This Economist Foresees 15 Years of Labor Shortagesby
Economists who worry about high unemployment are a dime a dozen, or 0.83¢ each, as they will point out. It’s less common to find an economist predicting an era of chronic labor shortages, with employers struggling to fill openings. One who does see things that way is Gad Levanon, the Israeli-born director of macroeconomic research at the Conference Board, a business research group founded in 1916.
I sat down with Levanon this week to ask him to explain why he’s swimming against the tide on the topic of labor. Here’s what he said:
Productivity: If it’s true that companies are automating and streamlining jobs out of existence, we should see a big jump in the government’s measure of output per hour worked—i.e., productivity. We see no such thing. In fact, when averaged over a three-year period, productivity has been drifting lower. This key fact simply doesn’t fit the conventional wisdom of a hyperefficient economy pushing workers into the street.
Baby-Boom Retirements: Lots of things about the future are unknown, but one thing we can say with certainty is that in 25 years, baby boomers will be 25 years older than they are today. The aging of the workforce has pushed down the share of Americans who are in the labor force, either working or looking for work. The labor force participation rate will continue to fall in coming years as the vast majority of those who haven’t already retired do so in the next couple of decades. Companies will struggle to replace those retirees, Levanon predicts.
Two-Tier Market: It’s quite possible for labor market shortages to co-exist with high unemployment for those people who lack the skills that employers are seeking, Levanon says. In fact, that’s what’s happening. For people who have been out of work for less than half a year, the job market is pretty much back to normal, while there’s still an enormous bulge in the number of people who have been out of work for more than half a year, as this chart shows. And these numbers don’t even reflect those who have dropped out of the labor force altogether. The upshot is that the labor market could start to get tight—and wages could start to rise—even at low levels of employment, Levanon says.
History: Automation has been a fact of life in the working world for generations, and never before has it generated mass unemployment, Levanon says. True, it dislodges people from old jobs and forces them to find new niches, but it’s never caused permanently high joblessness, he says, asking: “So why should it be different now?”
The Conference Board economist’s message rings true to many people in the business world, who have long been complaining that it’s a seller’s market for labor despite the above-average unemployment rate—6.7 percent in February. “There’s a greater demand for workers than there is a supply with the right skill sets,” George Prest, chief executive officer of MHI, the trade group formerly known as the Material Handling Institute, told me yesterday. “If we could somehow magically have people go to one of these [training] programs, they’d have a job very quickly.”
Levanon says both Republicans and Democrats have a political incentive to exaggerate the slackness of demand for labor—Republicans because perceived weakness makes the Obama administration look like a poor steward of the economy, and Democrats because it justifies more stimulus. So does that put Levanon on the side of those who think the Federal Reserve should start raising interest rates sooner?
Actually, no. He thinks a tighter labor market would help lift some people out of long-term unemployment, because employers couldn’t afford to be so picky. And he doesn’t think there’s a grave risk of an inflationary wage-price spiral. On the whole, Levanon thinks the big labor issue facing the U.S. economy over the next 15 years will be shortages, not surpluses.