Labour shortages bite advanced economies though many still out of work

Labour shortages are emerging across developed economies as businesses reopening after coronavirus lockdowns seek to speedily rehire workers, in a development that threatens to raise wage costs for companies.

The pressures are most evident in the US, economic data suggest. Jennifer McKeown, at the consultancy Capital Economics, said there was “already clear evidence of labour shortages in the US business surveys”, with job vacancies surging and employees working longer hours than has been typical in the past.

In Europe unemployment has begun to fall, and in London and Berlin, as in American cities, bars and restaurants have struggled to fill vacancies — raising the question of whether pay will need to rise to attract staff.

But with the US economy still some 10m jobs short of its pre-pandemic trend, and 5m workers furloughed in France and Germany alone at the end of the first quarter, employers should in theory be able to draw on a pool of people looking to come back to work.

In the US, some politicians and economists argue that a combination of generous unemployment benefits, health concerns and childcare issues may be keeping people out of the workforce.

In the UK, employers say they are finding that many EU citizens have left and some people are wary of leaving the relative safety of furlough for a new job, until the threat of further lockdowns has lifted.

Even in the eurozone, where economies are at an earlier stage of reopening, the latest business surveys suggest it is becoming more difficult to hire.

It is not yet clear whether this is beginning to push up pay. In the US, the quarterly Employment Costs Index showed the biggest jump in wages for 14 years in the first quarter of 2021, but it lags behind events on the ground and can be volatile. In the eurozone and UK, headline measures of wage growth have been distorted by the large number of low-paid workers still out of work and by reductions in working hours because of furlough and short-time work schemes.

Line chart of Index, rebased (December 2019 = 100) showing Job vacancies are rising, particularly in the US

“If the labour shortages evident in recent data are not resolved, then [US] wage growth is going to shoot up. Labour demand is rocketing,” said Ian Shepherdson at the consultancy Pantheon Macroeconomics.

But, he added, some of the pressure may prove temporary — especially once schools reopen and unemployment benefits become less generous.

“No one knows for sure whether these people have left the labour force. So no one knows for sure whether they will come back,” he said.

Heidi Shierholz, director of policy at the Economic Policy Institute, argued that hospitality and leisure wages in the US were merely returning to their pre-pandemic trend and were unlikely to lead to broader pressures because they remained far below pay in other sectors.

“There is very little evidence that the leisure and hospitality sector’s hot labour market is about to catch the rest of the economy on fire . . . Labour shortages leading to wage acceleration in this sector just are not working with a long enough lever to push up wages across the board,” she wrote in a recent blog.

Line chart of Unemployment rate (%) showing Unemployment rates are falling but still well above pre-pandemic trend

Other economists argue that pay pressures are real in the US but should prove weaker and more transient elsewhere, especially in the eurozone.

Holger Schmieding, economist at Berenberg, said that this is partly because of differences in wage bargaining systems. He noted that wages tended to adjust more slowly to swings in economic growth in continental European countries where many workers were covered by sectoral pay deals.

In some countries, wages are indexed to inflation in the previous year, meaning increases will be small in 2021.

In Germany, sectoral pay deals concluded “under the shadow of the recession” will last for two years, so even a strong rebound in industry will not show up in wages for some time, said Schmieding: “Wage moderation is already baked in the cake for next year.”

Additionally, employers in both the UK and eurozone may have a bigger pool of labour to draw on. Economic inactivity has risen everywhere, but McKeown argued that in the US, many workers who had left the labour market had chosen to retire permanently. In the UK and eurozone, at least some furloughed employees could be laid off when wage subsidies expired and re-enter the jobs market.

Line chart of % of population showing Economic inactivity has risen sharply during the pandemic

Nick Kounis, economist at ABN Amro, said there was “a great deal of hidden [eurozone] unemployment. So once some of the pandemic-driven volatility subsides . . . we are likely to be facing a very familiar sight: inflation below the [European Central Bank’s] price stability goal” of a rate under, but close to, 2 per cent.

Ultimately, the outlook for wages in developed economies will depend on the strength of their recoveries — and the extent of the stimulus governments and central banks continue to deploy in the coming months.

For the eurozone in particular, Schmieding warned, stronger wage growth would follow only once the bloc reached full employment — something he estimated would take one and a half to two years.

By contrast, he said, “the US is in fiscal overdrive. The US economy will be running hot well before that of the eurozone”.


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