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The Fallacy of the Labor Shortage Argument

There has been significant news coverage lately on the “labor shortage”. Companies are complaining that they are unable to hire workers even with increased wages and signing bonuses. This seems to be a direct contrast to a “disappointing” jobs report for April and May.

What this means in layman’s terms is that there are a lot of companies who are having trouble finding people to hire. There are also a lot of people who are looking for but unable to find work. This sounds like a contradiction, doesn’t it?

According to Republican politicians this discrepancy exists because of the extra $300/week Federal Unemployment Benefit. Over 25 states have dropped or are planning to drop this benefit during June or July because they believe the extra income is causing American workers to be lazy and choose to stay home rather than work since they have the extra income coming in.

I have so many problems with this idea!

We need the flow of money into the economy

Refusing the additional federal funding is a matter of states cutting off their nose to spite their face. They are so convinced that people need to return to work that they are overlooking the benefits of additional money being pumped into the state and local economies. “Heaven forbid anyone get a free ride. We must stop that at all cost.” Let’s suppose that jobs are plentiful and people are not returning because they make more on unemployment. Forcing people back into employment will still reduce the amount of money circulating through the community. For the store, restaurant, etc. that is making a sale it is immaterial whether the consumer got the money from unemployment benefits or wages. What counts is that the money is being spent. With people receiving less money less spending will occur.

There is a skills gaps

We need to look at how the labor market actually works.

The oversimplified observation: There are unemployed people. There are jobs that employers cannot fill. This must be because people do not want to work.

The actual situation: The available jobs do not necessarily match the professions or skills of the available workers. This is often referred to as a “skills gap”. There are labor shortages in specific sectors but that does not mean every person seeking employment can find an appropriate job. Just because restaurants cannot find employees does not mean that the unemployed electrician or HR professional is turning down job opportunities.

We have a wage shortage

We do not have a labor shortage, we have a wage shortage. A major signal that you have a labor shortage is when you see wages increasing. Do you recall during the tech boom all the stories about perks, extras, and high wages being used to attract tech workers from other companies? That is what happens when you truly have a labor shortage. Federal Reserve Chairman Jerome Powell stated in April

We don’t see wages moving up yet. And presumably we would see that in a really tight labor market. And we may well start to see that. So what will happen?… my guess would be that you will see people coming back into the labor force, the labor market will reach equilibrium, maybe pay will go up.

At this time wages in the service industry have not gone up. The risks due to working in the industry, however, have substantially increased with the pandemic. It is logical that employers would need to raise wages to lure people into these jobs. That is how the labor market is supposed to work.

For an insightful look into why certain industries are having difficulty hiring read Heidi Shierholz’s article U.S. labor shortage? Unlikely. Here’s why. In this piece Shierholz writes

Employers post their too-low wages, can’t find workers to fill jobs at that pay level, and claim they’re facing a labor shortage. Given the ubiquity of this dynamic, I often suggest that whenever anyone says, “I can’t find the workers I need,” she should really add, “at the wages I want to pay.”

Large numbers of women have exited the workforce

The pandemic has taken a huge toll on women. Many women, who statistically earn less than their male partners and have assumed additional caregiver roles. Someone needs to oversee virtual schooling, care for young children when daycares are closed, run errands for aging parents who no longer feel safe leaving the house. Because women earn less on average they are more likely to sacrifice their careers to manage family responsibilities. This was hugely exacerbated by the pandemic.

As we begin to move out of the pandemic there is the question of whether women will be returning to employment. Many if not most will clearly need to return out of financial necessity. Others, however, may ask themselves if they want to return to unrelenting pace of pre-pandemic life. Shemina Jiwani’s Blog article Why Are Women Leaving the Workforce? Provides a clever analysis of how many of the problems women face in the workforce already existed and were just highlighted by COVID.

Forcing a return to work is ablest

The idea that everyone needs to move on from the pandemic and get back to work is quite discriminatory. It is predicated on the idea that everyone can, with certain precautions, safely return to work. The assumption seems to be that these employees are just lazy young people who choose not to work. There are many people with severe health conditions, auto-immune diseases, and other underlying conditions which make them more susceptible to catching COVID and to experiencing life threatening symptoms. Many people cannot be vaccinated. Also, people may live in households with high risk individuals and be concerned about exposing them.

Clearly the decision to reject the additional federal unemployment relief was a political move by republican governors to play up to their populist base as well as to their corporate campaign supporters. It is unfortunate that many of the people most in need of assistance will be denied help to reinforce their “tough on freeloaders” images.

It can be tempting to listen to officials spew figures and ideas and assume that they must be making decisions based upon clear facts. We must remind ourselves and those around us that economics are based upon theories not certainties. We need to ask “who is benefiting from this action/policy?” (h/t Kelly Diels) The decision to reject the additional federal unemployment relief benefits the companies with predatory hiring practices and the politicians whose campaigns they support. Sadly this will be at the expense of who have suffered the most from the pandemic.

Maura Madden is a registered investment adviser in the State of Washington. The Adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.