Usually, businesses form and expand gradually during periods of economic growth. But now, as much of the economy reopens at the same time, demand for workers is at a record high and is not likely to fall for the rest of 2021. Combine that surge in demand with lingering labor supply problems and employers should prepare for a long period of recruiting difficulties, low retention rates and accelerating labor costs.
While employers may struggle, this is great news for workers. The risk of unemployment will be small, job satisfaction is likely to improve as more workers settle into jobs they enjoy, and wages will rise.
Signs of labor shortages are evident among small- and medium-sized firms. According to a March survey by the National Federation of Independent Businesses, 42% of firms say that they have job openings that they are unable to fill right now, the highest rate in the 47-year history of the survey. The voluntary quits rate, which is at a historical high, also suggests that employers are having trouble retaining workers.
Many working-age adults have left the workforce as a result of the pandemic, which has exacerbated those shortages. Some have avoided entering the workforce because of a fear of getting infected, the need to take care of young children or high federal unemployment benefits that may have reduced their incentive to find work. In addition, many Baby Boomers have left the labor force, reversing a 25-year trend of rising participation among older people.
Not all industries are equally impacted. For example, restaurants and other food services employers are especially struggling to hire workers because of the high infection risk and the relative low pay that makes unemployment benefits an especially attractive option. Some of these factors are temporary. If the United States reaches herd immunity by the third quarter, schools will likely reopen, and the childcare crisis will likely end, allowing many parents and people afraid of getting infected to return to the labor force. In addition, the generous federal unemployment benefits are set to expire in September. That will bring many people back to the labor force and temporarily ease the labor shortage — but not for long.Massive job growth in the coming year will significantly lower the unemployment rate and tighten the labor market. The number of new infections is expected to rapidly drop starting in May, governments will continue to loosen restrictions on consumers and businesses and people will feel more comfortable engaging in in-person services. And many US households will be flush with cash after accumulating more than $3 trillion worth of savings in the past year, both because they were not able to spend on many services they typically used to and because of a historically large set of fiscal support packages. As the economy opens, GDP and employment growth during 2021 are likely to break records. By the end of 2021, the unemployment rate is expected to reach its natural rate of 4.5%. And then what?Typically, once the unemployment rate starts declining, it keeps doing so until several months before the next recession. The economic expansion that started in 2020 is unlikely to be an exception. If anything, the downward pressure on the unemployment rate is likely to be stronger than usual because, for the first time in US history, the working-age population is shrinking as the large Baby Boom generation continues to reach retirement age. Retirees leaving the labor market will open up more jobs for unemployed workers. We therefore should expect the unemployment rate to continue declining until the next recession.
Americans should look forward to a prolonged period of very low unemployment and of shortages of qualified workers. For workers, the unexpected re-emergence of labor shortages will be a pleasant surprise after a hellish year.
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