Debating the Outlook for U.S. Workers

Is the economy running hot enough to generate pay raises? Conor Sen and Karl W. Smith discuss.

Agent of inflation?

Photographer: Ken James/Bloomberg

Bloomberg contributors Conor Sen and Karl W. Smith have very different views on the state of the U.S. labor market. In a Feb. 22 articleSen found signs that companies such as Campbell’s Soup are struggling to contain wage inflation, among other costs. Smith doesn’t buy the premise that the economy is running hot enough to generate adequate pay raises and exhaust the supply of workers. Here is an edited version of their email discussion.

Karl Smith: Conor, you’ve pushed pretty hard the view that demand for workers in the U.S. has started to outstrip supply — that the economy may have reached or even exceeded its capacity. If I’m reading you right, you think this will lead to lower profits, increased businesses bankruptcies and more job-switching. What then do you make of several facts: persistently low inflation, very low layoff rates, and wage growth that some economists say is consistent with only mediocre employment levels?

Conor Sen: Yes, as I wrote, I’m seeing packaged food and restaurant companies struggling with the increasing cost of labor and other inputs. Instead of raising prices, they’re sacrificing their profit margins. This illustrates how starting conditions — such as high profit margins and inequality — can help explain the paradox of a seemingly tight labor market combined with a low rate of inflation.

Companies with high profit margins are comfortable absorbing cost increases for a while rather than risk losing market share to competitors. Some are choosing to leave positions unfilled rather than pay market rates to be adequately staffed. The public sector, at the mercy of voter attitudes on spending, remains stuck in an era of austerity, reflected in growing numbers of vacancies for jobs like police officers. This should all be transitory if economic growth continues, but it’s hard to know how long it will last.

Smith: What you describe sounds like mere economic inefficiency. Workers aren’t finding their way to the jobs — such as police officers — where they will have the most value. If employers start bidding wages up, perhaps we can get past these starting conditions. Workers will become more productive, which in turn will make higher wages affordable.

I believe lots of workers are still on the sidelines. The prime-age employment-to-population ratio – the share of people aged 25 to 54 with a job — has not recovered to 2006 levels, let alone to its late-1990s peak. Competition for workers can draw more of them back into the labor force. Employers will overlook long spells of unemployment and perhaps other issues. Which means the economy still has room to grow without stoking inflation. What about this do you find unpersuasive?

Sen: Actually, the prime-age employment-to-population ratio strikes me as the most persuasive evidence that there are more workers available than the headline unemployment rate suggests. This is why I’m so focused on the experiences of individual companies, to better understand what’s happening on the ground.

My best guess is that wages for low-wage service workers — in restaurants, retail and the like — are growing at a rate of 4 to 6 percent, thanks to rising minimum wages and market pressures. One labor-intensive company, Brookdale Senior Living, said this month that compensation costs rose around 5.5 to 6 percent in 2017, and that they’re expecting the same in 2018.

So whom will this wage growth bring off the sidelines? What jobs do they want, and how much will it cost to draw them back in? I’m open to the possibility that if jobs paying $10 to $11 an hour move up to $13 to $15 an hour, that would do the trick. More job offerings at current pay levels, by contrast, won’t. To test this theory, perhaps we need higher minimum wages in places with low unemployment rates.

Smith: Higher minimum wages? Why would such a clunky, command-and-control policy be preferable to simply pushing unemployment lower? The former entails governments picking who deserves a wage and who doesn’t based largely on political considerations and partisan influence. A broader policy aimed at lowering unemployment puts the most pressure to raise wages precisely on those industries with the most acute labor shortages. In other words, it helps draw workers to where they are needed most.

Final question: What do you think of the argument that the abundance of labor over the past decade has suppressed the adoption of labor-saving technology? For example, we hear a lot about how driverless technology is going to revolutionize trucking and put drivers out of work. But as you point out, the U.S. is currently facing a shortage of truckers. Shouldn’t this encourage greater interest in automation — if not to replace workers, then at least to ease working conditions? For example, setting the truck on autopilot while the driver sleeps for the night?

I am not sure how much room a place like Brookdale Senior Living has for automation, but it does seem like many of the most labor-intensive professions could incorporate some sort of productivity-enhancing technology.

Sen: I definitely think the labor glut held back investments in automation. You could even say that a lot the investment in technology — in companies such as Uber, Airbnb and TaskRabbit — was aimed primarily at taking advantage of underutilized labor. Perhaps now that workers are harder to find and getting more expensive, we’ll see investment dollars shift to companies that can help increase productivity. Every era gets the startups that make sense for its time. Maybe the time for labor-saving technology has come.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the authors of this story:
    Conor Sen at
    Karl W. Smith at

    To contact the editor responsible for this story:
    Mark Whitehouse at

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