In this week’s Shore Daily News, Ted Shockley wrote a great piece about how the labor shortage is affecting businesses on the Eastern Shore. While the shortage on the Eastern Shore is acute, it is not unique. It is happening all across the United States.
Labor shortages are having a strong impact on the entire US economy. Today’s conditions could easily develop into one of the worst labor shortages of the last 50 years.
A report from the The Conference Board notes that the extreme shift in labor market conditions in the past decade is not a coincidence, but the result of a perfect storm in which several long-term trends have converged simultaneously.
- The massive retirement of the large baby boomer generation is bringing growth in the working-age population to a halt—a trend that will continue through 2030. This is the main reason why this era of shortages is so different. Never before have such a large number of retirements and almost zero growth in the working-age population happened before.
- The working-age population of noncollege graduates is already shrinking. As a growing share of young adults are enrolling in four-year colleges, the number of working-age people with a bachelor’s degree is solidly and uninterruptedly increasing by about 2 percent annually. On the flip side, the number without a bachelor’s degree is shrinking.
- The recovery in labor force participation has been disappointing. Overall, the tight labor market has led to an increase in labor force participation in recent years. But the improvement has not been remotely fast enough to prevent the labor market from tightening and has been somewhat disappointing, especially for men, and especially compared to other advanced economies in the last decade.
- Compared with earlier decades, young men without a college degree are less likely to be in the labor force. That decline in participation is partly because they are much more likely to be single, living with their parents, and have less of a need to earn income. These trends are more structural than cyclical and will be hard to reverse.
- The large drop in labor force participation of 16-24-year-olds. While good from a societal perspective since it is a result of higher education attainment at this age, the steep decline in the labor force participation of young people (aged 16 to 24) significantly reduces the supply of workers in occupations that typically hire young and less-educated workers.
The demand for blue-collar workers continues to grow, partly due to the unprecedented slowdown in labor productivity in the past decade. This is really a problem in manufacturing, where labor productivity has remained essentially flat since 2010.
Also, e-commerce has pushed the demand for other blue-collar and manual services workers such as in transportation and warehousing industries, which have increased by over 20 percent, compared to 9 percent in the total economy. Employment in personal care and health support jobs has been increasing.
The tightening labor market has already affected hiring and retention. Employers are hiring less-educated workers, which is partially responsible for historically high levels of concern about labor quality. Employee retention rates are declining due to increased employment opportunities, where voluntary quit rates are already well above 2007 rates.
The most basic and intuitive way to solve labor shortages is to raise wages. This is the most used solution for both recruitment and retention challenges. Wage acceleration is occurring in blue-collar and manual services jobs. Wage growth for management and professional workers, which includes close to 40 percent of the workforce and most of total compensation, is not rising as quickly.
Companies are using a mix of solutions to solve the problem.
The situation is only going to deteriorate in the coming decade as working-age population growth will be closer to zero and the decline in the number of noncollege graduates will accelerate.
To maintain the growth rate in standard of living, the US either needs to greatly improve labor productivity growth and labor force participation or introduce more immigrants to the country’s labor supply.