MainStreet Macro: Where are the workers?

Last week, the May jobs report captured the attention of economists, policymakers, Wall Street and Main Street. We know where the jobs are.  

This week, we answer the other question that has plagued us this year – where are all the workers?   

With more than 7 million workers still sidelined by the pandemic, it’s hard to explain the growing number of companies that say they’re having difficulty hiring workers.   

Some analysts have pointed to enhanced unemployment insurance benefits, which they say might discourage workers from seeking jobs. 

Yet labor shortages are notoriously hard to define, especially now, when the lack of affordable child- and elder-care options, generous but expiring unemployment benefits, and ongoing health concerns also could be barriers to employment. 

Here are three things every Main Street business should understand about labor shortages. 

1. There is no standard definition of a labor shortage.  

Your garden-variety economist typically would say a labor shortage exists when demand for workers in a certain occupation or sector is greater than the supply of workers willing to do that job at the prevailing wage. 

By this definition, there’s no shortage of anecdotal evidence of supply constraints. Business owners across a variety of industries, from restaurants to manufacturers, have reported hiring challenges. The authority on regional economic conditions, the Federal Reserve Beige Book, was released last week. It references labor shortages 49 times in its 31 pages.   

While company reports are important, we can’t discount labor-market conditions such as strong employment growth for worker-starved sectors, higher-than-average wage growth, and low or falling unemployment.   

By these metrics, evidence of supply shortages is in short supply. 

2. Skill gaps might masquerade as supply shortages. 

Employers might be suffering not from an insufficient quantity of available workers, but from their insufficient quality.  

Companies might have to adjust their expectations and consider hiring people with less experience–or the wrong experience–whose skills can be updated for post-pandemic roles. 

Moreover, some industries, such as professional business services and financial services, were barely touched by the pandemic. These sectors still look very much like they did in February of last year, when the labor market was at a 50-year low.  Yet the competition for talent could be just as high. 

Another complicating factor in the quest for talent is the broader acceptance for remote work, which might limit a company’s ability to be selective in its local market. Workers now have access to a national or even global job market, all from the comfort of a comfy couch at home.  

3. Slow reactions by firms and workers might trigger temporary shortages. 

Early in the labor recovery, it was relatively easier for employers to call laid-off and furloughed employees back to work. Back then, nearly 80% of the unemployed were on temporary furloughs.  

That’s changed. A growing share of the unemployed–40% in May–have been out of work more than six months.  

To grow their headcount, employers are having to work harder to find people and build hiring pipelines. That takes time.   

One oft-recommended solution is to raise salaries. This rational action could be tricky to implement without also raising wages for current workers in the same job. This is especially true for lower-paying or low-margin industries where employers have less wiggle room on compensation.

For workers, it might take time to figure out where the good jobs are after a long absence from the labor market. For them, finding work could mean changing occupations or industries. That takes time, too.  

Then there are the Covid-related health and family challenges we discussed earlier. 

My Take 

The takeaway for Main Street is that labor market shortages might exist, but they’re likely to be temporary as firms and workers adjust to the post-pandemic labor market.   

A longer-term challenge will be how to help lower-paid workers, those that have been disproportionately hurt by the pandemic, transition into higher-skill, higher-paying jobs.  

Finally, the simple fact is that the economy has changed. Some jobs just won’t recover. For example, office-support workers are less relevant in a remote-work world and retail jobs are being swallowed by e-commerce.       

These jobs won’t be back in the same way. The workers that they leave behind have yet to reap the gains of abundant employment opportunities and might still well be asking, “Where are all the jobs?”