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The labour shortage conundrum: What economists are missing in their hunt to explain the record number of job vacancies

The stay-at-home rate amongst the 18-34 year old age group – those who have moved back or never left the parental home – may well be a crucial missing link in explaining the record number of job vacancies and labour shortages in the developed world.

And the long-run consequences could be dire that could lead to far more persistent labour shortages than many realise, especially at the lower end, and by extension lead to higher levels of inflation for longer.
And with more angry, young people with no hope and a bleak future comes increased unrest and civil strife.

In the past, I found myself in agreement with a lot of what the Economist expounded and their general take on issues. 

But, like an older couple whose children have recently moved out and who – in the cold light of day – find that they don’t have too much in common anymore, I have found myself drifting recently on key fundamentals and many of their editorial positions and forecasts are becoming increasingly alien to my own (bleaker) outlook. 

And at the very heart of this drift is a different take on labour market dynamics – both in the short and long-term. 

A labour market that is obviously in turmoil right now. 

Job vacancies are at record highs in the U.S and U.K and the figures are sobering.  In U.S alone people quitting their jobs hit over 4 million in August. That’s 3% of the entire labour force quitting their jobs in one month.  And the number of vacancies now stands at a record of over ten million. In the U.K  – proportionately-speaking – the job vacancy figures are even worse.

It is one of the central problems contributing to supply chain problems in the post-pandemic world.  And if whatever is driving it persists, it will keep inflation high, forcing central banks to raise interest rates sooner than is comfortable for markets and many ordinary folk and possibly push a heavily-indebted western economy to the point of stagflation and maybe even worse. 

But while the likes of the Economist claim that such shortages are ephemeral.  And will soon settle and usher in a golden age for labour where the worker has far more say and control over the conditions and wage they earn, I am of the opposite view. 

For me – and the more pessimistic out there – labour market trends in the long-run are about to be shaken to the core by automated processes.  Where once automation was mainly a complementary force (say GPS systems for Uber drivers) it has finally reached the long-predicted tipping point where it becomes more of a substituting force (think self-drive lorries and cars).  There have been many false dawns.  In fact, the automation doomsayers go all the way back to the famous economist John Maynard Keynes himself in the 1930s.

But now and for the past 4 decades or so since the 1980s we finally have begin to see its effects on wage disparity between the highest and lowest earners and the gouging of middle-income jobs, whose repetitive nature in many cases (known as explicit knowledge in economic speak – think bank clerk or junior accountant or lawyer) that don’t require much physical or actual human input (known as tacit knowledge – like that of social workers or nurses) are most susceptible to being automated.

When it comes to HGV driver shortages in the UK for example, why spend a serious chunk of money training for an industry that by all intensive purposes might be automated out of existence by the end of the decade?  Or at least a sizeable chunk of it will be that will at the very least create downward pressure on wages in the sector.

But this is all in the medium term and has been well-covered.  And it is doubtful how much it weighs on any individual employment decisions today and the current labour shortages being faced. 

In its editorial in the Finance and Economics section 9th October 2021 the Economist posed the question:

Is the world economy going back to the 1970s?

In repudiating the statement, the editorial pointed to one of the main differences between now and the 1970s being a less unionised labour force that will be unable to sustain higher wage demands once the surge in demand for consumer products we are experiencing today subsides.  Indeed, the fall in trade union power has often been cited as one of the most important causes for the low inflation world we lived in until the pandemic struck.  The other being cheap goods from China.

But this still doesn’t explain why even though we are nowhere near full employment, job vacancies remain at their highest level ever in much of the Anglo-Saxon world.  And because there is no clear explanation no-one really knows if wage increases will persist (and hence worries that wage inflation will indeed be a major driver of persistent inflation).

Three reasons have been posited recently – none satisfactory and certainly not borne out by the facts on the ground:

Firstly, unemployment insurance top-ups in U.S and other such schemes have made people cash-rich in the short-run and unwilling to go back to badly-paid long-hour employment.  But countries such as Australia and UK – who opted for furlough schemes that compensated employment rather than unemployment are both witnessing shortages just as severe – and in fact in the UK more so. 

The second is that young people are hesitant to return to jobs where they will be exposed to the virus.  Covid-hesitancy so to speak.  But even this is shaky reasoning.  Especially given that most young workers in the developed world have had the option of getting vaccinated for a while now and where many haven’t bothered. 

The third reason is due to female workers in particular needing to take up child-care duties while schools were closed.  But this again has not been borne out by the data.  In fact, after schools reopened the level of female participation in the labour force in U.S actually fell rather than increased recently. 

So what is causing the worker shortage in the context or record numbers of job openings? 

It is interiguing that the biggest increase in wages has been at the lower end of the market.  According to the New York Fed, low-wage workers have seen increases as much as 19% compared to the average of 3%. 

And even today’s Economist editorial: “Wages are surging across the rich world”:

The article states that in America it is the wages of the least-paid quartile of workers that are growing fastest – almost 70% faster than those at the top.

And here lies the first clue as to what might be going on.

It seems that the low-end of the labour market might be the major instigator of wage inflation and might be causing ripple effects throughout all levels of employment. 

Now here at the low-end of the labour market, two factors in particular have played out during the pandemic that could have caused this:

The first is well-documented.  That immigration collapsed during the pandemic and many of the low-paid jobs usually taken by immigrants have not been taken up by the indigenous populations.  There is no better example of course of this than the current impact of Brexit on the U.K and its partial influence on the collapse in some employment sectors as many E.U citizens returned to Europe. 

But the second is possibly far more relevant and yet has not really registered in mainstream consciousness. 

And that is the rise in the live-at-home rate amongst the 18-30s and even those well into their 30s in many developed nations but especially in U.S and U.K where it had historically been far lower. 

In both these countries the rate of young people below 34 years old who now live at home reached a tipping point during the pandemic.  While the trend has been happening for decades, the pandemic of course saw a whole generation move back in with their parents.  In America, more than half of all young adults now live at home for the first time since the 1940s and possibly the Great Depression (there is no reliable data from that period).  And in the UK, nearly two thirds of childless single adults aged 20-34 now live at home. 

And they are not moving out now after the pandemic.

This has for the first time impacted the job market.  Where many young adults would have filled low-wage positions mainly in cities living in cheap rented or shared accommodation and seen this as the first step to better-paid opportunities down the line, many have chosen to simply stay at home. 

There might be a few reasons for this.  Some might be hoping to bypass that initial stage of having to work low-paid job to make ends meet and might be studying for example to bypass that initial stage and move a few steps up toon their career paths.  This is borne out by some of the data.  The OECD data graph below shows levels of tertiary education for the 25-34 year old age group.  And indeed, in the U.K and U.S especially, there have been significant gains since 2008 and the Financial crash and Great Recession.  In U.K whereas just over 43% of young adults were in tertiary, that figure has jumped to 55.83% today – with a big jump during the pandemic.

That is not necessarily a bad thing in the long-run.  But it will mean though that for now, wage inflation, pushed by a large shift in the youth labour force not wanting to do low-paid jobs is here to stay with all the repercussions that that brings.

There is a second reason though for the shift back to their parents home.  And this – while having the same immediate effect on the labour market and wage inflation, may have far more serious repercussions in the long-run – not just for the economy – but for the very stability of western countries. 

And that is that many young people are completely dropping out of the labour market.  And with it comes the sense of no hope, anger and the “nothing-to-lose” generation that could bring with it civil unrest. 

As the OECD Data graph shows above, in the U.K labour participation for the U.K dropped from 54.8% to 52.5% immediately before and after the pandemic.  And in the U.S – where the levels of labour market participation were alarmingly low for that age group to begin with, it fell from 51.2% to 45.9%.  Of course, a lot of this could be the rise in further education in the same age group.  But the problem here is that the fall in people actively looking for work is far greater than the increase in those who have gone back into education.

To be sure, the move-at-home trend has been a long-time coming – certainly in both U.K and U.S and was not simply an outcome of the pandemic. 

In fact in the U.S the live-at-home rate amongst young adults has actually been creeping up since the 1960s when it hit a low of 29%.  Low wages and sky-high inner-city rents have seen the live-at-home rate creep up certainly since the 90s.  And after the GFC in 2008, when getting a mortgage with unattainable levels of deposit put home-ownership out of reach of a lot of first-time buyers, the rate began to increase in earnest:

In the U.K home ownership among the 25-34 age group fell from 55% in 1996 to 34% in 2016.

But while the stay-at-home jump during the pandemic might seem relatively small in comparison to the historic trend – from 47% to 52% by end of 2020 in U.S, something more fundamental appears to have occurred in the process that has reached a tipping point for many and finally had a sizeable impact on the jobs market. 

It is no longer taboo amongst many of the younger generation to live at home.  And while data is still scant, it appears those remaining are prepared to stay there for a lot longer and plan ahead seeking higher levels of education to get ahead in the job market and start higher up the career ladder, or more worryingly, might have simply completely dropped out of the job market all together. 

Whatever the reason, as I’ve said above, the overall effect won’t be good in the short-term

For what many economists feel is only a transitory problem – the mismatch between job vacancies and available labour – may actually be a more fundamental shift that proves  far more stubborn to resolve.  And if so, then wage inflation may persist, driving up costs for business and ultimately prices in the shops for far longer than many might think. 

And just maybe – unlike my own relationship with the Economist – those kids might stay a while longer at their parent’s home and continue to be a headache for the rest of us, pushing us closer to a collective nervous breakdown sooner than we had hoped for.  

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