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Kenan Institute 2023 Grand Challenge: Workforce Disrupted
Market-Based Solutions to Vital Economic Issues
Kenan Insight
May 26, 2021

Labor Shortage or Post-pandemic Growing Pains?

The current narrative around the U.S. labor market is a mixed bag. On the one hand, many companies are struggling to find enough workers to return to a semblance of normal operations. On the other, 8 million fewer Americans were employed in April 2021 as compared to February 2020. We asked three experts from the University of North Carolina at Chapel Hill — Christian Lundblad, Director of Research, Kenan Institute of Private Enterprise and Richard “Dick” Levin Distinguished Professor of Finance, Area Chair of Finance and Associate Dean of the Ph.D. program, Kenan-Flagler Business School; Luca Flabbi, Associate Professor of Economics; and Paige Ouimet, Professor of Finance, Kenan-Flagler Business School — to weigh in on the critical issues behind this dichotomy.

Q: Do you think the United States is in the midst of a labor shortage?

PROFESSOR PAIGE OUIMET: There are significant labor shortages, with the number of job openings measured by the Bureau of Labor Statistics reaching an all-time high of 8.1 million in March. But at the same time, there are 9.8 million unemployed Americans currently looking for work.

How do we reconcile these two statistics? I think much of what we are seeing is growing pains from a rapidly recovering economy. For example, the accommodation and food services industry saw nearly half of its jobs disappear in early 2020. Many of those workers have since found work. So as firms in this industry quickly try to rehire as demand is increasing, they’ll have to find new workers. I think what we’re seeing now is a temporary bottleneck as customers return to some sectors faster than those sectors can add employees.

PROFESSOR CHRISTIAN LUNDBLAD: The extent to which many children around the country remain at home in remote learning situations has forced some workers, disproportionately women, to exit the labor force all together. Also, unemployment benefits and other government support mechanisms have been generous; the unintended consequence is that a subset of workers may delay returning to work until benefits roll off, temporarily limiting supply.

What’s more complicated is the growing wedge between those workers with skills in high demand and others. It’s important to characterize the pre-COVID labor market as highly bifurcated; even then, there were significant shortages of certain skills, while other skills were plentiful. The pandemic experience has likely pressed fast-forward on that story, and businesses and workers will need to adjust.

PROFESSOR LUCA FLABBI: We’re in the middle of a large increase in labor demand, and therefore wage levels should increase. So it’s not surprising that some employers are finding it extremely difficult to find workers at pre-pandemic wage levels. But this difficulty does not necessarily denote a labor shortage; it may instead indicate that wages have not adjusted enough.

The pandemic is fading, but there is still a significant proportion of people who are not vaccinated, and who may never be. Given this lingering uncertainty, workers may wait before accepting a job. They may think that things will be better in the future, and if they wait a little longer, they’ll get a better job. Or they may think things will be worse again in the future in a particular sector (e.g., hospitality or health), and they are therefore looking for a job in other sectors. Such reallocations may be generating genuine shortages in specific industries.

With schools and childcare facilities closed, women have been forced to spend more time caring for children and less time in the workforce. Some have been forced to leave the labor force entirely. As of today, it’s still not clear if schools and childcare centers will reopen full-time for the entire year. Therefore, many women are reluctant to reenter the labor market, reducing the labor supply overall, but especially in sectors with a predominately female workforce.

Q: What needs to happen for the labor market to fully recover from the pandemic?

OUIMET: One important step is for the employment-to-population ratio, the fraction of working-age individuals in America who are currently employed, to return to more historic levels. For the labor market to fully recover, we need millions of these American who left the workforce during the COVID pandemic to reenter. What conditions are required for this to happen?

First, workers need to feel safe going to work. Vaccine availability is a game-changer, but as mask requirements are dropped, some workers will be hesitant to return to public spaces. Second, schools need to open and parents must feel safe sending their kids back to school. If families can’t find childcare, this will also limit labor force participation rates.

Finally, we need to be patient. With 8.1 million job postings —the highest level ever measured — there are great signs for the economy, but we also have to understand that the labor market can’t adjust overnight. There’s a lot of reallocation involved, and this will take time.

LUNDBLAD: First, nonessential economic activity (the willingness of a customer to walk through a shop door, sit in a crowded theater, book a cruise, and so on) needs to bounce back. So no policy is more important than an effective vaccine distribution and, critically, uptake.

Second, we need kids to get back in school. While we have long argued for the economic benefits of education on future productivity, we’ve learned that there is a perhaps far more direct link between economic activity and school; if kids are out of school, we really can’t work!

Third, we need to find a way to adjust government support in a way that continues to help the subset of Americans who will still struggle as we navigate through next steps without dis-incentivizing their return to work.

Finally, on the international stage, our global trading partners are largely in far worse shape than are we. At a very pragmatic level, U.S. supply chain, export/import and financial considerations are inextricably tied to the wellbeing of our partners. Global vaccine distribution is key.

FLABBI: Three things need to happen before we reach a full recovery of the labor market in particular and the economy in general. First, wages should adjust to the new post-pandemic labor market conditions. Second, the ongoing uncertainty should be resolved. Third, the labor reallocation that seems to be taking place needs to settle. This process may take some time, as workers who decide to change their occupation may need to acquire new skills.

Q: Are there other economic conditions we should watch that could disrupt the labor market recovery?

OUIMET: We‘re currently seeing bottlenecks throughout the economy, not just in hiring. And these supply shortages, if they persist too long, could slow the speed at which firms can grow and, therefore, hire. I expect these will keep popping up, especially as COVID-19 continues to surge internationally.

LUNDBLAD: The real wild card is a viral mutation that renders our vaccines significantly less effective. Such a development would endanger much of our economic progress.

Aside from viral developments, there’s also a brewing risk of inflation. There is a several-trillion-dollar wall of savings, ballooned by federal stimulus, that’s ready to go; this creates a real risk of demand-induced inflationary pressures. While we’re admittedly far from these pressures manifesting in wages themselves, I fear that sustained inflation is coming, and the Federal Reserve may very well be caught behind the curve.

FLABBI: In the readjustment phase, economic agents may overreact, magnifying uncertainty and slowing down recovery. For example, some employers may wait too long to increase wages, losing valuable business opportunities in the meantime. Others may increase wages by too much, forcing themselves to increase prices too steeply, possibly generating inflation. As another example, childcare services and schools may take too long to reopen, hindering the reentry of women into the labor market.

Q: What is one policy that the federal government either should or should not adopt in order to support job growth?

OUIMET: I am concerned about the inequities in our labor market that were laid bare during the pandemic. During COVID, high-skilled workers were mostly protected from job losses and often received wage gains. But we need to ensure that workers and families on the other end of the skill distribution can still meet their basic needs in this labor market. One policy on which I’m very bullish is the child tax credit that was passed as part of the American Rescue Plan aid package. I would like to see this become permanent policy.

LUNDBLAD: We need to get kids back in school. Undeniably, part of our labor market disruption remains linked to a sizable fraction of parents still struggling to juggle work, school and everything else. The labor market will remain jumbled until we figure this out.

The most important reason to take action stems from the fear that this educational disconnect will be far more consequential in its long-run implications, with a generation of kids who suffer poorer educational and labor market outcomes over their entire lifetimes. The aggregate economic implications of such a scenario would be staggering.

FLABBI: First, this shock had nothing to do with economic fundamentals; it was a health crisis, so any policy that can make the health sector more resilient to shocks will be helpful. Any such policy will decrease uncertainty because economic agents will know that even if another pandemic hits us in the short or medium term, we’ll be better prepared.

Second, any policy favoring the reentry of women into the labor force will be beneficial. To that end, at the top of the list is the provision of childcare services; for younger ages, these services are similar to public goods, but in the U.S. have not so far been considered as such.

This piece has been edited for length. To read the entire expert commentary, visit our Economic Growth Initiative  Data Commentary webpage.

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