May 2, 2021
Why Are We Hearing About a Labor Shortage?
Many businesses are reporting difficulty in finding workers. I hear this from business owners whose judgement I trust. I also read about it on social media, here in Indiana and around the country. These reports don’t square with the data that show very large numbers of unemployed. There are more than 130,000 fewer workers in Indiana than in February 2020. So, one would imagine there are plenty of available people to take open positions. There are a few possible explanations for the feeling that there is a labor shortage.
One of the most popular arguments is that government benefits, especially the generous CARES Act supplementary unemployment payments, cause people to avoid work. That is surely true for some workers, but the notion that this is widespread is just not supported by the evidence.
First, the benefits are generous, but temporary. There’s just not a lot of evidence that workers make long-term decisions about work based on short-term benefit programs. Second, the program expired in a few states, including Indiana, late last year as President Trump delayed signing the extension bill. That experience didn’t cause an increase in employment that would be consistent with workers going back to work as benefits end.
The biggest argument against benefits as the leading barrier to employment growth is data on help wanted ads. First quarter 2021 help wanted ads in Indiana were only about 7.0 percent higher than the same three months of 2020. Keep in mind, the economy entered recession in February 2020, and were already recession-like by early 2019. Not only that, but employment crashed in late March 2020 due to COVID. As of three weeks ago, there was just no evidence of a spike in hiring.
Moreover, there is little secondary evidence, beyond help wanted ads, that businesses are even trying to increase hiring in any meaningful way. Indiana has created only 30,000 new jobs since September, and only 6,000 so far in 2021. At the rate of job growth so far in 2021, it will take six years and two months to return to February 2020 levels of employment. That’s June 2027 if you are wondering.
Still, with few jobs being created, it seems more likely that jobless Hoosiers would be scrambling for these scarce opportunities. That makes stories about a labor shortage more worrisome. What else could be occurring?
Joblessness during the COVID downturn was almost wholly concentrated among low-wage workers. Employment levels for workers with a college degree have climbed back to 2019 levels and are likely to fully recover by year’s end. Employment for workers with only a high school degree are lower than at any time over the past 30 years for which we’ve been gathering monthly data.
The demographics of joblessness suggest many workers may be training for better jobs. This could take a year or more, and would explain the experience employers have with fewer available workers. One of the few good things to come out of this pandemic would be a cohort of workers with better job skills. Still, college and workforce training programs haven’t seen enough of an enrollment spike to account for the reports by businesses of difficulty finding workers.
Remote work may also play a role. I personally know three people who’ve started remote work in the past few months that replace local jobs. So, maybe displaced workers have concentrated their job searches on finding jobs they can do at home. These jobs often have more flexible work conditions, so may be very appealing. Over the past 30 days (mid-March to mid-April), 3,082 jobs with ‘remote’ in their description were advertised in Indiana. Nationally, 7.5 percent of open job applications have ‘remote’ in their description. So, employees might be finding work, just not at the occupations and firms they left during COVID.
Many of the jobs lost to COVID were in occupations with considerable exposure to the virus. The risk of returning to these jobs is not trivial, and many workers might be unwilling to return to work at the same place, for similar wages. So, some firms might find themselves facing higher wage costs to rehire the same workers.
Another explanation is that many displaced workers may have chosen not to return to work. In the 13 months since the recession started, the labor force has shrunk by 3.89 million. Overall, the Labor Force Participation Rate is lower than it was last summer, suggesting a significant share of people who were working last year aren’t actively seeking a job today. Importantly, these people should not be counted on the rolls of those currently receiving unemployment benefits. However, the source of collecting data on the unemployed differ, so there is surely some overlap.
In recent decades, the dwindling Labor Force Participation Rate has been worrisome, occurring disproportionately among young, poorly educated men. Over the past year, the rate for men has dropped more than for women, but it remains much higher for men. The reason for concern about this is that women leave the labor force primarily to care for children. The experience of young men is different and far less productive.
Child care is probably the most productive non-market exchange within the economy. If adults are voluntarily choosing to work less and remain home to raise children, it is not a policy problem. In fact, it may well generate significant benefits. It is too early to know if this is happening in large numbers, but it seems certain that an event as significant as this pandemic would result in these types of changes.
Workers may also elect not to work through more than child care duties. Many workers might have retired early, while others might be attempting to remain in school longer. These are not uncommon during a recession. Likewise, the family disruptions of the past year, which also caused a loss of close to 575,000 lives, may have altered the work interest of many Americans. The value of limited time with family may be worth more than the additional earnings from a job for some family members.
Finally, labor markets adjust imperfectly to quickly changing conditions. Businesses and workers might have very different expectations about pay, working conditions, benefits and scheduling. A job isn’t created because of an ad, but because a worker and employer agree on wages, schedules and work conditions. A fast recovery, which we are anxious to see, could contribute to the sense that there is a labor shortage.
As of early May 2021, it is clear many businesses feel starved for new workers. It is not at all clear why that is, and whether or not it is a transient matter, or longer-term consequence of COVID.
About the Author
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