Is the worker shortage over?

Daily Data: Supply is catching up

In today’s dispatch:

• is the worker shortage over?

• what happens when the most important, but least appreciated, pandemic phenomenon comes to an end? people may be surprised.

• good thing for Gross Domestic Healthcare

• healthcare hiring is a whole other ballgame

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Is the worker shortage over?

One of the most important (and still under-appreciated) dynamics of the economy is that the demand for workers has vastly exceeded supply.

Random Walk has written about this at length, but just quickly for the uninitiated:

The supply-demand imbalance has kept unemployment very low (despite higher rates), and it’s caused wages to rise (driving up the cost of services, long after the stimmy-driven goods inflation came and went). Likewise, that the gap has been slowly closing, is the thing that is gradually bringing inflation to heel (for now).

Perhaps even more importantly, the supply-demand imbalance is driven by a shortfall of workers, rather than a sudden increase in demand for work.

Most people see low unemployment and rising wages and conclude “the labor market is strong,” but they are incorrect, and it leads to all kinds of mistakes.

• By sloppily declaring “strong,” they mostly overlook what is, in fact, an enduring secular worker shortage, driven by aging and a failure to babymake. The “strength” of the labor market is actually a weakness, and we’ve already seen some of the effects, in the form of high service inflation (and generally inferior services)—yet another phenomenon that “labor market is strong” folks have unsurprisingly struggled to understand.

• Another mistake is a failure to notice that the demand for labor has been alarmingly flat for ~2 years.

A “strong” labor market would be a productive economy where we were discovering all kinds of new things that were worth doing, and therefore needed more people to do them, at prices that made those things worthwhile. We haven’t really had that.

Mostly we’ve been holding steady at the previous level of “needing people to do stuff” and gradually letting supply catch up to demand, primarily through illegal immigration.

In other words, if you think the labor market is strong, then you probably haven’t noticed that “playing catch up” has been the thing keeping unemployment low, and wages rising.

And if you haven’t noticed that, then you probably haven’t asked “well, what happens when we’re all caught up? What happens when the supply of workers finally catches up to demand?”

All of which brings me today’s data.

We’re all caught up (maybe)

From Indeed’s hiring lab, there’s some evidence that we’re very nearly all caught up.

One way to measure the supply-demand imbalance is the ratio of job openings to unemployed workers. If the ratio is high because there are lots of job openings, but few unemployed workers available to do those jobs, then the labor market is awfully tight.

Before the pandemic, that ratio was ~1.2, but during peak pandemania, the ratio blew out to 2:1. That’s 2 open jobs, for every 1 unemployed worker. A job-seeker’s bonanza.

Since March 2022, however, that ratio has been steadily compressing—not because the number of unemployed workers increased, as some expected—but because job openings have steadily deteriorated ~-30%:

Down the Beveridge Curve we go, we go!

Indeed¹

The job market has gradually loosened because supply has steadily soaked up job openings.

Indeed doesn’t say it, but the reason that the labor market has rebalanced without a lot of unemployment is because demand was never the issue—supply was. And supply has steadily come online in the form of “foreign born” workers (mixed with some part-time work, and retirees coaxed back into the labor force).

All that new supply has brought the v/u ratio back to ~1.3, or slightly higher than it was in 2019.

So how much farther do job openings have to drop before we fully return to 2019 levels of labor market balance?

If we assume unemployment inches up slightly to ~4%, then we achieve 2019 levels of parity once job openings fall between 8 to 8.3 million. By last count in March, there were 8.5 million job openings.

Extrapolating openings data using JPI data projects that there were 8.2 million openings at the end of April. In short, job openings are on the precipice of reaching the range that would signal a return to 2019’s balance.  

So, basically we’re already there, or very close to it (maybe).

Job openings are in range of what they need to be to bring supply-demand of labor back into balance.

Labor shortage is over. Hooray.

When supply catches up, unemployment takes over

Now, to be fair, this is a model, and it’s not ground truth. This whole thing is a very imperfect science to begin with.

Nonetheless, this is kind of a big deal.