Theme: Labor market
Early recruitment problems are threatening the recovery
Unemployment has already fallen close to pre- pandemic levels in many countries. Meanwhile the share of businesses having difficulty recruiting employees has rapidly increased. This is partly because the labour supply has been depressed by various factors, some of them temporary in nature. In the US and the UK, pay increases have already accelerated, while no such clear trend can be discerned in the euro area or the Nordic region. The US labour shortage will probably ease as working life normalises and incentives to work become stronger again. Efficiency-improving business investments may possibly also give labour productivity a boost.
Early supply side constraints may change the playing field. When the pandemic crisis was at its deepest, economists predicted that it would take a very long time before we returned to normal resource utilisation. Such a view was also largely behind central bank signals that normalisation of monetary policy was far in the future. The prospect of a long period of extremely low interest rates, in turn, increased the manoeuvring room for fiscal policymakers. Due to an unexpectedly rapid recovery in demand, forecasters have gradually brought forward the time when economies are expected to return to the trend that prevailed before the pandemic. Recently, however, various kinds of supply side problems have worsened, prompting observers to question how much idle resources actually exist in the economy. This theme article analyses some key issues in the US and Western European labour markets, including the reasons why unemployment has fallen so quickly and why such a large percentage of companies already have major recruitment problems. The duration of these problems will be crucial to the ability of economic policymakers to continue supporting the recovery. It is also essential to ensure that these problems are not permanent if the growth and corporate earnings forecasts behind today's fairly high stock market valuations are to materialise.
Unemployment close to pre-pandemic
Actual unemployment is now relatively close to the situation at the start of the pandemic, indicating that we are not so far from normal resource utilisation. In the euro area, September unemployment was at exactly the same level as at the end of 2019. In the US, it is just over 1 percentage point higher than before the pandemic, after initially soaring more than 10 points in the spring of 2020.
Depressed labour supply
We have seen a large decline in unemployment, even though the number of people with jobs has a long way to go before reaching pre- pandemic levels. This is because a relatively large share of those who left the labour force during the most dramatic lockdown period have not returned. There are several reasons for this, and dividing these into various categories can facilitate our analysis of how long the labour supply may conceivably remain depressed.
Statistical exaggerations
Because of certain crisis programmes, employees are still registered as being outside the labour force. In some countries, young people have left the labour force to an especially great extent, such as students with low average working hours. If you look only at changes in the number of people in the labour force, it is easy to overestimate the decline in the potential number of working hours.
Incentives/behavioural factors
US stimulus programmes including relatively generous benefits for the unemployed and families with children made it easier to give up working. The system of simple, low- paid, low-productivity jobs is increasingly being questioned, which may also reinforce this trend.
Although most people now want to return to a normal working life, there are many who want to avoid returning to their old jobs. This applies, for example, to older age groups; those who can will retire to a greater degree. Partly due to the pandemic, younger age cohorts have also had to wait before entering the labour market, and some have instead continued their studies.
Pandemic-related factors
There are also lingering practical difficulties in returning to a normal working life. These include fear of becoming infected during travel to or at work, or the need to stay home with children until schools or day care centres reopen.
Structural factors
Ageing populations and declining immigration also lower labour supply. To some extent, the reasons for reduced mobility are pandemic-related, but they are also driven by underlying trends. The UK after Brexit is the clearest example. But in the US, too, there is a clear shift, especially in terms of the influx of labour into low-paid occupations.
Widespread recruitment problems
Generally speaking, labour market statistics are especially uncertain in the current situation, yet signals about recruitment problems in various business surveys show a robust pattern. We have created estimated normalised time series based on some of these surveys. In the US, we use a narrow metric – small businesses surveyed by the NFIB, which are now showing record labour shortages.
Most of these shortages have increased exceptionally fast, which may be due to several factors. During almost all previous crises, manufacturing has been hardest hit. The sector has thus developed methods to bridge periods of weak demand. This is especially true in northern Europe, where employer and employee organisations often collaborate with governments to ease the consequences of crises. Well-educated, skilled work forces have been strongly motivated to expect better times in their old sectors and have been given opportunities to further their education within their professions during crisis periods.
Unaccustomed crisis sectors and imbalanced demand. The pandemic has mainly affected service sectors that are historically less accustomed to dealing with economic crises. Their employees often have a weak position in the labour market. This makes them more mobile, and they have less incentive to return when demand has revived. In addition, there is a generally imbalanced demand situation. Many goods- producing companies bounced back quickly after the most acute pandemic phase in spring 2020, and their current recruitment problems are more similar to traditional overheating symptoms.
Accelerating wages in the US and UK
How rising labour shortages will affect short- and long- term wage formation will be an important question for central banks in the near future. In recent decades, the link between labour markets and price/wage formation has been weak (the "death of the Phillips curve"). But we are now seeing clear signs of acceleration in US and UK wage growth. In the US, various metrics now show annual wage growth of 4-5 per cent. However, it is hard to find clear indications of general acceleration in the euro area or in the Nordic countries partly because bottleneck problems in the labour market are less prominent, but also because centralised pay agreements are more important, especially in Germany and the Nordic countries.
Distinctive features of the Swedish labour market
Sweden’s mild pandemic-related restrictions in the spring of 2020 may have helped limit the decline in labour supply. The Swedish labour market is also characterised by a special combination of traditional and new features. In general, the collective agreements concluded late in 2020 specifying relatively low annual pay hikes of around 2.2 per cent seem to have set the pace, since additional pay increases appear to be small. Most agreements are valid until spring 2023. In addition, within the framework of its labour market policy, the government pays a large proportion of salaries in low-paid jobs for people with little formal education, who often have poor Swedish language skills. Within this system, market forces play only a minor role in wage formation. Parallel with this, there is a completely different type of market mechanisms. Very liberal labour immigration rules have contributed to increased competition in low-wage sectors. Downward wage pressure is exacerbated by the fact that enforcement of existing regulations is spotty and many employees have no opportunity to assert their rights.
Improvement on the horizon in the US
Our analysis thus shows that the supply side situation is now most acute in the US and the UK. Because of the UK’s unique Brexit experiment, that country’s problems will probably be quite long-lasting. In the US as well, there are long-term forces in play. For example, many older people who have left the work force will probably not return. In other areas, we are more optimistic.
Pandemic-related problems should ease soon, since the Delta wave has now culminated. We should thus see a normalisation when it comes to commuting between homes and workplaces and the school and childcare situation. The incentives to get a job are also gradually increasing as federal stimulus is phased out, and the weakness of US safety nets will have an effect. But it is important that we see a response to the labour supply situation before the end of 2021, now that conditions have changed. Another potential positive effect is that current labour shortages may accelerate productivity- enhancing investments. The potential for efficiency improvements and automation should be significant, since the share of simple jobs is higher in the US than in Japan and northern Europe, among other places.