07/10/2023
The Bright Side of Demographic Reality
The labor shortage is usually described as an economic problem, but it has a bright side, too.
Let’s start by admitting the problem is real. Current demand for labor far exceeds supply. There isn’t some pool of idle workers who could be enticed or coerced to fill the gap. That’s just demographic reality. It’s happening around the globe in every political and economic system, so policy tweaks don’t seem like the answer. Technologies like AI might help, but not quickly. The shortage is here and now.
Economists focus on things they can measure, and in this case, wages are a significant measurable data point. They are rising in most places and industries, to varying degrees. This contributes to inflation, but I think is mostly a good thing. Wages are rising the most in so-called “service” occupations: restaurants, retail, healthcare, construction, etc. These hard but necessary jobs boost living standards for everyone. We all benefit when they are done well. Moreover, these better-paid workers are also consumers. Enabling them to spend more generates growth in ways that higher asset prices don’t.
The bright side of this is less measurable but no less real. The division of labor is a basic principle of economic growth. People are more productive when they specialize in the tasks for which they are best suited. Growth happens when we find ways to unlock everyone’s best talents. The labor shortage is doing exactly that.
Look at what is happening. Given multiple opportunities, people are seeking jobs they find enjoyable and rewarding. Wages are part of that, but not necessarily the most important part. I suspect much of the churn we see in the employment numbers isn’t about higher pay but people leaving jobs that were never a great match. Getting them into something that better applies their skills should make them more productive.
Source: BLS
“Stop right there, John,” you say. “Productivity is plunging. That doesn’t fit your theory.” You are correct, but we expect lower productivity when someone starts a new role. It takes time to adapt to an organization and get into your groove. The most productive workers in any company are the ones who have been there a few years. I’m hopeful the lower productivity numbers are temporary.
We can also quibble with those numbers. Productivity is simply GDP divided by aggregate hours worked. GDP ignores a lot of output. Someone who stays home to care for a disabled or elderly relative doesn’t “work” nor add to GDP, but hiring a caregiver to do the same thing would. The latter is increasingly difficult due to the labor shortage. I score the productivity numbers as at least questionable.
Another term fits here, too: “labor mobility,” or worker willingness to change jobs. As technology advances and workers gain new skills or their life conditions change, their ideal job might change, too. Staying in a job that no longer fits you is suboptimal for the worker, employer, and the economy in general. Today we are in a situation where skilled people in many industries can change to a better role with more confidence.
This is short-term disruptive but long-term positive. Once the current “Musical Chairs” game is over, the economy should have (generally—there are always exceptions) better paid, happier, and more productive workers. That will help everyone, including the overwhelmed employers who for now are so desperately seeking workers.
