29 January 2024

Labor Shortages are Here to Stay

It is not hard to notice that more and more businesses across the world are struggling to find workers. Many businesses have been forced to reduce their operating hours due to staff shortages, while service levels are being compromised. In fact, a recent survey of businesses in the United States found that 90% of businesses in our region identify staffing shortages as the biggest threat to their business.

These labor shortages are not a surprise. In fact, we have been warning about the looming threat of labor shortages since the early 2000s. As we have seen, the Covid-19 pandemic has dramatically accelerated the arrival of these labor shortages and in many cases has made them much worse. Unfortunately, this problem is here to stay and while this will benefit the bargaining position of workers in the coming years, many businesses may struggle to survive.

To be clear, the pandemic has played a major role in the labor shortages that we have experienced in recent years. This includes workers missing time due to illness or exposure to Covid-19, changes in attitudes toward work about younger adults, and the early retirement of many older workers due to the pandemic. However, the pandemic has only accelerated the changes that we had predicted many years ago. In fact, labor shortages had begun to impact some sectors of the economy, such as the trucking industry, well back in the early 2000s. The main reason for these labor shortages is a major shift in our country’s demographics.

This issue revolves around the long-term decline in the birth rate in most major economies, a decline that has dramatically worsened of late. As demographic changes are generally very gradual, it is unlikely that the birth rate will rise significantly in the years ahead, and this will have a major impact on our working-age population for decades to come. What was once a major demographic advantage for countries such as the United States and China is now becoming a potential drag on economic and business growth.

These trends raise two tricky questions around our ability to alleviate labor shortages. The first revolves around immigration. Many major economies remain attractive destinations for skilled and unskilled workers. However, restrictions on immigration in recent years have contributed significantly to the labor shortages impacting many sectors of the economy all around the world. As such, governments must do a better job of both attracting skilled workers to their countries as well as better regulating the inflow of unskilled workers, for we need both to offset this growing labor shortage problem.

The other question involves retirement. Any close look at the finances behind the funding of the retired segment of the world’s population reveals that without dramatic changes, the ability to fund spending programs for retired citizens cannot be sustained. Worse, without an increase in our working-age population, less money will flow into the government, making it impossible to pay for rising retirement costs. As such, we must find a way to extend the productive lives of our citizens. That is not to suggest that people in their 70s should be working physically-demanding jobs, but rather we should be using their experience and knowledge in a more productive manner.

Clearly, these proposed solutions are likely to meet with much opposition, as any suggestions of promoting immigration or raising the retirement age are unlikely to be vote-winners. However, our economy will face the threat of long-term decline if we do not solve the labor shortage issue. Automation may eventually help alleviate some of these shortages, but that time is still far away (and will do nothing to offset the decline in the number of consumers). If we do not solve this problem, a lack of economic growth will mean major cuts for all sorts of government-funded programs, including for our infrastructure, police, healthcare and military. As such, tackling this issue today will go a long way towards helping us to avoid to very uncomfortable developments tomorrow.