In the first part of this two-part series, we share insights from the National Bureau of Economic Research (NBER) on why the economic and labor numbers are unfamiliar with the ongoing talent shortage.
Even though there are plenty of predictors for employment and unemployment, most hiring managers rely on the unemployment rate to determine if their company will struggle to acquire talent. Since the pandemic began, the traditional indicators that usually moved together aren’t. Have they gone haywire? Are magnetic fields affecting the numbers? The answers are no and no.
How to Interpret the Conflicting Numbers
Alex Domash and Lawrence H. Summers, both from the Harvard Kennedy School of Government, have studied all the predictors and indicators and conclude, in their NBER working paper, that the “labor market tightness is likely to contribute significantly to inflationary [wage] pressure in the United States for some time to come.”
They note that, “Economists have typically turned to common slack measures, such as the unemployment rate or the job vacancy rate, to assess labor market tightness and predict nominal wage growth. Historically, measures of slack on the supply-side, like the unemployment rate and the prime-age (25-54) nonemployment rate, have moved in tandem with measures of slack on the demand-side, such as the job vacancy rate and the quits rate, meaning that different indicators gave broadly corroborative signals of labor market tightness. Since the beginning of the Covid-19 pandemic, however, the supply-side indicators and the demand-side indicators have diverged significantly. While the unemployment rate and prime-age nonemployment rate remain elevated at late-2017 levels and imply modest degrees of slack, the job vacancy rate and quits rate have surged to series highs and imply a very tight labor market. The unemployment rate does not adequately capture all movements in the labor market that are significant for wage inflation.”
Federal Reserve Chairman Jerome Powell suggests looking at other indicators, like the prime-age employment- (25-54 years old) to-population ratio, to better understand the presumed lack of candidates every company is feeling. So, it’s not just a matter of how many people are employable, it’s a correlation between the population and those who want to work. More on this in a minute.
Does This Have Something to Do With Soaring Wages?
Quite simply, yes. Domash and Summers comment that, “A high vacancy rate signals a high demand for labor and puts upward pressure on wages as firms compete to attract workers. A high quit rate signals that workers are confident enough to leave their jobs to search for a better opportunity, and can put upward pressure on wages since job switchers drive up wages as they move up the job ladder.” Let’s see a show of hands from the hiring managers out there who can relate to this.
Domash and Summers note their research indicates that “estimated wage inflation in the fourth quarter of 2021 is the highest it’s been in the last 20 years.” They also “simulated wage growth in 2022 and 2023 under the assumption that the vacancy rate, the quits rate, and the inflation rate remain the same…nominal wage growth under these assumptions is projected to increase dramatically over the next two years, surpassing six percent wage inflation by 2023.”
Where are the Workers?
Understanding indicators and predictors is one thing, but we are all feeling the pain of finding workers. Here’s the reality. Domash and Summers outline six factors as to where the workers have gone, and chances are, they might never come back. Those factors are:
- Shifts in demographic structures (population aging specifically) = 1.3 million workers;
- Covid-19 health concerns = 1.5 million workers;
- Immigration restrictions = 1.4 million workers;
- Excess retirements = 1.3 million workers;
- Reduced incentives to work = 1 million workers; and
- Covid-19 vaccine mandates = 0.4 million workers.
At the same time, they “project demand-side indicators such as the vacancy to unemployment ratio to continue to be very high over the next year.”
Domash and Summers predict that “the majority of the employment shortfall will likely persist moving forward. Moreover, if employment were to increase due to an increase in labor force participation, it would be accompanied by increases in incomes, and therefore an increase in demand. We believe that labor markets will continue to be very tight unless there is a considerable slowdown in labor demands.” This all suggests that companies need to sharpen their talent acquisition strategies and stay on top of the numbers since the tight labor market is bound to continue for some time.
In the second part of this series, we’ll discuss the “demographic drought” associated with the labor force participation and how it may shrink the available labor pool going forward.
If you would like to receive a copy of Domash’s and Summer’s complete working paper, email us at email@example.com. Let us help you develop effective talent acquisition tactics.
 This is equivalent to one minus the prime-age employment-to-population ratio.
 As of December 2021, the BLS Job Openings and Labor Turnover Survey (JOLTS) reported a seasonally adjusted
job vacancy rate of 6.8% (a near-record high, and much higher than any vacancy rate before 2021) and a seasonally
adjusted quits rate of 2.9% (the second highest quits rate on record).