The Next Global Pandemic: Labour Shortages
Written by: Leticia Dickyta
Despite the US economy bouncing back to pre-covid levels, it is still missing around 4.3 million workers (Mitchell et al., 2021). Shortages of all kinds have become economic headlines for this year. Global labour shortages and supply chain disruptions are two major problems faced by firms around the world. Why are there labour shortages when unemployment is high? How do labour shortages affect the supply chain?
Labour economics is the study of the labour force as an element in the production process. Understanding labour economics will help people find solutions to problems caused by economic shocks, such as a recession. Labour economics comprises those within the labour market, whether as employees, employers, and the unemployed.
Unemployment refers to a situation when a person who is able and willing to work, is actively searching for a job but unable to find one. There are three types of unemployment: frictional, structural, and cyclical. Frictional unemployment occurs when there is imperfect information that comes during the job search process. Structural unemployment occurs when there is a mismatch of skill sets and job opportunities due to changes in the economy. Another type of unemployment is cyclical unemployment, which increases when there are downturns in the business cycle.
High Unemployment, High Labour Shortages
There are 10 million job openings in the US, yet more than 8.4 million unemployed are still actively searching for a job (Long et al., 2021). Many firms complain that they cannot find enough workers, while many workers complain that they cannot find a job. Most unemployed people during this time period belong to the structural unemployment category due to changes in the economy.
Figure 1: Job openings now outnumber job seekers
Source: Bureau of Labor Statistics
Labour shortages happen because there are changing demographics such as aging and retiring employees, demand for better pay and flexible working arrangements, as well as border and immigration controls. Even though the pandemic has emphasized the labour shortages, the roots of this problem are pre-pandemic with a lack of skilled workers due to more fundamental developments in the US, UK, and EU. Employers prefer to have the position unfilled instead of hiring unskilled workers, especially those without any prior experience.
There is a mismatch between what the jobs offer and what the workers want. Workers have changed their preferences in terms of where and how they want to work. That is why millions of job openings cannot reduce unemployment. There are millions of job openings in professional and business services. However, people whose most recent jobs were in that sector, have indicated that they do not want to return. The same situation applies to leisure and hospitality, retail and wholesale trade, as well as education and health services.
Consequences of Labour Shortages
Wage Rises and Inflation
The labour market refers to the demand and supply of labour in an economy. Labour demand is the firms' demand for labour, whereas labour supply is workers' supply of labour. The demand for labour is based on consumers' demand for the output produced by the labour. Hence, demand for labour is a derived demand. The analysis of labour’s demand and supply can be used to determine the price (real wages) and the quantity (employment) of the labour.
Labour shortages occur when the labour demand exceeds the labour supply. The fundamental economic response to labour shortages is for firms to increase wages to attract more workers in the long term. Figure 2 represents how labour shortages affect the wage. As seen from figure 2, when the labour supply decreases from S1 to S2, the wage will increase from W1 to W2.
Figure 2: Fall in the supply of labour leads to rising wages
Labour shortages have led to increasing wages which in turn has induced inflation. Inflation is a sustained increase in the average level of prices. To reduce their expenses, firms tend to pass the burden of wage costs to consumers. The increase in overall price level due to the rise in wage costs results in cost-push inflation. It leads to a situation that persists with inflation and recession known as stagflation.
Another type of inflation caused by higher disposable income and higher spending is called demand-pull inflation. It arises from an increase in demand for goods and services since the rise in wages increases workers’ income. Demand-pull inflation is considered better than cost-push inflation as it involves higher price and higher output, whereas cost-push inflation involves higher price and lower output. Both demand-pull inflation and cost-push inflation will lead to a definite increase in the price level, but the overall impact on output depends on their relative strengths.
Figure 3 illustrates the two types of inflation: cost-push and demand-pull. Cost-push inflation happens because there is a leftward shift of the AS curve. When SRAS1 shifts to SRAS2 due to labour shortages, the price level will increase from P1 to P2. On the other hand, demand-pull inflation happens because there is a rightward shift in the AD curve. As seen from figure 3, there is an increase in the price level from P1 to P2 as AD1 shifts to AD2 due to higher demand for goods and services.
Figure 3: Cost-push and demand-pull inflation
Source: Ezy Education
Supply Chain Disruptions
Labour shortages are one of the reasons why there are supply chain disruptions around the world. Many manufacturers and distributors struggle to produce or supply goods as much as they did pre-pandemic due to labour and raw material shortages. For instance, shortages of truck drivers in the US. Suppliers are unable to deliver their goods since they are short of drivers. Thus, manufacturers have to postpone their production until the goods are delivered.
The American Trucking Association estimated that there would be a shortage of around 60,000 drivers (Vann, 2021). Those shortages have increased due to retirements and new truck drivers that need to be trained. Another reason behind this labour shortage is that households have built up their saving buffers and do not feel the urgency to return to work. However, during festive seasons, household expenses will increase and people will have the incentive to seek work.
Brexit marked the withdrawal of the UK from the EU. It has caused many foreign workers in the UK to go back to their home countries. UK firms will find it hard to source for overseas workers because post-Brexit visa rules have made it trickier for EU citizens to work in the UK with lower-paid jobs. As a result, job vacancies in the UK rose to a high record of nearly 1.2 million (Pylas, 2021). It is a sign that the UK economy is experiencing labour shortages. There is an absence of workers in critical industries, such as meat production, agriculture, and transportation. Shortages of fuel at gas stations have also worsened this situation.
Furthermore, labour shortages also cause supply chain disruptions in the EU. Many EU firms experience a lack of skilled workers due to aging workers and qualification mismatches. According to the United Nations (2019), Europe will have 95 million fewer working-age people (between 20 and 64) in 2050 than in 2015 (Spanjaart, 2021). As a result of labour shortages, there are microchip and semiconductor shortages in the car manufacturing and electronic industries. That is why the automotive sector has been hit the hardest with temporary shutdowns of car plants since April. Other goods that have been affected by supply chain disruptions are metal, rubber, plastic, lumber, and paper.
Even though unemployment is high, labour shortage persists in some parts of the world, including the US, UK, and EU, because of the changing economy in those developed countries. There are changing demographics such as aging and retiring workers, demand for better pay and flexible working arrangements, as well as border and immigration controls. The problem is more structural due to a mismatch of skills and job opportunities.
Labour shortages have grave economic consequences globally in terms of wage hikes, inflation, and supply chain disruptions. Employers tend to increase wages to attract more workers in the long term. It will lead to cost-push inflation since firms pass wage costs to consumers. Besides that, it will induce demand-pull inflation as rising wages increase the purchasing power of workers and, thus, their demand for goods and services. Finally, labour shortages will worsen the global supply chain crisis as there are insufficient workers to produce and deliver the goods.
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