Talk of labor shortages is everywhere. That is to say, many economic commentators and policymakers have been bemoaning the supposedly alarming reports of a lack of workers to fill the jobs vital to the ongoing economic recovery. But there is always a chorus of employers complaining they can’t find the workers they need. We have to look beyond anecdotal reports to fully understand the data.
In the same way the price of a good increases when it is in short supply, a sign of a labor shortage is accelerating wage growth, accompanied by sluggish job growth. If employers badly in need of workers can’t attract them, they will raise wages to hire them away from other employers, who will consequently raise wages to retain their workers, and so on. When those measures don’t result in a substantial increase in workers, that’s a labor shortage. Absent that dynamic, you can rest easy.
As we sift through the latest jobs report, which showed the economy gained 559,000 jobs in May, three key findings rise to the surface. Bona fide labor shortages are not pervasive. The main problem in the U.S. labor market remains one of labor demand, not labor supply. And unemployment insurance — which many commentators say is keeping workers from returning to work — is bolstering the economy.
After the Great Recession, reports about employers unable to find the workers they needed were pervasive. Everyone from the U.S. Chamber of Commerce to the Obama White House joined in. Growth was slow because workers didn’t have the right skills for the available jobs, the story went.
But they had it completely wrong. At its peak in the Great Recession, the unemployment rate was 10 percent, but it ultimately got down to 3.5 percent — without a massively expanded national training program to accelerate skills attainment. What actually slowed growth? Insufficient demand for goods and services, which, in turn, meant low demand for workers — not that there weren’t enough qualified workers. It was a labor demand problem, not a labor supply problem.
This is also true today. Wage growth decelerated in May in most sectors. And in the vast majority of sectors, wages are growing solidly but not fast enough to raise concern about damaging labor shortages, given that job growth is also strong. Further, we still have 7.6 million fewer jobs than we did before Covid and there are large employment gaps in virtually all industries and demographic groups. The good news is that unlike in the wake of the Great Recession, today’s labor demand problems are likely to be resolved relatively quickly, thanks to the American Rescue Plan.
While we haven’t seen widespread labor shortages, there is one sector where wage growth points to the possibility of an isolated one: leisure and hospitality. For typical workers in this sector, which includes restaurants, bars, hotels and recreation, the current weekly wage translates into annual earnings of $20,714. With that figure so low, there is little concern recent pay increases will generate broader pressure on wages. In addition, wages in this sector plummeted in the recession and have largely returned to where they’d be if there were no pandemic. And, these job reports also take tips into account, which means that wage changes in this sector are likely driven by the impact of customers returning, en masse, to in-person dining. On top of all this: Rising wages in leisure and hospitality don’t appear to be stymieing job growth, which has been by far the strongest of any sector, contributing three-quarters of the total jobs added in the last two months.
Nevertheless, many commentators have ignored this evidence. They conclude not only that there are widespread shortages, but that the culprit is pandemic unemployment insurance benefits. Governors in 25 Republican-led states have now said they will no longer accept federal unemployment benefits. This will cut aid to nearly four million impacted workers, despite the absence of compelling evidence that jobless benefits are causing problems in the labor market. Instead, we have considerable evidence that it is helpful.
Low-wage sectors have seen swifter job growth than higher-wage sectors in recent months. This is exactly the opposite of what you would expect to find if unemployment benefits were keeping people from working. This is because pandemic programs, like the extra $300 weekly benefit, are worth much more to low-wage workers than to higher-wage workers. Unemployment insurance, then, is not hampering job growth.
Face-to-face service jobs have become far harder and riskier during the pandemic. A healthy labor market would compensate for that by offering higher wages.
But employers of low-wage workers typically have a great deal of power to suppress wages. Out of desperation, these workers often have no choice but to take any job no matter how bad the wages, unsafe the labor, or chaotic the schedule as they try to cobble together child care or elder care. Unemployment insurance isn’t keeping people out of the labor market en masse right now. But, when expanded benefits mean some individuals don’t feel the same pressure to accept a terrible job, that is what economists would call efficiency enhancing.
Finally, the 25 states cutting pandemic programs are weakening their own recoveries. The recipients of benefits in these states are expected to lose $22 billion in aid, and as a consequence these states will be foregoing an enormous amount of economic activity.
For lawmakers crafting policy that will shape the future of a recovery, affecting both the larger economy and the lives of those hardest hit by the recession: Look at the facts.
Heidi Shierholz leads the Economic Policy Institute’s policy team, focusing on labor and employment policies.
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