-enter offices after a winter lull, according to Kastle Systems, a security firm that monitors access-card swipes.

February job gains “could potentially be very strong,” Aneta Markowska, chief economist at Jefferies LLC, said. The February report will capture employment gains tied to new hiring and the return of workers following the Omicron surge, including cafeteria workers at Ms. Markowska’s office building this week after a nearly two-month shutdown.

H&R Block Inc., a tax-preparation company, is in hiring mode, as tax season gets under way.

“Everyone has got to get their taxes done,” said Tiffany Monroe, H&R Block’s chief people and culture officer.

The company has been able to retain tax professionals, such as certified accountants and tax advisers, from previous years because they have close relationships with their clients, Ms. Monroe said. But H&R Block is finding it more challenging to retain and hire entry-level receptionists to greet clients and take calls across its offices.

“We’re definitely going after the same people that a lot of the other retailers are going after,” said Ms. Monroe. H&R Block is emphasizing to receptionists that they can advance into a leadership position or a tax-professional job, she added.

Many workers are reaping their largest pay gains in years, as companies compete for a limited pool of workers. Wage growth—at nearly 5%—is much stronger than the average of about 3% before the pandemic hit.

“The labor market is as tight as we have ever seen it,” said Luke Tilley, chief economist at Wilmington Trust Investment Advisors.

There are roughly 60 unemployed people for every 100 job openings, meaning just about anyone who wants a job can find one. Still, that doesn’t mean everyone will have a job. There are about 2 million fewer Americans working or looking for a job than before the pandemic struck. Child-care shortages, early retirements and worker concerns of infection are holding back job searches.

Workers could have more incentive to return to the labor market, as their savings dwindle and the health situation improves, economists say. The prospect for a big paycheck could also draw more Americans off the sidelines.

Write to Sarah Chaney Cambon at [email protected] and Gabriel T. Rubin at [email protected]