- The US economy appears to have a labor shortage on its hands as businesses are having trouble attracting workers.
- But there are reasons – improving vaccination rates, childcare reopenings, the end of boosted unemployment – to believe the job market imbalance won’t last long.
- Given the temporary nature of the issue, the Federal Reserve shouldn’t overreact.
- This is an opinion column. The thoughts expressed are those of the author.
- See more stories on Insider’s business page.
Until recently, enthusiasm was building in the economic recovery. But a series of dark clouds have come together all at once to darken the outlook for the US economy and they all point to one thing: inflation.
The most hotly debated topic is the question of the labor market. The weak April jobs report and reports from firms citing difficulties finding workers and mounting wage pressure have people worried about labor supply shortages. In turn, some economists are swinging from the optimism of accelerating demand to the pessimism of binding supply. As I will argue, first, the fretting over the job market and labor shortage will prove to be short-lived and second, the Federal Reserve should not change course to address the concerns – interest rates are too blunt a tool.
Yes, there is a labor shortage but it will pass
I believe there is enough evidence to conclude that there is indeed a shortage of workers for companies to hire. Since last summer, the percentage of prime-age workers – people aged 25 to 54 – in the labor force (employed or actively looking for employment) has not budged and is still stuck 1.7 percentage points below its pre-pandemic peak. At the same time, total job openings have surged by just over two million, indicating strong demand from businesses for labor. There is plenty of anecdotal evidence of firms boosting pay: McDonald’s, Chipotle and Amazon among them.
These are 2019 like headlines in 2021. The only difference is that the unemployment rate was below 4% then and it is above 6% now. This would indicate a temporary increase in NAIRU, which is not surprising in the early stages of recovery. There was a similar phenomenon following the financial crisis. The initial recovery always involves a “clearing out of the brush” so to speak – the reallocation of resources often results in short-run labor market frictions.
But these frictions will be just that, short. In the coming quarters, there are good reasons to expect labor supply constraints to ease:
- There is less fear of COVID in the general population. Believe it or not, we saw more people with a job, but not at work due to illness in April than we did on average last summer. As cases continue to decline, the spread of COVID is less likely to be a reason keeping people from attaching to jobs in the future. As Fed Governor Lael Brainard recently noted, the vaccinated share of the population increased notably from the survey week of the April payroll figures.
- Schools are likely to return to full in-person instruction in the fall. Now, just half of school districts are fully in-person. This might be impacting the attachment of parents to the workforce, especially mothers. The participation rates for women aged 25 to 44 has dropped a bit more than men. There’s some debate about how much of an impact school closures are having but I’d be surprised if the return of a normal routine did not bring with it some recovery in labor supply.
- The jobless benefits are coming to an end. This is the most contentious point, but there is some reason to believe these payments, critical safety nets during the worst of the pandemic, have now kept workers from attaching to jobs. After all, one reason for these programs was to bridge people over the pandemic by staying away from working. At any rate, there area slew of states endingthe boosted unemployment benefits early (covering about one-third of the labor force) and the program itself is over the summer. So, to the extent this is a big constraint, it will be fading in the months ahead.
What to do about it? Stand pat.
I think this easing of labor supply constraints has a few important implications, particularly for the Fed.
Many investors and economists are anxiously awaiting speeches from Fed officials, especially Chairman Jerome Powell, about whether these constraints and wage increases could lead to a hike in interest rates. These breathless observers should exhale. While there is some evidence that a tapering of asset purchases is coming into focus (“thinking about thinking”), rate hikes remain in the distance.
More importantly, what exactly is the Fed supposed to do about labor constraints? Lift rates and cool demand for labor? In the same way that much of the rise in consumer prices has been concentrated in items related to supply chain disruptions or the economic reopening, the Fed will likely view the recent supply side pressures in the labor market as temporary. Thus, the Fed’s best strategy is to do nothing.
In short, I think the months ahead will alleviate some of the supply pressures in the labor market. While the increased unemployment benefits are the most contentious, the fact that COVID is going away should bring many people back into the workforce. This positive labor market supply shock will give the Fed some breathing room to bide their time.
Of course, no outlook is without risks. In this case, there is some chance that the pandemic has accelerated the retirements for many. The participation rate for those aged 55 and over has declined 2 percentage points against pre-pandemic levels, a bit more than prime-age workers. If we assume that the participation rate for those aged 55 and over stays flat, the participation rate for those aged 16 to 24 would need to rise by roughly 7 points from its current level to push the total participation rate back to its pre-pandemic level – in other words, by quite a lot.
But, for now, I see more evidence that the labor supply problem is temporary than permanent. The next couple of quarters should be better.