The Labor Shortage Is Worse Than It Looks, and Help Is Not on the Way

By Lisa Beilfuss

Fadi Achour has had to fill in for service staff at the hotel he manages in Romulus, Mich., as many employees didn’t return from pandemic-related furlough. / Photograph by Nick Hagen

For Fadi Achour, the general manager at Delta Hotels in suburban Detroit, September can’t come soon enough. 

He is operating with less than half his normal staff. 

Room service and overnight cleaning has been nixed. 

The restaurant has limited hours and a bare-bones menu.

When Michigan fully reopened from pandemic shutdowns months ago, Achour called each of his roughly 100 employees, most of whom had been furloughed. 

But most had moved on or weren’t ready to return. 

He raised wages several times as an enticement, but the housekeepers and cooks still didn’t respond. 

Some workarounds, like reducing services, making beds himself, and offering grab-and-go food in the lobby are helping him to barely break even at his Marriott-affiliated hotel. 

With all the cutbacks, only a third of the property’s 271 rooms can be booked.

“We’re struggling,” Achour says. 

“The labor is not there. 

There are help-wanted signs everywhere. 

Everybody is looking at September.”

There are 9.2 million job openings and 9.5 million unemployed in the U.S., with workers quitting their jobs at a near-record rate as companies seek to fill a record number of open positions. 

Employers, economists, and policy makers blame the bottleneck on twin forces they expect to ease this fall: generous jobless benefits that have made unemployment the better economic decision for millions of low-paid workers, and a year of remote learning that has pushed some two million parents—mostly mothers—out of the labor force.

There is a lot of hope pinned on September, when enhanced unemployment benefits expire and schools reopen, and with it the risk of disappointment. 

Behind those factors and the help-wanted placards that dot American cities and towns are deeper problems besetting the labor market, from an aging workforce and a new desire of many workers to be their own boss to a deep skills mismatch and a pandemic that isn’t over, and in fact has been reintensifying.

The expectation that the labor shortage will resolve itself this fall informs the Federal Reserve’s prediction that bubbling inflation—already greater and more persistent than forecast—will be fleeting, or transitory in policy makers’ parlance. 

Once extra jobless assistance ends as of Sept. 6 and parents send their children back to school, the logic goes, labor-force participation will pick up, companies will staff up, supply chains will thaw, and upward pressure on wages—and overall inflation—will cool.

“We’re struggling. 

The labor is not there. 

There are help-wanted signs everywhere. 

But if the labor shortage persists past the fall, the consequences could be pernicious. 

A more persistent problem that caps growth while stirring inflation complicates already-complicated monetary policy, which includes $120 billion a month in Treasury and mortgage-backed securities purchases launched as an emergency measure early in the pandemic. 

As workers demand increasing wages to meet rising costs of shelter, groceries, and other household goods and services, both wages and prices run the risk of spiraling higher.

For investors, a lasting labor shortage presents a host of potentially negative outcomes. 

It heightens the risk of a more aggressive monetary-policy response, as Dallas Fed President Robert Kaplan has warned—and the risk of a policy mistake. It promises to weigh on corporate profitability. 

And ultimately, it makes the nightmare scenario of stagflation more realistic.

“It’s very likely that September will come and go and the issue won’t resolve itself,” says Ed Yardeni, president of Yardeni Research.

Fadi Achour, general manager of Delta Hotels by Marriott in Michigan, vacuums and tends bar—tasks that used to be handled by employees who’ve been slow to return from the pandemic. / Photographs by Nick Hagen

Dismal Demographics

Right before the pandemic struck, the unemployment rate was at a 50-year low of 3.5%. 

And employers were then just starting to recognize that labor was in short supply, Yardeni says, owing to demographic trends that have been years in the making and are only getting worse.

Around the start of the 2007-09 recession, the birthrate in the U.S. began to fall. Ronald Lee, an economist and demographer at the University of California, Berkeley, expected a temporary drop, but the decline has continued to about 1.6 births per woman from 2.1 about a decade ago. 

Covid has exacerbated the trend. 

“This is extraordinary and unprecedented for the U.S.,” says Lee, adding that the decline translates to population growth that is roughly a half-percentage point slower per year and thus on track to turn negative over coming decades.

The impact of slowing population growth on labor supply hadn’t been so apparent before the pandemic because many baby boomers worked past the traditional retirement age of 65. 

In July 2019, Pew Research Center said the majority of U.S. adults born between 1946 and 1964 were still working, with the oldest among them staying in the labor force at the highest annual rate for people their age in more than half a century. 

But now the oldest boomer is turning 75, the working-age population is falling for the first time in U.S. history, and the pandemic has led many older workers to retire ahead of schedule.

Geoffrey Sanzenbacher, an economics professor at Boston College, found that 15% of those over age 62 were retired a year after the coronavirus took hold in the U.S., up from 10% a year after the 2007-09 recession started and 13% right before the pandemic. 

As companies expect workers to return in the fall, he says another wave of older workers may choose to retire if they can no longer work remotely.

‘My Dream Was to Walk Away’

Tamara Gruschke, shown with newborn goat Cupid, epitomizes the many workers who broke away from traditional jobs during the pandemic and don’t intend to return. / Photograph by Zack Wittman

It isn’t just older workers walking away from the labor market, nor is it only low-paid service workers. 

An hour outside of Tampa, Fla., Tamara Gruschke has been raising dairy goats for six years, using excess milk to make soaps, lotions, and scrubs. 

She had been looking for a reason to leave her job working for Veterans Affairs when Covid hit. 

Her business—Olive Drab Farm, named for the color of military gear and her olive grove—took off, with sales doubling to six figures as quarantined consumers splurged on personal products.

“My dream was to walk away from that job,” says Gruschke, 40, adding that she won’t return to the traditional workforce if she can help it. 

“My perspective has changed. 

I’m not reliant on anyone but me and am responsible for my own future.”

It is unclear how many departed workers like Gruschke are gone for good, and how many will return with the expiration of enhanced unemployment benefits. 

Still, there is some evidence that continuing claims for jobless insurance have fallen faster in states that ended the extra payments ahead of the federal Sept. 6 expiration. 

Aneta Markowska, chief economist at Jefferies, says such claims have fallen 24% since mid-May in the states that have already cut the extra $300 a week, compared with a 0.7% increase in states that haven’t. 

The data are limited, though, since some 70% of people receiving benefits live in states that haven’t yet cut the additional payment.

Gruschke’s Olive Drab Farm sells goat milk soap, scrubs, and lotions. / Photograph by Zack Wittman

Not everyone is optimistic that the end of pandemic unemployment insurance will meaningfully improve companies’ hiring prospects. 

Companies are increasingly competing with the likes of (ticker: AMZN), which has raised entry-level pay to $15 an hour. 

A record number of new businesses launched during the pandemic as workers turned into entrepreneurs. 

Immigration, the lifeblood of many services companies, dropped significantly in recent years. 

Retail day trading is still booming along with the stock market, keeping many who became amateur traders during the pandemic on the sidelines.

Achour, the hotelier in suburban Detroit, says the Biden administration’s monthly child tax credit of up to $300 is a new deterrent for some would-be staff who had been expected to return to work when their children return to school.

Meanwhile, doubts are growing that millions of moms will return to work in September. 

Many families have established new norms over the past year, and many parents still harbor virus concerns, says Misty Heggeness, economist at the U.S. Census Bureau, as Covid variants spawn and mask mandates are revived.

While employment among working women without children has almost returned to prepandemic levels, mothers with school-age children are lagging, she says. 

She is skeptical that trend will meaningfully change in September. 

“School opening in the fall isn’t going to be the savior for getting people back to work,” says Heggeness.

“I think we’re underestimating the fear people have with the virus,” she says, adding that it’s plausible some parents will hold back children in the fall if virtual learning is an option and if parents themselves remain reluctant to return to workplaces. 

And some employers are already altering their September reopening plans, with Google parent Alphabet (GOOGL), for example, pushing back the return to October and requiring vaccinations.

Even for parents of young children who want to return to work, the child-care options may not be there. 

Many day-care centers closed during the pandemic, and many others have limited capacity given demand or staffing shortages.

When Amy Rudolph Nordstrom reopened Little Wonders Child Care in Erie, Pa., after months of closures last year, she raised hourly pay to $10 from $8 in an effort to poach workers from other employers, and in turn increased the rates she charged families. 

Bidding wars for workers ensued, Rudolph Nordstrom couldn’t hire enough qualified staff at rates she could afford to pay, and she permanently closed her day-care business in July. 

The calls are still flooding in for care, she says, as other centers in the area are similarly short on labor and unable to meet demand.

Workers have more leverage than they have had in decades, especially in the lower-paid service industries hit hardest by the pandemic. 

At a time when the pool of available workers is already shrinking because of structural issues, employers have had to compete with unemployment insurance that, in Pennsylvania, for example, translates to about $15 an hour over a 40-hour workweek. 

The minimum wage there is $7.25 an hour. 

At that rate, a worker would need to work 89 hours a week to afford a modest one-bedroom rental in Pennsylvania, according to the National Low Income Housing Coalition. 

That suggests prepandemic wages are increasingly insufficient to meet the rising costs of shelter, food, and other necessities.

Wage-Price Spiral

Higher pay is good for the economy until it isn’t. 

The worry is that companies pass the cost of rising wages on to consumers, who then demand higher wages, driving prices higher still. 

The answers to how fast and for how long pay continues to rise will help determine how quickly workers come back. 

This could spell the difference between inflation that is transitory and inflation that isn’t.

A sign of the times outside Achour’s hotel on a recent day. / Photograph by Nick Hagen

As prices soar, catching policy makers and Wall Street economists off guard in both their speed and endurance, the Fed has started to emphasize inflation expectations. 

If consumers see rising prices as a temporary effect of the reopening, spending behavior won’t change and inflation itself will remain anchored.

At least that is the outcome central bankers are counting on. 

“Indicators of longer-term inflation expectations appear broadly consistent with our longer-run inflation goal of 2%. 

If we saw signs that the path of inflation or longer-term inflation expectations were moving materially and persistently beyond levels consistent with our goal, we’d be prepared to adjust the stance of policy,” Fed Chairman Jerome Powell said during his press conference Wednesday.

Reality, however, keeps undermining theory. 

Inflation expectations are at 4.8% and 2.9% over the next one year and five years, respectively, according to the University of Michigan’s consumer sentiment index. 

An 11% rise to $71,403 from November 2019 in the so-called reservation wage—the average lowest wage a person would be willing to accept for a new job—suggests inflation expectations significantly above the Fed’s 2% target aren’t so temporary.

“Powell saying inflation expectations are well anchored is just not credible,” Yardeni says. 

“Time is not on their side. 

The longer they wait [to tighten], the greater the likelihood it becomes more of a wage-price spiral.”

Yardeni says the consensus view that the Fed is largely right will be challenged by wage data through the rest of the year. 

He now puts the odds of a wage-price spiral at 35%. 

Two months ago, he placed those odds at 25%. 

A year ago, they were at zero.

Against this backdrop, companies are already looking to adjust to new realities to defend margins against rising prices—not least of which is labor, usually a company’s biggest expense by far. 

First, cost pressures are prompting layoffs that have been easy to miss amid plentiful help-wanted signs. 

Recently, General Mills (GIS) said it would cut about 1,000 jobs, while small employers like Rudolph Nordstrom let go of employees as they close their doors. 

The decline in initial jobless claims, a leading indicator of employment, has sputtered.

Second, automation is increasing. 

Productivity gains sparked by shortages are something of a shock absorber when it comes to inflation, and rising productivity inevitably leads to the creation of new jobs. 

By the same token, such productivity gains threaten to eliminate a swath of currently unfilled jobs. 

The faster dash toward automation puts nearly half of the seven million jobs yet to be recovered from the pandemic at risk—potentially leading to a permanent labor-demand shortfall over the next three to five years, says Lydia Boussour, economist at Oxford Economics.

“Most industries have responded to the pandemic by urgently adopting productivity-enhancing technologies, and we don’t expect firms to abandon these labor-saving tools,” Boussour says. 

The productivity boost will inevitably lead to the creation of new jobs, she adds, but not before destroying some in the process.

Illustrating the acceleration in automation: Capital spending on information-processing equipment rose 5.7% in 2020, almost double its average after the financial crisis, as companies deferred traditional investments in other equipment and structures, which fell roughly 12% last year, Boussour says. 

Meanwhile, an October 2020 McKinsey Global Institute survey found companies digitized 20 to 25 times as fast as they had previously considered possible, and a World Economic Forum poll done in the same month found more than 80% of business executives are accelerating plans to digitize work processes, while 50% of employers expect to accelerate the automation of some roles.

Productivity is a wild card on which policy makers are relying to cool inflationary pressures. 

The trouble, though, is in balancing the near term with the long term—especially when the former helps determine the latter.

Investing in technology takes time and there is immense pressure to meet demand now, says Markowska of Jefferies. 

That means firms will largely remain focused on hiring in the more immediate term. 

“The fact is, there are more jobs than people looking. 

I don’t know how these wage pressures dissipate completely,” she says.

The Fed’s Policy End Game

The Fed’s supposition that easy monetary policy can heal the labor market’s pandemic-induced scars means dismissing long-brewing structural issues including worsening demographics and a widening gap between labor supply and demand. 

It assumes that the impact on work from enhanced unemployment benefits and the disrupted school year have been as dramatic as blame suggests—and that those kinks sufficiently reverse next month. 

And it assumes that the pandemic, still ongoing, hasn’t changed the labor market in some irreversible ways.

The medium-term outlook—the next two to three years—is what the Fed cares most about, and it is driven by what happens in the labor market, Markowska says. 

Looking ahead to fall employment data that will set the stage for that medium-term outlook, investors face the challenge of predicting how Fed officials will respond as the economy’s biggest question starts to get answered.

One outcome, Markowska says, is that quick absorption of job-market re-entrants cools wage pressure. 

Such relief will only be temporary, though, as quick hiring would bring the economy to full employment sooner than forecast and result in an even tighter labor market, complete with longer-term wage inflation. 

Markowska says such a scenario probably wouldn’t affect the timing or pace of tapering of $120 billion in monthly Treasury and mortgage-backed securities purchases, but it could mean more aggressive rate increases once the central bank begins to lift rates.

That is presuming the Fed can and will eventually raise interest rates. 

Labor shortages persisting well beyond September may present officials with a veiled trump card: If millions remain on the sidelines as a result of structural issues and ongoing pandemic concerns, labor-force participation will remain weak and unemployment high.

Since the Fed has signaled to investors that it is prioritizing the employment side of its dual mandate, as opposed to the price-stability side, it is easy to see how ongoing labor-supply problems could underpin continued easy-money policies and an ongoing bull market.

Lisa Shalett, chief investment officer at Morgan Stanley’s wealth-management unit, puts 60% odds on Fed action by year end. 

She expects the labor shortage will push wages high enough to prompt tightening by then, and says rhetoric to that effect would be enough to cause a stock-market correction of 10% to 15%. 

Most at risk, she says: the Nasdaq 100 and long-duration secular growth stocks.

Shalett puts 40% odds on a policy mistake. 

“It’s entirely possible the Fed digs its heels in and rejects the data,” she says, letting inflation steamroll, spurring more tightening than would otherwise be necessary.

That’s not to say investors don’t react at some point to rising inflation that would accompany a more lasting labor shortage, no matter what Fed officials say. 

The bond market’s ability to tighten financial conditions would increase if the Fed begins to taper monthly asset purchases later this year, as is widely expected, because doing so would diminish the central bank’s own impact on bond yields.

Some say attempts to predict the timing of policy action is futile because tightening itself isn’t realistic. 

Consider the cooler-than-expected increase in second-quarter gross domestic product, reported on Thursday. 

Supply constraints, at the core of which is the labor shortage, are limiting growth as companies can’t restock fast enough and face rising costs to replenish inventories.

The surprise GDP slowdown supports the Fed’s view that the economy hasn’t yet made the “substantial further progress” officials deem necessary for tapering, but it came with the uncomfortable fact that prices of goods and services hit the highest levels since 1983.

With no plans to take steps to slow inflation anytime soon, the Fed is “telling the markets and hedge-fund titans the playbook from here: It is safe to run commodities prices up even higher,” says Richard Farr, chief market strategist at Merion Capital Group. 

“Inflationary pressures are beginning to choke off growth. 

You can therefore make the case that the Fed itself is hurting the job market by not addressing inflation.”

The Fed might have it both ways, then, until it has it neither way. 

For now, officials will wait for fall data. 

What doesn’t happen in September may wind up mattering more than what does. 

If workers don’t return to work in meaningful numbers in the fall, the Fed will be forced to confront the inflation that the labor market is both stoking and responding to—bringing market turbulence, one way or another.

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