Global Trend

 

As highlighted elsewhere, the global economy is facing an extraordinary logjam unlike anything seen since the late 1940s. The causes range from conventional warfare in eastern Europe to pandemic lockdowns in China to economically indefensible energy policies in the United States and the EU.

Internationally, these factors and an array of others are contributing to run-away inflation, production shut-downs and even looming food shortages. However, the most consequential factor creating problems for the U.S. economy is its inability to return to 2019 employment levels

Prior to the pandemic, the most recent jobs report from the Bureau of Labor Statistics would have had economists dancing in the streets.

In April 2022, payroll employment increased by 428,000; the average annual wage growth was 5.5 percent; and the primary unemployment rate stood at 3.6 percent.

That’s the lowest unemployment rate since 1969, excluding record lows we saw in the months immediately preceding the pandemic.

 

And things are even better for so-called “rank-and-file workers.” More than half of the employment growth came from just four industries: retail, manufacturing, transportation and warehousing, and leisure and hospitality.

As a result of this labor shortage, average annual hourly wages of all production and nonsupervisory employees rose by 6.4 percent, while those of transportation and warehousing workers rose by 11.2 percent and wages of leisure and hospitality workers rose by 12.6 percent.

Meanwhile, the March 2022 Job Openings and Labor Turnover Survey report (or JOLTS) showed the largest-ever number of job openings: 11.5 million. Compared to the 5.9 million unemployed workers, that suggests almost two open jobs for every person seeking employment. In other words, 7.1 percent of all the jobs in the economy are currently unfilled.

In the aftermath of the large-scale pandemic lockdowns, the number of people working at payroll jobs has grown by an average of 550,000 per month for the last 16 months. However, that still means that, compared to the pre-pandemic labor market, there are 3.1 million fewer people currently participating in the workforce.

However, such a simplistic pre-pandemic comparison isn’t meaningful, since it doesn’t include or address older workers’ retirements and younger workers joining the workforce over the last 19 months. Pre-pandemic trends suggest that the workforce should be around 5.75 million larger than it currently is. Former Treasury Secretary and Harvard University President Larry Summers estimates the number at 6.9 million.

From the standpoint of economic growth and inflation, if those people were working, the number of unfilled jobs would be 4.5-to-5.75 million rather than 11.5 million.

In turn, that would mean far more output and much lower wage pressure. Obviously, this would lower inflationary pressures even in the face of geo-political crises and faulty energy policy. What’s behind this labor force shortfall?

In an era of strong wage growth, surging inflation, and record demand for workers, we’re still seeing workers returning to the labor market at a glacial pace. For the business community and the broader economy, the fastest solution to the problem would be to rapidly expand immigration opportunities, which have been severely curtailed by pandemic-era policies. However, this is not politically tenable in the short or medium term.

So, addressing this problem means we need to focus on why Americans haven’t returned to work as you’d normally expect. As the pandemic began to wind down, analysts put forth three main explanations:

1) an aversion to being exposed to COVID-19

2) insufficient child care, and

3) overly generous relief programs.

For the most part, these considerations will continue receding in the rearview mirror.

First, with readily available vaccines and boosters, the risk of COVID-19 infection for the typical worker has been minimized. Similarly, avoidance of the vaccines which has kept at least 400,000 workers idle is becoming less of an issue as employer vaccine mandates are being dropped.

Second, most schools resumed in-person classes in the fall of 2021 and primary school children have had access to vaccines since November 2021. Furthermore, schooling interruptions associated with new COVID-19 variants have faded away. That means fewer parents need to stay home to take care of their kids. And,

Third, nearly all pandemic relief programs which would reduce a worker’s need for a paycheck have now expired.

But there’s still a marginal case that each of these explanations is still weighing on employment.

First, around 2.7 percent of the U.S. population (which represents up to 7 million potential workers ) is immunocompromised. Because they face a higher risk of severe illness from contracting COVID-19, that threat may still inhibit them (or their household members) from reentering the workforce.

Second, children under the age of 4 still can’t receive COVID-19 vaccines - causing some parents to keep their children away from group child-care services. It’s also quite possible that there is a bit of a chicken-and-egg problem, in which the reduced supply of child-care workers limits the amount of child-care services the nursery school industry can provide, thus making it harder for parents to return to work. And,

Third, some pandemic relief programs remain in effect, which may, at the very least, be indirectly reducing the labor supply.

For instance, the federal Emergency Rental Assistance (or ERA) program still has almost $20 billion out of an initial $46.5 billion to spend. Applicants can receive up to 18 months of rental assistance, including payments for previous and future housing costs.

Recipients can also reapply for additional assistance. March 2022 data from the Treasury Department show that the program distributed $2.2 billion to anywhere from 305,000 to 514,000 households.

Assuming that no household was double dipping in the two rounds of the ERA program, this averages out to a $4,200 payment per household per month. Meanwhile, anti-eviction programs have, until recently, enabled many homeowners to avoid making mortgage payments.

Similarly, the number of student loan borrowers seeking loan repayment relief has significantly increased since the onset of the pandemic. Specifically, the proportion of federal student loan borrowers opting for loan forbearance grew from under 10 percent to over 50 percent in 2020 and has remained there ever since.

Such programs dramatically reduce the cost of living for many people receiving assistance, diminishing the pressure workers feel to return to work. Quantification is difficult since there hasn’t yet been any official estimate of how these programs have affected the labor supply. However, this impact led governors of Nebraska and Arkansas to decline much of the available ERA funding in response to such concerns.

Furthermore, even though enhanced unemployment insurance benefits have expired, we shouldn’t ignore some of the lingering effects of that extravagant program on people’s attitudes toward work.

Those federally expanded unemployment insurance programs famously exceeded prior income for many workers, and there are many anecdotes of workers squirreling away the extra cash for the future. With solid cash reserves, it seems like a good strategy for many such workers to hold out for a high-quality job offer rather than taking the first one that comes along.

In reality, fear of COVID, a lack of child-care and government subsidies all probably play some role. And the disincentive created by federally expanded unemployment insurance benefits seems to have had an especially large effect, even after the nominal ending of the federal program.

Fortunately, while these pandemic-related factors are important, they are largely transitory . On the other hand, the largest contributors to the constrained labor supply are demographic and psychological drivers, which are more challenging to address. They stem primarily from the increase in people retiring, the decrease in immigration and the pervasive sense of disappointment explained in the April 2022 Trends issue.

Bringing America’s workforce back on-line after our apparent over-reaction to COVID-19 is turning out to be a monumental challenge. And it will prove especially difficult in light of the multi-dimensional social and political stresses discussed in prior issues.

A big question is “How long will it take to fully address the economy’s labor shortfall?” A bigger question is, “What impact will this have on economic growth, corporate earnings, wages and technology deployment?”

Given this trend, we offer the following forecasts for your consideration.

As highlighted in trend #3 this month, dramatic reductions in price coupled with exponential improvements in performance are rapidly making robotics and AI realistic alternatives to human labor. In many cases, barriers to reliance on this technology has stemmed from customer preferences.

However, the extraordinary bottlenecks created by this transition are making consumers more amenable to “good enough” solutions which exploit advanced technologies. In prior issues we explained such technologies have the potential to enhance human performance as well as replace it.

An over-emphasis on replacement is likely to create social disruption as today’s underemployed become increasingly marginalized. When the employment cost component of business declines, margins expand and end-user prices fall, benefiting investors and consumers; but workers are likely to suffer from reduced opportunities.

How will this be resolved? Ultimately, finding an optimal balance between enhancement and replacement will depend on customer acceptance, price-performance and public policy.

The business community will clamor for rapid expansion of immigration both at the bottom and top of the talent pyramid. As of this writing, pandemic-era immigration restrictions - including closing borders with Canada and Mexico via Title 42 and curtailing international visas for skilled workers, students, and temporary workers - have led to 2 million fewer working-age migrants in the U.S. compared to pre-pandemic trends.

This has played a big role in creating America’s growth-limiting, inflation-increasing labor shortage. In the short-term, the solution seems obvious: allow the immigrants clamoring at the border to take the jobs that employers desperately need to fill. Expanding immigration to allow arriving migrants to fill the labor supply shortfall would stimulate long-term economic growth, while reducing inflationary pressures.

However, the problem is that the current immigration system exacerbates violent crime, increases the burden on our social safety net, facilitates drug trafficking and provides an “easy-out” for businesses which put little if any effort into integrating America’s so-called “hidden workers.” - In an era of political and social upheaval, accelerated immigration is a “non-starter” unless it’s accompanied by reforms which address these problems. Given the glacial pace of public policy, immigration is unlikely to play a major role in resolving the immediate crisis.

Up to 40% of remote workers say they would quit rather than go back to pre-2020 arrangements. So, it’s obvious that a combination of overtime, hybrid and nontraditional work arrangements will dramatically transform white color jobs and the lives of tens of millions of workers.

The result will include reduced commuting time and expense, greater reliance on e-commerce and a need for less office space. This will permit companies to tap talent pools in remote, low-cost regions, which they have not traditionally considered. More importantly, it will open-up the possibility of recruiting a different type of employee who is not amenable to on-site employment.

During the pandemic, many older workers decided to retire rather than put up with day-to-day hassles. Many of those workers are finding that retirement is not as much fun as they imagined and the rising costs of living is making that particularly obvious. In fact, rising inflation is tending to reduce the purchasing power of retirees on fixed incomes more than others.

So, expect to see an increase in retirees returning to the labor market (or older workers delaying their retirement), which may gradually reduce the labor shortage. Given their work-ethic and knowledge, recently retired Boomers are especially valuable, particularly if the company’s benefits only have to pay the cost of a supplementary Medicare policy. And,

Research by Harvard Business School in conjunction with Accenture recently identified a huge population of socalled “Hidden Workers” and the barriers keeping them out of the workforce. With up to 350,000 open jobs in construction and 900,000 in manufacturing, America needs to proactively begin addressing the NEET crisis examined in the March 2021 Trends issue.

Otherwise, we should consider the possibility that the United States has entered a completely new paradigm - one in which a subset of workers has discovered that they can get by on very little, and who view lots of leisure time as a sufficient tradeoff.

After all, preferences change, and markets change with them. If that’s the case, this will become a permanent drag on society.