Gad Levanon, Conference Board labor-markets economist, talks about changes for employers and the outlook for jobs, wages and productivity as economies recover from the pandemic.

Author: Andrew Osterland

Global Finance: How bad are the current labor shortages and how much are they a US phenomenon?

Gad Levanon: The labor shortages we’re facing now are extreme, and it’s not just in the US. The long-term trends of an aging population and a decline in the working-age population affect many countries. Japan and other Asian countries are in a similar situation to the US, and most of Europe is further along in terms of these trends.

There are also temporary trends due to the pandemic that are making the labor shortages more severe. Higher unemployment benefits and government support have allowed people to be more selective looking for jobs, and there are also more people dropping out of the labor force. We’ve seen a dramatic increase in the number of retirements.

There was also a big drop in immigration to the US during the Trump administration, and Covid-19 made it more severe. 2020 was the first year that the working-age population in the US declined.

GF: How can governments and businesses find solutions to these labor shortages?

Levanon: The most obvious thing for governments to do is increase immigration. Companies can also try to raise labor force participation by targeting groups that have been less connected to the labor market. For example, Hispanic women in the US.

Eventually, higher wages will likely draw more people back into the labor market as will the end of the extraordinary government support. There is also more incentive for companies to automate so they need fewer people. This could be a big deal. In the decade before the pandemic, labor productivity growth was low worldwide. It’s too early to tell if the pandemic will be a gamechanger in this regard.

We may see some easing of the labor shortages in the next several quarters, but it will still be a very tight market. The shortages are not going away anytime soon.

GF: Will stronger growth in wages fuel sustained inflation in economies?

Levanon: It is still an open question whether the recent inflation is temporary or more permanent. With every month that passes, “team permanent” is winning. When you have average wage growth over 4% and some industries experiencing double digit growth, businesses must shift costs to consumers. I can’t see how that won’t affect prices. Three or four months ago, more people thought this inflation was temporary than do now.

The question is what the Federal Reserve will do about it. I expect multiple interest rate hikes in the US next year.

GF: What other major impacts has the pandemic had on labor markets?

Levanon: The shift to remote work is a huge development. Employers—particularly tech companies on the West Coast—are expanding remote work, and it is happening across the country. Based on surveys, employers are confident they can have high productivity with a remote working environment. We’ll find out if that’s true in the next five to 10 years.

The remote work trend combined with the labor shortages is also making changes in location—both by companies and workers—more popular. Businesses in expensive labor markets like Silicon Valley and Seattle are dramatically increasing hiring in other locations like Atlanta, Charlotte, Austin and Nashville. If you’re an employer in Nashville, you now must compete with West Coast tech companies for employees.