One of the biggest questions for the economy right now is the job market. The headlines are doing a good job covering the immediate issues—labor shortages, wage increases, and so forth. But the more I look at it, there are a couple of implicit assumptions in how we view the job market that need more consideration. For example, much of the analysis has taken what is going on now as something that is happening without any warning and for no apparent reason. But is that really the case?
New Patterns for Labor Market
The start and end of the pandemic are being trotted out as reasons people are quitting in unprecedented numbers, or leaving the labor force, or simply not taking the available jobs at wages employers want to pay. This situation is all being treated as something of a mystery. The implicit assumption is that we will, sooner or later, return to normal. In this case, “normal” means there is a surplus of labor, employers set pay rates and job terms, and employees take what they can get. In other words, while we may be in a seller’s market for labor now, we will be back to a buyer’s market very soon—and stay there.
The more I look at the data, the less sure I am about that assumption. I do think we will get back to something like normal by year-end, in that people will be working again, with most jobs filled. But looking back at the pre-pandemic data, there were already signs that things were changing before the pandemic. Wages have been rising faster than inflation for several years now, as I wrote about at the start of 2020. That shift means something, especially when you couple it with the demographic trends as the boomers age out of the labor force and immigration slows. The pandemic certainly broke the labor market. But as we recover, workers seem to be finding that old patterns are not holding.
Sellers Vs. Buyers
There is no fundamental reason why employers get to set wages. That has been the case for decades, of course. With the boomers flooding the labor force, with immigration high for much of that time, and, most important, with the global labor force exploding with the addition of China, there have been more workers than jobs. The labor market (and it is a market) responded as you would expect, by bidding down wages. Employers could set the terms because they had something workers wanted: jobs.
But if you look closely, all three of those trends are now leveling off and reversing. Boomers are retiring. Immigration is down and likely to stay that way. Even if companies were still globalizing, which by and large they are not, the Chinese working population is declining. The number of workers is going down even as the number of jobs is going up. While we may not yet be in a seller’s market for employees, it doesn’t look like we are still in a buyer’s market for employers either.
What Comes Next?
I am not sure how real this situation is. It might be an effect of the pandemic. I don’t think so, though. As I said, when you look back at the data, this trend pre-dated the pandemic. I do think it is worth a much closer look, and I will be doing just that over the next couple of weeks.
As we move past the pandemic, we need to spend much more time thinking about what comes next. And now that the immediate problems are fading? We can do just that.