Why labor shortages aren’t going anywhere

Mitchell Hartman Aug 31, 2023
Heard on:
Pandemic disruptions and baby boomer retirements have created a mismatch between labor supply and demand. That has boosted worker pay, but employers might respond by investing more in automation. Joe Raedle/Getty Images

Why labor shortages aren’t going anywhere

Mitchell Hartman Aug 31, 2023
Heard on:
Pandemic disruptions and baby boomer retirements have created a mismatch between labor supply and demand. That has boosted worker pay, but employers might respond by investing more in automation. Joe Raedle/Getty Images

There are signs that the hot labor market is cooling — a bit. Job creation has been trending down, as have the wages posted by companies making new hires

But it’s still pretty hard for employers to find the job candidates they’re looking for and pay them the going rate. National unemployment’s at 3.5%, near a 50-year low. Plus, job openings still outnumber job seekers by about 1½ to 1.

Another way to put this: Following all the labor disruptions early in the pandemic, we have faced stubborn labor shortages for years during the economic recovery. That’s the case in multiple sectors, from the skilled trades to leisure and hospitality, from health care to high-tech. 

Add demographic shifts, especially an aging workforce, and those labor shortages could be with us for a while. 

From his office on the outskirts of Chicago, Jim Piper looked down on the shop floor of his manufacturing company, Matot — where about 40 workers cut, bend and weld sheet metal to make dumbwaiters and lift systems for commercial and industrial clients.  

“We’re fortunate to be as busy as we are, given the economic uncertainty that seems to permeate the news every evening,” said Piper. “We have a strong backlog of dumbwaiter and material-lift work for new retail locations, restaurants, health care and manufacturing — many of the new semiconductor plants that are being built across the U.S.”

That business is being juiced by the Joe Biden administration’s CHIPS Act, he said. But finding new skilled workers is a problem he thinks about every day.

“The crisis we could see coming”

“It’s probably my No. 1 issue: the so-called silver tsunami,” Piper said. “We have several employees on our shop floor that have been with us for over 40 years. Which is great — they’re the backbone of our manufacturing facility — but we recognize that we’re going to need to replace them soon.”

The demographic shift Piper’s preparing for in his business has been predicted for decades. “This was the crisis we could see coming,” said Joe Brusuelas, chief economist at RSM, a consulting firm focused on small- and medium-sized businesses. “The conditions that prevailed for almost our entire lives — excess supply of labor caused by the size of the baby boom — has now come to an end.”

“The onset of the pandemic, with the acceleration of the retirement of the boomers,” Brusuelas continued, “has created a confluence of events where we have a labor shortage that’s verging on a crisis, that’s going to cause big changes in firms, with respect to wages and flexibility, and public policy.”

Workers age 25 to 54 have largely returned to the workforce. According to the Bureau of Labor Statistics, that group’s labor force participation rate, or LFPR, was 83.4% in July 2023, up slightly from 83% in February 2020. But participation among older workers, those 55 and up, remains 1.7 percentage points lower than it was before the pandemic (38.6% in July 2023, down from 40.3% in February 2020). The LFPR for those 65 and over has fallen 1.5 percentage points.  

The COVID retirement surge

“Because of their increased vulnerability, we saw older workers during the pandemic leave the labor force,” explained Sharon Block, executive director of the Center for Labor and a Just Economy at Harvard Law School.

Block predicted more of the same could be in store. “If we see an upsurge in the pandemic or something unexpected with COVID, I think you would expect to see that dynamic of older workers leaving the workforce again accelerate.”

Brusuelas pointed out that some older workers who retired early in recent years might be prodded to un-retire and return to work — at least temporarily — out of economic necessity, perhaps driven by continuing inflation, dwindling savings or other financial setbacks.

“We know that two-thirds of the public doesn’t have $400 for a financial emergency,” he said. “Therefore, you’re going to have an ebb and a flow of those 55 and older reentering the workforce. But there’s not enough of them to make a difference.”  

That’s because as the years go by, the wave of retiring boomers will outnumber those who return to work by a bigger and bigger margin. 

A reframing of “labor shortages”

That surge in retirements means labor shortages are likely to persist, driving wages up in such industries as leisure and hospitality, health care, construction and manufacturing, said Teresa Carroll, CEO of California-based workforce management firm Magnit.

“In the skilled trades, the shortage is very significant,” Carroll said. “Nursing has gone through its increase in wages because of the post-pandemic, the aging of the population and the need for more health care workers.”

But are these labor shortages new? And are they really labor shortages?

After all, employers have been complaining about not being able to find qualified workers for decades, said Erica Groshen, who served as commissioner of the Bureau of Labor Statistics during the Barack Obama administration and is currently senior economics adviser at the Cornell School of Industrial and Labor Relations.

“With nurses, I don’t know of a time in my professional life that there hasn’t been a quote-unquote ‘shortage of nurses,’” Groshen said.

What some call an economywide labor shortage, Groshen argues, is more properly seen as a failure by employers to offer high enough pay to get workers off the sidelines.

It’s all about the money

“It’s not what economists would call a labor shortage. It is a period of time during which at least nominal wages, if not real wages, have to rise,” she said.

“We are coming off a period of about 50 years where the median American worker got essentially no increase in their real [inflation-adjusted] wages,” Groshen continued. “It’s only in the past few years that we’re starting to see a sustained increase in wages for the median American worker. So you could see that as catch-up.”

Brusuelas acknowledged that wage increases will be the best way for employers to attract and retain talent, at least in the short run.

“If you have a long-term labor shortage, that’s a positive shock in terms of nominal income for underrepresented groups that traditionally have a hard time accessing the workplace,” he said. “It’ll be easier to find a job, get higher wages and build wealth over their lifetimes. All undeniably good things.”

“But,” he added, “as those conditions prevail, there’ll be industries — such as leisure and hospitality, restaurants — that will find it difficult to attract labor to do those jobs.”

Brusuelas predicts employers will increasingly invest in automation and artificial intelligence to work around persistent labor shortages and keep their costs down. They’ll want to “meet demand without hiring additional people at higher wages, along with health care and pensions. This isn’t because [employers] don’t want to pay them.” It’s just that the workers are not there, Brusuelas said.

Solutions to the labor crunch

Brusuelas and Sharon Block of Harvard strenuously advocate for better public policy to boost employment among prime-age workers. That would be achieved through increased immigration and by expanding high-quality, affordable child care to free up more women with children to join the paid workforce.

Looking at the challenges he faces staffing his sheet metal shop, Matot President Jim Piper said schools, employers and nonprofits need to better prepare young people for the entry-level jobs he has on offer, starting at $18 to $22 per hour.

“We just need to get them trained,” Piper said. “Put shop classes back into high schools, provide vocational training, give them that basic set of skills using hand tools and power tools and understanding basic measurement techniques.”

Piper is confident he’ll find young people from Chicago-area schools to do this work, as well as the boomers they’ll eventually be replacing.

Production in progress at Chicago-based Matot. While businesses is booming, Matot President Jim Piper worries about finding new skilled workers. (Courtesy Piper)

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