West’s labor shortage is a fleeting phenomenon

Are people leaving jobs because of better job prospects? Is this brainstorming a good thing? That doesn’t seem to be the case given the US unemployment rate, which is still above 5.4%. Weekly jobless claims are also rising; Currently they are at around 360,000. The US labor force participation rate is still below its pre-pandemic level of 2%, meaning more than 4 million people are out of the workforce and not even looking for work. Isn’t this burnout? Adding to this labor market conundrum is the fact that the BLS also reported 10.6 million job vacancies. The US labor market seems very tight, with 51% of small business owners reporting that job openings could not be filled in September. Among those hired, 92% said there were few or no qualified applicants. Jobs are not getting workers, and yet there are many unemployed, and millions of people are leaving their jobs in large numbers. This trend has been dubbed “The Great Resignation” by management professor Anthony Klotz.

There are many questions about the co-existence of large number of vacancies with these incidents of mass job losses and high unemployment. What is the reason for leaving them? Is this a sign of strength or weakness? Is it fleeting or permanent? Is this specific to the US labor market or is there echo elsewhere? Does this mean a long-term change in people’s work priorities?

The first two of these questions have relatively straightforward answers. To investigate the reasons for the “great resignation”, one has to dig deeper and look at different statistics. It turns out that dropout rates are highest in only a few areas. In hospitality, 7% of employees quit in just one month. But the average salary is 13% before the pandemic. This is well above US standards of wage growth. It is also high in the health and technology sectors. Coupled with wage growth, this should be interpreted as a sellers market.

Derek Thompson writes in The Atlantic that this level of quitting should be seen as an expression of optimism. For decades, wages have stagnated, and the fear of losing social benefits has kept workers from quitting. But leaving such a large number of jobs is a sign that the prospects are brightening up for workers in the service sector. The strike has been called by unions in all services and manufacturing units. It shows that there is some muscle-flexibility by labor, which has acquired bargaining power in America.

With inflation running above 5%, there was bound to be some wage adjustments. Adding to the labor shortage is the disruption caused by various supply-chain breakdowns, causing factories to cut production or raise prices sharply and risk a drop in demand for their products. The labor shortage is so acute that it can lead to early parole even criminals who are being considered for employment.

On the question of whether the tightness of the labor market is temporary or permanent, it is undoubtedly the former. The market always adjusts, sooner or later. This may take longer due to skill mismatch. There was a shortage of jobs and workers simultaneously before the pandemic, and we have experienced it in India as well. The pandemic exacerbated these mismatches. No wonder the demand for skills related to the digital economy is going to grow rapidly.

The technology sector recruitment in India this year is expected to exceed the number recruited in the last three years combined. The massive inflow of investments in this sector and the rise of unicorns will certainly catalyze more recruitments. There are some long-term structural changes that may apply only to the future of work. For example, increased acceptance of work from home. Or virtual mode is now being considered as the default mode for meetings. Or enhanced collaboration through digital connectivity. Also expect some strengthening of workers’ rights in the gig economy.

In other places also the shortage of staff is fast coming to the fore. For example, in the UK, there is a butchering shortage, which leads to overpopulation of pigs and consequently a lack of farm space. Due to the inability of the government to help, pig farmers have started rearing healthy pigs. Their harsh immigration policies of recent years have led to an increased worker shortage in both the UK and the US, which has restricted the influx of workers, particularly low-skilled immigrants. Brexit has made it difficult to cope with such shortfalls. Even in Australia, vacancies are 40% higher than pre-pandemic levels.

As the global economy improves, don’t be surprised by widespread shortages of not only technology and healthcare workers, or butchers, but also truck drivers, airline pilots and agricultural workers in developed economies. With an aging workforce, it is bound to put pressure on their policy settings to ease immigration for skilled and semi-skilled workers. Meanwhile, high inflation will make wage increases inevitable. In the next decade, the pendulum looks set to swing in favor of labor rather than capital. India has a huge opportunity to benefit from the labor shortage on a global scale, either directly through job-related emigration or indirectly by promoting labour-intensive exports.

Ajit Ranade is the Chief Economist of Aditya Birla Group.