Introduction
Have you been late to your morning class because the 61D was seemingly never coming? Perhaps you had to wait months for an otherwise standard Amazon order to be delivered? Maybe you’ve been noticing that fast food restaurants such as McDonalds and Taco Bell have been reducing their operating hours or turning to drive-through only options?
You're not alone –the US labor shortage has had a profound impact on our daily lives, shattering our sense of “normal” and disturbing many of the conveniences that we have come to enjoy and even expect. On a larger scale, the disturbances translate to billions of dollars in lost economic output, depressing the recovery from the COVID-19 pandemic.
Despite the colossal reverberations set in motion by the labor shortage, the factors which led us to this point are labyrinthine and set in sharp debate. While colored by politics on the cultural stage, academics and researchers have pointed to a wide array of components which warrant consideration,with some being catalyzed by the pandemic and others having been set in motion decades ago.
Is Unemployment Insurance to Blame?
Although the incredible significance of the labor shortage is a bipartisan issue, the causes of the behavior the labor market is currently experiencing is highly contested. A considerable number of employers have blamed the extra $300 a week on federal pandemic unemployment aid, claiming that unemployment benefits were too high and were disincentivizing people from working.[1]Politicians have capitalized on this sentiment in order to attract supporters.
For example, in response to a closure and hiring sign from the fast-food restaurant Hardee’s due to staffing issues, Representative David Rouser from North Carolina tweeted “This is what happens when you extend unemployment benefits for too long and add a $1400 stimulus payment to it. Right when employers need workers to fully open back up, few can be found.” [2]By July 2021, twenty-five states had ended their participation in pandemic unemployment insurance programs after months of heavy criticism. However, when comparing states which cut off federal unemployment insurance early to states which have continued increased unemployment benefits, there have been no substantial disparities in employment conditional on the expiration of pandemic unemployment insurance.
Arindrajit Dube, a labor economist at the University of Massachusetts Amherst, published an analysis of the early effects of the expiration of pandemic unemployment insurance programs. He found that the share of the population receiving unemployment insurance (UI) dropped 2.2 percentage points in states where pandemic UI expired. [3] However, the weekly employment to population ratio for states that ended pandemic UI was within a 95% confidence interval compared to states that did not end pandemic UI. [4]So, the difference has not been statistically significant.
via Arin Dube
This finding suggests that many of those who stopped receiving unemployment insurance in June did not transition into the workforce as well as some may have predicted. Additionally, in states that ended pandemic UI early, many households are reporting a higher difficulty with expenses, potentially leading to decreased consumption and an impaired economic recovery.
via Arin Dube
As such, pandemic unemployment insurance does not appear to be the major reason driving the current labor shortage, as the magnitude of the effect observed is relatively small. It appears that the magnitude of the effect of unemployment benefits is relatively small, and that the lack of labor force participation is due to other factors (or something else to transition into causes).This may prompt an investigation of other possible causal short-term factors behind the labor shortage, such as mandatory vaccinations, increase in childcare costs, and fear of becoming infected with COVID-19. [5]
Is “Proof of Vaccination” Disincentivizing Applicants?
A controversial requirement for an increasing number of jobs that ceased to exist prior to the pandemic is “proof of vaccination”. The January 4th Mandate President Biden released, enforcing vaccines or tests on all medium or large businesses was the Supreme Court; however, a growing list of companies including Apple and McDonalds are already requiring employees to be vaccinated against COVID-19. Vaccine requirements pose a significant obstacle to a nontrivial population of job-seeking individuals in the United States. In fact, an April 2021 poll conducted by NPR and Marist University found that 1 in 4 Americans are unwilling to be vaccinated. [6] However, those initially unwilling to become vaccinated due to concerns of its safety and efficacy have become more willing to get vaccinated over time. According to a November 2021 Gallup poll, there is still significant resistance by a non-trivial population of the United States towards becoming vaccinated. Those unwilling to become vaccinated are more concentrated in industries such as agriculture and construction which are less dependent on education. [7] The disproportionate effect of the vaccine mandate on certain populations of Americans furthers inequity.
One of the most significant contributors to the labor shortage is the lack of affordable childcare for working parents, many of whom have exited the workforce since the pandemic. The childcare industry was one of the worst affected and slowest to recover when the economy took a hit. As a result,many daycare workers have opted to work within the education system or pursue employment in the service industry. In a vicious cycle of labor shortage, one of the worst hit industries was the childcare industry; this is exacerbating the labor shortage in other industries as well. Employment rates in childcare are still significantly below pre-pandemic levels, and daycare centers are reluctant to raise prices for their customers in order to compensate for this by hiring more people or raising prices.
Joe Biden’s American Rescue Plan, which included stimulus money to centers, can cover costs in the short run and allow centers to keep prices down, but many look to the promised $400 billion for childcare funding in his Build Back Better program to lower costs for families and bring employment levels back up.
Is the Fear of Infection Greater than the Desire to Find Employment?
One of the most turbulent and uncertain factors in the decision to work is the current state of the pandemic. With fears of contracting the virus, rapidly changing guidelines about gatherings, and information regarding new variants, some Americans may feel uncomfortable or unsafe working an in-person job and therefore remain unemployed. A report released by the U.S. Bureau of Labor Statistics stated that in November, approximately 1.2 million people not in the labor force were unable to actively seek employment due to the pandemic. While overall businesses were continuing to expand their employment opportunities, with a total of 210,000 new jobs, retail trade jobs, among other areas, declined by 20,000 in November.
Yet, this explanation likely fails to cover the whole story. A survey conducted by Indeed showed that fears about COVID-19 are likely not the cause of this labor shortage. Polls of 5,000 US working age adults at periodic intervals in June, July, August, and September found that 11% less people felt the need to urgently look for jobs due to COVID-19 related fears. [8] Conversely, the percentage of unemployed respondents actively seeking a job stayed relatively constant at around 32% between June and September of 2021. With the introduction and widespread availability of vaccines and booster shots, many individuals appear to be more comfortable working in-person, meaning that fears surrounding COVID-19 are not the prohibiting factor for the 68% who are unemployed but not seeking a job. While this survey may not be updated due to new concerns about the Omicron variant, it still shows that the disparity between the number of workers needed and the number looking for jobs in the last quarter of 2021 cannot be explained solely by workers’ concerns about the pandemic.
The labor shortage is a complex issue deeply rooted in various factors that affect the US economy. While short term issues, mainly those related to the COVID-19 pandemic have made its effects more apparent to all, there are still a host of long term structural problems including a growing skill gap that are significant contributing factors.
Are Wages too Low?
In a market economy, if a firm is struggling to find workers, the firm can raise the wages that it is paying. Economic theory predicts that these wage changes will prompt additional workers to enter the labor market, allowing the firm to hire more people. National data gathered by Opportunity Insights shows that employment rates for people earning more than $60,000 a year have surpassed pre-COVID-19 levels, but are 21% below pre-COVID-19 levels for those earning less than $27,000 a year. [9] Wages as a share of gross domestic income have been steadily decreasing since the 1970s and the pandemic has allowed workers to reevaluate their material conditions. [10]Workers are now demanding to be adequately compensated for their labor. This combination of factors suggests that firms may have a simple solution to ending the labor shortage: paying their workers more.
Many firms have already made moves to raise their minimum wages. Amazon, Bank of America, Citigroup, JP Morgan Chase, McDonalds, and Wells Fargo have all begun raising their wages in the last year. [11] Some small businesses have begun to follow as well. In Pittsburgh for example,Klavon’s Ice Cream Parlor was flooded with over a thousand applications after raising its posted wage to $15 an hour. Jacob Hanchar, co-owner of Klavon's Ice Cream Parlor, claims that the change has helped with turnover and burnout. [12] In essence, the labor shortage could in part be understood as a stand against the widening gap between the income and productivity of U.S. workers. Studies focusing on the direct care industry have also investigated the impact of higher wages on the labor shortage and found wages have a stronger impact than improving worker credentials, despite the skill gap being a significant contributor to the overall issue of labor shortage.
Is there a lack of technical skills among job applicants?
Although the COVID-19 pandemic has contributed to the labor market’s current shortage, there are also a host of other factors–demographic shifts, lower participation in the labor force, and structural unemployment– that will continue to affect the United States labor force without intervention.
Structural unemployment, a form of unemployment caused when the skillset of a displaced population of workers is no longer desired by employers, has been increasingly prominent in the United States. According to PwC’s Annual Global CEO Survey conducted in 2019, 79% of respondents were concerned over the availability of skills in the labor force, an increase from 53% in 2012. [13] Furthermore, the skills desired by employers have shifted to emphasize dexterity in the digital space, requiring a high degree of technical expertise. Credentials which could signal such experience such as a higher education degree are valued by employers, but are not the only factor considered. According to a 2020 report published by the United States Chamber of Commerce, soft skills such as critical thinking and a willingness to adapt are necessary qualities that employers seek even more so than degrees. [14] Education needs to be reformed in order to produce employees which contain what employers want: both soft and technical skillsHowever, this is a process that will occur gradually, shaped by policy decisions at every level.
JP Morgan and Chase investigated thethe long-term effects of a skill gap and found that the biggest mismatch between employers and potential workers occurs in the market for what they term ‘middle-skill jobs’- - jobs which require a high school diploma and technical training, but not a four year degree. Their investigation revealed that one of the significant causes of this is the inability of training institutions or colleges (such as the City University of New York) to retain students long enough to gain necessary credentials. Additionally, the investigation found that technology and healthcare are the two main sectors that would be most affected by the skill gap. Along with the development of more training institutions which are significantly underfunded, partnerships between these education providers and employers provides a mutually beneficial solution which is gaining more attention. [15]
Effects:
The effects of the labor shortage are already being seen in higher prices and supply chain issues. Amazon already warns that increased costs in shipping, higher wages, and supply chain issues will impact their Q4 performance. [16] With many businesses raising wages in order to attract workers, there is also a possibility of falling into a wage-price inflation spiral, which would need to be corrected through careful monetary policy. [17]
The labor shortage is worsening already slow supply chains. With many baby boomers retiring earlier, there is a large shortage in industries such as that of truck drivers, causing slower delivery times for supplies and goods. [18]
What is the future of the workplace?
Piercing the ordinarily slow moving undercurrents of the global economic system, the coronavirus pandemic constituted a rapid and sudden paradigm shift which affected nearly every aspect of life. Indeed, the modern workforce suffered from disruptions impacting supply chains, labor force participation, productivity, and as a result, has had to devise a range of new mechanisms–both novel and derivative–in order to adapt.
One of the most visible changes resulting from the pandemic has been the significant increase in the prevalence of telework, from this setting being utilized by only around 6% of the labor force to verbs like “Zoom” quickly entering the cultural lexicon. [19] And yet it is also important to bear in mind that this transition to the virtual workplace was not heterogeneous. There was a strong correlation between teleworking and income; for example while roughly 57.5% of those earning between $100,000-$150,000 annually worked remotely as reported by a 2021 Census survey, this figure was as low as 17.5% for those earning $25,000-$34,000. The same Census survey found that, because income is strongly correlated with other demographic variables such as education, respondents with a telework option also self-reported significantly better overall health than those without one. [20] The pandemic has only deepened and exposed pre-existing fissures in our labor force, where those who receive higher education are much more likely to have access to safer means of work.
With some reports projecting that 20% to 25% of employees in advanced economies may be in a hybrid setting going forward, some of the biggest questions relate to the characteristics of this partially remote environment. [21] Traditionally, face-to-face interactions have been viewed as the most fruitful forms of social interaction; they are thought to facilitate the most open channels of communication, and in turn, lead to a significant cross-pollination of ideas. [22] This is significant because researchers believe that ideas hold certain virtues such as non-rivalry and increasing returns to scale which drive productivity and even larger-scale economies. As such, in-person workplaces can be viewed as a microcosm of a city, where each member not only contributes to the tangible output of the company, but through discussions, debates, and conversations with others, driving efficiency and growth. Within this context, it would be natural to predict that the pandemic may have wreaked havoc on global productivity; however, the truth is much murkier than that.
In a regular survey of more than 30,000 workers conducted jointly by researchers at the Booth School of Business and the Mexico Autonomous Institute of Technology, around 60% of respondents found that they were more productive from home than they had expected and roughly 40% of the same group believed that they were more productive at home than at the office. [23] Similar studies by the HR consulting firm Mercer found that more than 90% of respondents (in a sample of 800) believed that their productivity had remained steady or even increased after the pandemic. [24]
Yet despite the seemingly enthusiastic response to work-from-home, there is no consensus on the effects of this mode on productivity; estimates vary widely across studies, industries, and demographics. There are several important factors shaping this dynamic. For one, virtual technologies have been rapidly acquiring many of the characteristics that made face-to-face interactions unique such as synchronicity and the ability to convey genuine in-person emotions. [25] Slashing commute times by around 62.5 million hours per work day seems to play a major role as well. In a study that found a productivity increase after the pandemic, 3/4th of these gains stemmed from decreased commuting. On the other end, researchers have also identified deteriorating mental health as a result of long-term social isolation and the general anxiety arising from the pandemic as other significant determinants.
Because of the still-limited literature on coronavirus, it is difficult to predict the long term effects of the newfound hybrid nature of work on productivity. However, this has not prevented companies from instituting major changes in their infrastructure and operations. Despite the forceful comments of certain Wall Street CEOs, some firms such as Citibank wave hybrid work as a recruiting tool. Other industries have pounced on the chance to save on the overhead coming from real estate costs. Yet all the while, there is a muted wariness about eroding rates of innovation that might emanate from this new reality.
The pandemic has also accelerated certain trends because of the unique limits it placed on society, organizations, and workplaces. One such of these trends is the growth in automation and AI usage. A Mckinsey Global Institute survey of those with senior-executive roles found that “two-thirds of senior executives said they were stepping up investment in automation and AI either somewhat or significantly.” [26] With some scholars estimating that up to 70% of changes in the U.S. wage structure may be accounted for by “the relative wage declines of worker groups specialized in routine tasks in industries experiencing rapid automation,” it is clear that the rising prevalence of AI technologies have already begun reshaping the modern workforce–and the pandemic may only be intensifying this revolution. [27] For example, while routine and non-cognitive jobs such as file clerks and cashiers are still the most at-risk for being automated, the pandemic has added another element to this equation–threatening jobs that require high physical density or close proximity.
There are several documented effects of these changes that are likely to continue as a result of the pandemic. For one, there has been a sustained rise in demand for jobs which facilitate AI processes such as natural language processing and image recognition. This has,in turn, fueled a larger shift in the skills that employers seek from the labor force. While it is plausible that the adoption in AI technologies may have increased productivity to catalyze an increase in general employment, several studies have not supported this story. At least from establishment level data, it is evident that “AI exposure is associated with lower (non-AI and overall) hiring.” [28] Therefore, the pandemic may have sharpened the labor force transitions that automation has already wrought, introducing new sectors to change and escalating the forces in those already exposed.
A new and dynamic effect of COVID-19 has been a resurgence in the push for workers’ rights and increased leverage for labor organizations through a combination of unique conditions set by the pandemic, national political support,and changing public sentiments. The widespread resignations and continued depressed participation rate has given many workers the latitude to ask for greater benefits across the board from higher wages to more opportunities to work from home, all with the credible threat of leaving because so many other companies are also recruiting. For example, Indeed found that postings categorized as “hiring urgently” increased by more than 50% from 2020. [29]
The ability for workers to seek better opportunities has also been bolstered by increased household savings. Since the pandemic brought stimulus checks and reduced discretionary spending in the form of travel and other expenses, workers have a slightly larger cushion to try their chances on the labor market. In addition, some workers have also been encouraged to push for better conditions by a national affirmation of the “essential’ nature of their work, reports of booming company profits, a desire to partake in the fruits of their actions, and signals from the government including proposed legislation and federal mandates.
The pandemic has also highlighted the important role that labor unions can still play in a modern economy which suffers from chronic inequities despite years of declining membership– can still play in a modern economy. One study found that, while 90% high-wage workers have access to paid sick leave, this figure drops to 47% among low-wage workers. [30] Furthermore, COVID-19 also revealed widespread problems in workplace safety, with related complaints increasing by more than 350% between April and August 2020. In the middle of the pandemic, specifically May 2020, only an estimated 16% of employees at big-box stores had masks, representative of the experience for many workers who were labeled as “essential.” Studies show that those at unionized workplaces were less likely to encounter such dangerous conditions and were also able more effectively negotiate other benefits such as additional pay and paid sick leave. [31] Taking advantage of labor’s national spotlight, unions have also called strikes as measures of last resort at a tremendous rate at some of the nation's most recognizable companies. In the last few months of 2021 alone, 100,000 workers participated in strikes across a gamut of industries and sectors.
However, it is also likely that the conditions which precipitated this national movement will also not last indefinitely, meaning that any permanent changes to the national workplace will depend on Congressional legislation.
How has the pandemic exposed inequity between white/blue collar workers?
Based on current trends in the labor market, employment in traditional “blue-collar” jobs is rising but still not at pre-pandemic levels. Employment in “white-collar” fields of professional and business services are only down by 69,000 from their pre-pandemic levels as of December 2021 and employment in financial activities is actually 30,000 jobs higher than in pre-pandemic times. [32] Conversely, “blue-collar” manufacturing employment is down by 253,000 and construction is down by 115,000. While this disparity has caused many employers to attempt to improve the benefits for their workers, in order to attract more employees, it has yet to be seen whether improvements in wages will continue beyond the end of this labor shortage.
Prior to the pandemic, blue collar workers were witnessing relatively larger wage gains than in previous years, and this trend appears to be continuing in certain industries. [33] With the average hourly wage increasing by 4.8% in the last year and many employers considering improving benefits, it appears that gains in workers’ benefits may continue for the short-term. [34] A significant increase in the average minimum wage could contribute to decreasing the inequality seen between white and blue collar workers.
However, the labor shortage and subsequent increases in wages are also contributing to inflation. Prices increased by 6.8% in the last year, the greatest increase since 1982. [35] With many industries raising wages, they often increase prices in order to make up the difference for their profitability. These cost increases translate into higher supply prices for other goods or services that are made up of raw materials and other products. While price changes can go into effect quickly, wage changes may occur much more slowly. This could leave many Americans at a disadvantage when purchasing goods at a higher price. Even so, improvements in wages can contribute to increased consumer spending, which could also increase costs and increase inflation. Such a cycle of inflation is called a wage-price spiral, and was curbed in the 1970s through effective monetary policy by the Federal Reserve. [36]
When speaking to Dr. Anita Woolley, an Associate Professor of Organizational Behavior and Theory from the Tepper School of Business, she stated that white and blue collar workers may differ in their outcomes from the labor shortage. Although the current labor shortage is allowing prospective employees to make more demands of employers, in terms of wages, benefits, and the ability to work remotely, Dr. Woolley also said that certain jobs, if being performed remotely, may be outsourced if possible. In cheaper labor markets, it would be less costly for companies to employ workers and therefore reduce their need for domestic workers.
This uncertainty is causing some employees and firms to consider implementing Cost of Living Adjustments (COLAs) again, as a means of providing more stable compensation for workers during times of rapid inflation. [37]
Conclusion:
Although the American public may want to believe that "the Great Resignation" is an issue that will resolve itself with the conclusion of the COVID-19 pandemic, evidence shows that deeper underlying factors may be the true cause. The pandemic accelerated the speed at which these problems were found, but issues such as fair worker's compensation, benefits, and the skill gap have been at play for years and must be addressed in order to fully recover from this economic recession.
The labor shortage has had an economic impact on the United States which extends further than missed buses to campus and short-staffed fast food restaurants. In essence, the current labor shortage is the byproduct of years of workers being undercompensated for their productivity. The extraordinary conditions of the COVID-19 pandemic have allowed workers to take a stand and demand the compensation that they deserve for their labor.
It will require employers’ deep commitment to rethink their relationships with workers and offer more appealing working conditions and better pay. The government will also need to reconstruct the national education system to better prepare graduates in the face of a constantly evolving workforce. Ultimately, despite how these issues are approached by our major institutions, one thing is certain: the workplace of tomorrow will be profoundly shaped by [the long term effects of the pandemic], along with the public policy that will be enacted to help the US recover.