The Shortage of Labor May Last for Years

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Jun 25, 2021

In May, the unemployment rate fell to 5.8% as employers added 559,000 jobs. At the same time, the number of unfilled positions soared to 9.3 million, the highest they have been since the start of the century. Meanwhile, the number of job-seekers per job opening plunged to 1.1, from 5 in April of 2020. The sectors with the largest number of openings being healthcare, leisure and hospitality, and professional services. 

This shortage of workers is likely here to stay. 

A survey from the U.S. Chamber of Commerce showed that 61% of those unemployed are in no hurry to find work. Additionally, 30% say they do not expect to return to work this year, with nearly half of those (13% of the total) saying they never plan to return to work. 

Extrapolated to 9.3 million unemployed, that’s an estimated 2.8 million people who will remain on the sidelines this year, 1.2 million of whom never expect to return to work. 

The reasons are by now familiar to most, expanded unemployment benefits being a key reason. Indeed, 28% of respondents in the same survey agree that “[T]here are a lot of people who are not looking for work because they can do almost or just as well collecting unemployment benefits.” 

This is borne out by estimates that show 76% of those eligible for the expanded benefits could get at least as much for being jobless as they’d earn by working. But even when the benefits end in September, other factors may continue to limit the availability of labor.

Churn Is Increasing

More workers are quitting their jobs than at any time in over 20 years. The quit rate (share of workers leaving jobs) jumped to 2.7% (4 million workers) in April. And this is likely to continue because workers are increasingly optimistic about their future. 

In one survey, a quarter of workers say they plan to look for a job with a different employer as the threat of the pandemic decreases. Millennials are the most interested in leaving their current employers — 1 in 3 plan to do so, compared to a quarter of Gen-Xers and only 10% of Boomers. 

Granted, a high churn rate indicates a healthy labor market, but it creates more job openings at a time when jobs are already difficult to fill. 

At the same time, workers leaving their employers rank flexible work schedules, mobility opportunities, and remote-work options as their top reasons for leaving. Seventy-three percent say employers should continue to offer and expand remote-work options even after the pandemic is over; 42% say if their current employer doesn’t continue to offer remote-work options long-term, they will look for a job at employers that do. 

The pandemic has altered the labor force in ways that mitigate against a return to what it was earlier. Many workers who lost their jobs have changed their status: 22% now work part-time, 1 in 10 have become self-employed, and another 1 in 10 have retired. Notably, more than 1 in 4 over the age of 45 who became unemployed during the pandemic have now retired. The shrinkage in the labor force as a result is not likely to reverse anytime soon.

Worsening the Shortage

The government’s response to this situation is something of a head-scratcher. The much touted American Jobs Plan proposes to “create millions of good jobs” to draw workers into the labor force by spending $1.7 trillion over 10 years on improving infrastructure, funded by increased corporate taxes. But an independent analysis found that the plan could actually result in there being 101,000 fewer jobs over the same period. 

How can this be? The analysis finds that while the effect of the infrastructure spending would create 61,000 (not million) jobs, the increased taxes would result in less money being available for corporate investment, which reduces GDP by 0.5% and eliminates 162,000 jobs.  

There’s also the PRO Act (Protecting the Right to Organize) recently passed by the House, which is intended to boost unionization by making it easier for unions to organize workers. That is a strange response to a labor shortage since unions, by definition, limit the supply of labor. 

And lastly, the Labor Department has rescinded a rule that made it easier for employers to hire gig-workers, further limiting options available to find employees.

The Impact on Employers

As with any shortage, price has to rise before supply will meet demand. That is what is happening as evidenced by rising wages. 

McDonald’s has announced it would raise wages for more than 36,000 hourly workers by an average of 10%. Amazon said it will hike wages by up to $3/hour for more than half a million of its U.S. employees. Bank of America will raise the hourly minimum wage of its U.S. employees to $25 by 2025. Wage growth averaged 3% in May and compensation costs for private industry workers increased 2.8% over the year. That may not seem like much, but after the recession of 2008-09, both measures were below 2%.

But we’re also experiencing rising inflation, now at 5%. Inflation effectively reduces the value of any wage increases by cutting spending power. That creates demand for still higher wages, and so on. We are likely at the start of a wage-price spiral, and there will be sustained upward pressure on wages until such time as inflation recedes. 

The combination of job openings, worker shortages, and inflation is unprecedented. Some economists describe the situation as being “transitory.” What that means is anybody’s guess.