Labor shortages weigh on advanced economies although many are still out of work

Labor shortages are emerging in developed economies as businesses reopening after coronavirus lockdowns seek to quickly rehire workers, in a development that threatens to increase labor costs for businesses.

The pressures are most evident in the United States, according to economic data. Jennifer McKeown, of the consultancy firm Capital Economics, said there was “already clear evidence of labor shortages in surveys of US companies,” with job vacancies on the rise and employees working longer than usual in the past.

In Europe, unemployment has started to fall, and in London and Berlin, as in American cities, bars and restaurants have struggled to fill vacancies – raising the question of whether wages will have to rise. to attract staff.

But with the US economy still at 10 million jobs less than its pre-pandemic trend, and 5 million workers laid off in France and Germany alone at the end of the first quarter, employers should in theory be able to tap into in a pool of people looking to come. back to work.

In the United States, some politicians and economists argue that a combination of generous unemployment benefits, health problems and childcare issues can keep people from working.

In the UK, employers say they are finding that many European citizens have left and some people are reluctant to leave the relative safety of time off for a new job, until the threat of further lockdowns subsides.

Even in the eurozone, where economies are at an early stage of reopening, the latest business surveys suggest it is becoming increasingly difficult to recruit.

It is not yet known whether this is starting to drive up wages. In the United States, the Quarterly Employment Costs Index posted the largest increase in wages for 14 years in the first quarter of 2021, but it lags behind events on the ground and can be volatile. In the euro area and the United Kingdom, general measures of wage growth have been distorted by the large number of low-paid workers still unemployed and by the reduction in working hours due to leave and partial unemployment programs .

“If the labor shortages evident in recent data are not resolved, then [US] wage growth will explode. The demand for labor is skyrocketing, ”said Ian Shepherdson of consultancy Pantheon Macroeconomics.

But, he added, some of the pressure may turn out to be temporary – especially once schools reopen and unemployment benefits become less generous.

“No one knows for sure whether these people have left the workforce. So nobody knows for sure if they will come back, ”he said.

Heidi Shierholz, director of policy at the Economic Policy Institute, argued that hotel and leisure wages in the United States were simply reverting to their pre-pandemic trend and that they were unlikely to lead to broader pressures as they remained well below wages in other sectors.

“There is very little evidence that the hot labor market in the leisure and hospitality industry is about to ignite the rest of the economy. . . The labor shortages leading to an acceleration of wages in this sector simply do not work with a leverage long enough to push up wages at all levels, ”she wrote in a statement. recent blog.

Unemployment rate line graph (%) showing unemployment rates falling but still well above the pre-pandemic trend

Other economists argue that wage pressures are real in the United States but are likely to prove weaker and more transient elsewhere, particularly in the euro area.

Holger Schmieding, an economist at Berenberg, said this was in part due to differences in wage bargaining systems. He noted that wages tended to adjust more slowly to fluctuations in economic growth in continental European countries where many workers were covered by sectoral wage agreements.

In some countries, wages are indexed to the inflation of the previous year, which means that increases will be small in 2021.

In Germany, sectoral wage deals concluded “in the shadow of the recession” will last for two years, so even a strong rebound in industry will not show up in wages for some time, Schmieding said: “The wage moderation is already cooked in the cake. for the next year.”

In addition, employers in the UK and the euro area may have a larger labor pool. Economic inactivity increased everywhere, but McKeown argued that in the United States, many workers who had left the workforce chose to retire permanently. In the UK and the eurozone, at least some employees on leave could be made redundant when wage subsidies expire and re-enter the workforce.

Line graph of% of population showing that economic inactivity increased sharply during the pandemic

Nick Kounis, economist at ABN Amro, said there was “a lot of [eurozone] unemployment. So once some of the volatility caused by the pandemic has subsided. . . we will probably be faced with a very familiar sight: inflation below [European Central Bank’s] price stability target ”from below 2 per cent, but close to it.

Ultimately, the wage outlook in developed economies will depend on the strength of their recovery – and the extent of stimulus packages that governments and central banks continue to deploy in the months to come.

For the eurozone in particular, Schmieding warned, stronger wage growth would only follow once the bloc reached full employment – which he said would take a year and a half to two years.

In contrast, he said, “the United States is overdrive. The American economy will function well before that of the euro zone ”.

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