Aside from international tax reform (see “Other readables” below), the big topic in economic policy right now is labour shortages. Reams of reports are coming in that businesses are struggling to recruit as economies reopen and people return to shops, hotels, cafés and bars. Some, it appears, are even taking the unheard-of step of raising pay in order to find staff.
That should be good news. But such stories are feeding the bigger debate on whether the risk of overheating is starting to overtake the risks of stalling growth — at least in the US, where the Biden administration’s fiscal programme is much bigger than what is happening across the Atlantic. In Europe, too, an impression of widespread labour shortages could easily unravel the temporary consensus for strong fiscal and monetary support for the economy.
Free Lunch says don’t panic. The flurry of reports about labour shortages is nothing to worry about. Today, we give you a round-up of the reasons why.
Anecdotes of businesses struggling to find staff are plentiful not only in the US and the UK but across a wide range of high-income countries including Germany and Norway. Yet look at the state of these economies.
The US economy is still 10m jobs short from the pre-pandemic trend (see chart below). In the eurozone, researchers at Capital Economics estimate the “slack” in the labour market — how much it falls short from full employment — at 4m people, double the rise in unemployment in the pandemic. (Even then, some of us thought the economy was already a good way short of its potential).
And worldwide, the International Labour Organization says employment will grow by 100m this year, but that will still leave 75m missing jobs. Against the backdrop of such numbers, it is simply ridiculous to talk about shortages in a macroeconomic sense — and it is dangerous to mistake local squeezes for an aggregate phenomenon that would warrant pulling back aggregate demand stimulus. A study of post-pandemic fiscal policies by IMF and other researchers has just established that premature fiscal withdrawal after pandemics worsens inequality significantly.
But isn’t inflation suddenly accelerating? Sort of — but not in any way that indicates broad price pressures. US consumer prices inflation jumped to 4.2 per cent in April (the personal consumption expenditures index, which the Federal Reserve targets, rose a more modest 3.6 per cent). Some of this is due to “base effects” — just getting back to the pre-pandemic price path would produce snapshots of high inflation about a year after prices were particularly subdued in the first pandemic wave.
There are certainly dizzying price rises in some sectors, such as lumber, where US prices have more than quadrupled. But to see that these are exceptions that prove the rule, look at a different inflation measure. The Cleveland Fed’s median inflation index, which measures inflation for the goods category whose price rises faster than half of all goods and slower than the other half, hardly budged: at 2.1 per cent, it is right on the Fed’s target. The broader trimmed index, which measures the CPI but excludes the 8 per cent most extreme price changes in either direction, rose at 2.5 per cent.
In other words, the prices of most things are behaving in a benign way, despite the particularly steep price rises in a few cases (apart from lumber, microchips and second-hand cars are often mentioned). Similar things can be said in other economies: any rise in headline inflation rates is less than meets the eye.
And this is even more true for wages. Media stories about employers having to pay more suffer from the same curse of most journalism: it focuses on what is unusual rather than what is representative. It is very hard to find any sign of a generalised wage pressure-cooker heating up. In the US, average hourly wage growth is not particularly high (see chart below). In the UK, it is, but only because the latest numbers (for the first quarter) coincided with a lockdown in which lower-paid workers disproportionately fell out of work. Remove this compositional effect, and wage growth looks similar to before the pandemic.
In the US, the Atlanta Fed’s Wage Growth Tracker avoids the composition effect by looking at a survey of individual wages and examining how each individual’s wage changes. The chart below shows the median-growth wage — the wage growth of the person whose wage grew faster than half the sample in the period, and slower than the other half — alongside the average rate of wage growth across all the individual wages as well as the 75th and 25th percentile. You would be hard-pressed to spot where the post-pandemic shortages they tell us about kick in.
That is not to say there are no wage pressures at all, if you look narrowly enough. In the US leisure and hospitality industry, wages are clearly picking up fast, as the chart below shows. But this confirms the point: any price or wage dynamics we are seeing are sector-specific effects of sector-specific mismatches between demand and supply.
A proper look at the facts about labour shortages and prices, then, gives a picture of very local pressures: those due to a restructuring economy where the pandemic has rapidly shifted both what consumers demand and where workers want to work. The sector that seems to struggle most to recruit is hospitality. But this is the sector that was most affected by lockdowns, is now trying to open up at a very fast pace, relied disproportionately on migrant labour and often offered subpar working conditions even at the best of times. If workers find better jobs elsewhere — and that same anecdotal reporting suggests delivery outfits and supermarkets are snapping up workers — that is good news.
Of course, this could change: local wage dynamics could eventually turn into all-economy inflationary pressures. So here is the third answer. If unsatisfied demand for workers were indeed to drive wages higher, what’s not to like? As Annie Lowrey puts it, maybe a labour shortage is a good thing. It could shift incomes from capital to labour in places where the opposite has taken place for decades, it could make the tide of precariousness in labour markets recede and it could strengthen incentives to increase labour productivity.
Of course, this would not be the result of a wage-price spiral à la the 1970s, where wages rise unsustainably and lead to inflation so high it erodes their real purchasing power. But this is not the 1970s. Then, the world suffered huge negative supply shocks in the form of oil price rises. The result was stagflation: output suffered while prices rose. The problem we are told to worry about today is a huge positive demand shock. But that makes all the difference.