Denis Doulgeropoulos

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Help Wanted: Why Can’t Businesses Find Enough Workers?

The headline U.S. unemployment rate fell from 6.7% at the end of December 2020 to 3.9% in December 2021 — the biggest one-year improvement in history.1 While many workers took advantage of this strong rebound in the job market, companies large and small have been struggling with labor shortages.

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Lack of workers has snarled corporate supply chains; resulted in delayed and cancelled product orders; left working parents without access to child care; and disrupted air travel; and forced restaurants, retail stores, and other businesses to shorten their hours or close understaffed outlets. A recent spike in outbreaks from the Omicron variant worsened the situation.2

Since the pandemic began, unpredictable demand shifts have exposed pre-existing mismatches between the knowledge and skills of available workers and the tasks for which they are needed.3 But the sheer number of available jobs is also running well above the number of unemployed job seekers. Employers reported 10.6 million job openings on the last business day of November 2021, even though there were the 6.8 million unemployed persons in November and 6.3 million in December.4

COVID-19 may have triggered a severe labor shortage, but long-term demographic trends are also to blame for this highly unusual job market.

The Flux of the Workforce

The labor force participation rate – the percentage of people age 16 and over who are working or actively seeking work – plummeted from 63.4% in February 2020 to a record low of 60.2% in April 2020. By December 2021, the rate had recovered only partially to 61.9%.5 About 2.3 million people have dropped out of the workforce entirely since the pandemic began.6 Some may have left temporarily, but others are probably gone for good.

Early retirements. In recent decades, birth rates have declined because of the large baby boom generation (born 1946–1964). In the United States, the labor force has been aging and shrinking, and retirees’ share of the population has been increasing. The pandemic may have accelerated some boomer retirements, which have been predicted for a long time. By one estimate, there were 2.4 million “excess retirements” due to COVID-19 (as of August 2021). Higher retirement account balances and home values made it feasible for some people to retire earlier than they would have otherwise.7

Immigration slowdown. It’s estimated that declining immigration may have removed as many as 2 million potential workers from the current U.S. labor pool. Net migration to the United States has dropped steadily each year, from a peak of 1.05 million people in 2016 to 595,000 in 2019 and 247,000 in 2021. The most recent and drastic annual decline (July 2020 through June 2021) was due in part to travel restrictions associated with the pandemic.8

Pandemic repercussions. In December 2021, about 1.1 million people reported that the pandemic had prevented them from seeking work.9 This subset of missing workers includes those who still have child-care challenges or health concerns, including those who are contending with long-COVID symptoms.

Many households were able to stabilize their finances thanks to pandemic relief measures. Excess savings resulted from stimulus payments, student loan pauses, and reduced spending in 2020. Workers used the extra money to rethink their careers and/or care for their children and elderly parents instead of working.

Economic Effects

When there are a lot of job openings, job seekers have more options and leverage. U.S. worWorkers in the U.S. quit their jobs at record rates in 2021, often to join new employers who offered higher wages, more benefits, better working conditions, or more flexibility.

Due to intense competition for workers, wages increased 4.7% for the year ending in December 2021. Shortages have been more acute for lower-paying, in-person jobs, resulting in larger wage increases for workers in the leisure and hospitality, transportation and warehousing, and retail industries.11

Only when wage increases outpace inflation do workers benefit, as inflation cuts into their purchasing power. And unfortunately, real wages, which are adjusted for inflation, dropped as prices spiked in 2021.

The Consumer Price Index (CPI) rose 7.0% in 2021 — the highest annual rate in nearly 40 years — as many businesses passed higher labor costs on to their customers.12 In December, the Federal Open Market Committee voted to speed up the tapering of the Fed’s bond-buying program, setting the stage to begin raising interest rates more aggressively in response to persistent inflation.13 The dilemma for Fed officials is that they don’t want to raise interest rates too fast and risk cooling the economy if labor shortages and other supply-chain issues will fade in time. Nevertheless, they must also be prepared to act if it appears that wage increases will fuel a dreaded spiral of rising wages and prices.

Despite labor shortages ranking as the number-one external factor, U.S. executives believe it will have the greatest impact on their businesses in 2022. Rising inflation followed closely in second place.14 The U.S. Chamber of Commerce has called on the federal government to reform and expand the legal immigration system so employers can fill jobs in labor-strapped industries, arguing that it could help cool inflation.15

Some sidelined workers could become more motivated to seek work after their savings are depleted or after their pandemic-related worries subside in the coming months. Increasing wages might also attract some early retirees and stay-at-home parents back to the workforce.

However, labor force participation may never return to pre-pandemic levels, which means employers might need to change their hiring practices, lower experience and education requirements, or provide training programs to give workers access to better-paying jobs. It is also possible that automation technologies will help fill the gap. Yet, it remains to be seen whether technology investments can boost productivity enough to offset a smaller workforce and maintain economic growth.