Help Wanted: Why Can’t Businesses Find Enough Workers?

Labor Shortage and Ongoing Supply-Chain Disruptions

The ongoing labor shortage has disrupted corporate supply chains, delayed or canceled product orders, and limited access to child care for working parents. In addition, the labor shortage has affected air travel and forced restaurants, retail stores, and other businesses to shorten hours or temporarily close understaffed locations. More recently, a surge in cases linked to the Omicron variant has further intensified the labor shortage and the challenges it creates for employers and workers alike.

Since the pandemic began, unpredictable shifts in demand have exposed long-standing mismatches between the skills workers possess and the roles employers need to fill. Moreover, the number of available jobs has far exceeded the number of unemployed workers. Employers reported 10.6 million job openings in late November 2021, while unemployment totaled 6.8 million in November and 6.3 million in December.

Although COVID-19 triggered the labor shortage, long-term demographic trends have also contributed to this unusually tight job market.

The Flux of the Workforce: Labor Shortage in the United States

The labor force participation rate, which measures the percentage of people age 16 and older who are working or actively seeking employment, fell sharply from 63.4% in February 2020 to a record low of 60.2% in April 2020. By December 2021, participation had only partially recovered to 61.9%. Consequently, approximately 2.3 million individuals have exited the workforce entirely since the pandemic began, and some may not return.

Early Retirements

Over recent decades, declining birth rates and the aging of the baby boom generation have reduced workforce growth. As a result, retirees now make up a larger share of the population. The pandemic appears to have accelerated this trend, leading to an estimated 2.4 million excess retirements as of August 2021. Higher retirement account balances and rising home values made early retirement more feasible for many individuals.

Immigration Slowdown

Declining immigration has also reduced the available labor pool. Estimates suggest that as many as 2 million potential workers have been removed from the U.S. workforce. Net migration dropped steadily from 1.05 million people in 2016 to just 247,000 in 2021. Moreover, the steep decline between mid-2020 and mid-2021 was partly driven by pandemic-related travel restrictions.

Pandemic Repercussions

In December 2021, about 1.1 million people reported that the pandemic prevented them from seeking employment. This group includes individuals facing child-care constraints, health concerns, or lingering effects from long COVID.

At the same time, many households stabilized their finances through pandemic relief measures. Consequently, stimulus payments, paused student loan obligations, and reduced spending created excess savings. Some workers used this financial cushion to reassess career paths or focus on caring for children and aging parents instead of returning to work.

Economic Effects of Labor Shortages

When job openings are plentiful, workers gain leverage and flexibility. As a result, U.S. workers quit their jobs at record rates in 2021, often moving to employers offering higher wages, improved benefits, better working conditions, or greater flexibility.

Intense competition for workers pushed wages up by 4.7% in the year ending December 2021. Moreover, shortages were most severe in lower-paying, in-person roles, leading to larger wage gains in leisure and hospitality, transportation and warehousing, and retail sectors.

However, workers benefit only when wage growth outpaces inflation. Unfortunately, real wages declined in 2021 as rising prices eroded purchasing power.

The Consumer Price Index increased 7.0% in 2021, marking the highest annual inflation rate in nearly 40 years. Consequently, many businesses passed higher labor costs on to consumers. In response, the Federal Open Market Committee accelerated the tapering of its bond-buying program in December, setting the stage for more aggressive interest rate increases to combat persistent inflation.

Nevertheless, policymakers face a difficult balancing act. They aim to curb inflation without slowing economic growth too sharply, especially if labor shortages and supply-chain disruptions ease over time. At the same time, officials remain prepared to act if rising wages threaten to fuel a sustained wage-price spiral.

Despite these uncertainties, U.S. executives ranked labor shortages as the most significant external factor affecting their businesses in 2022, with rising inflation close behind. Consequently, the U.S. Chamber of Commerce has urged federal leaders to reform and expand legal immigration pathways to help ease labor constraints and potentially cool inflation.

Looking ahead, some workers may reenter the labor force as savings diminish or pandemic-related concerns subside. Additionally, higher wages could entice early retirees and stay-at-home parents back to work. However, labor force participation may never fully return to pre-pandemic levels. Therefore, employers may need to adjust hiring standards, invest in training programs, or rely more heavily on automation. Whether these strategies can boost productivity enough to offset a smaller workforce and sustain economic growth remains uncertain.