SINCE 2015 many hawks have continually suggested that the American economy is at or close to maximum sustainable employment. They have some explaining to do. Fully 5.8m more Americans are in work than in December of that year, when the Federal Reserve began raising interest rates. That is two-thirds as many as lost their jobs during the Great Recession. In May the unemployment rate fell to 3.8%, its lowest for 18 years (it has since risen back to 4%). Yet the economy has not yet overheated. Only recently has inflation hit or exceeded 2%, the Fed’s target, for three straight months—and that is partly because of a worldwide recovery in oil prices.
Nevertheless, the hand-wringing has continued. The latest supposed problem is a labour shortage. For the first time since data began to be collected in 2000, there are more job openings than there are unemployed workers (see chart). Nearly 90% of small businesses who are hiring or trying to hire workers report that there are few or no qualified applicants, according to the National Federation of Independent Business. The shortage is reaching a “critical point”, read one recent CNBC headline. A lack of applicants for blue-collar jobs such as trucking and construction has received particular scrutiny, as have states like Iowa where the unemployment rate is especially low (it is just 2.7% in the Hawkeye state).
But portraying widespread labour shortages as an economic problem is misguided. While they may be bad for firms, they are a boon for society—so long as inflation remains contained. In fact, a labour market in which firms must compete for workers, rather than workers competing for jobs, should help resolve three of America’s biggest economic problems.
The first is inadequate wage growth. From mid-2009 to the end of 2017, wages and salaries grew by only 2% a year on average. That outpaced inflation, but mainly because petrol prices slumped in 2014. Today, however, paycheques are fattening faster. In the year to the first quarter of 2018, wages and salaries grew by 2.9%—equal to the average growth, though hardly the quickest, seen during the 2000s.
Plenty of outside opportunities give workers negotiating power even without labour unions, which have been in near-terminal decline. In May 2.4% of workers quit their jobs, the highest figure since 2001—good news in an economy that has been plagued by falling dynamism. Job-switchers are banking median pay rises of nearly 4%, according to the Atlanta Fed. In the jobs boom of the late-1990s, overall wage and salary growth reached 4.3%.
At that time, fast productivity growth enabled wages to boom without provoking inflation. Yet the second benefit of economy-wide labour shortages is that they may precipitate faster productivity growth, which has been disappointing in America—and in other rich countries—since the financial crisis. If less profitable firms have to fold because they cannot pay enough to attract workers, their labour and capital can be put to better use. A similar process can take place within firms. Plagued by resignations, Dunkin’ Donuts, a purveyor of starch, sugar and caffeine, recently asked its ex-employees which tasks they disliked most, and then automated the dullest, such as writing labels and checking the quality of coffee grounds. Less prosaically, worker shortages might encourage firms to adopt path-breaking technologies such as artificial intelligence.
A labour shortage is also likely to reduce inequality. As wages stagnated, corporate profits—and stockmarkets—touched record highs. That has contributed to a feeling that the economy has tilted towards capital and away from labour. From 2000 to 2014 labour’s share of national income fell from just over 57% to below 54%. If rising wages reduce profits, labour’s share could yet rebound. Moreover, the biggest wage gains in a tight labour market tend to accrue to the poorest workers. Full-time employees at the 10th percentile of the income distribution are earning almost 4% more than a year ago.
Firms are also reaching into untapped pools of labour. For years policy wonks have worried about rising disability rolls. Today nearly 10% of disabled workers who were outside the labour force a year ago are employed, a figure that has been steadily rising. There have been scattered reports of firms hiring more ex-convicts. Even a 30-year-old jobless man who recently gained notoriety after his parents went to court to evict him was offered work by a pizza chain as a publicity stunt.
Some labour shortages are worth worrying about even while inflation is contained: those caused by restrictions on labour supply. Such barriers to entry are usually found at the top of the labour market rather than at the bottom. For example, extensive licensing requirements have shielded many higher-earning occupations from competition from immigrants. Foreign-born workers fill nearly two in five jobs in farming, fishing, forestry, building, groundkeeping and maintenance, but make up only 7% of lawyers and paralegals and 15% of skilled health-care workers. Burdensome rules needlessly require the involvement of American-trained professionals in simple processes. As a result, their jobs are unduly lucrative. Health care and law account for around one-quarter of the top 1% of earners.
Whereas labour shortages spurred by a hot economy—while it lasts—may increase equality and boost productivity, restrictions on the supply of professionals act as a permanent regressive tax. To find a labour shortage worth worrying about, look in the hospital, not on the building site.