Is the robust job market masking underlying labor market risks?

Even with a reported 10.4 million job openings, around 7.7 million Americans remained officially unemployed in September. Meanwhile, a record number of Americans have been quitting their jobs of late as the impact of the pandemic shock continues to reverberate. The “Great Resignation” trend is just the latest sign of the extraordinary level of flux in the U.S. labor market.

As the underlying dynamics of the labor market evolve, it is becoming increasingly apparent that many workers are no longer willing to tolerate poor working conditions and are increasingly demanding better work environments and higher pay. After experiencing a decline in bargaining power with employers and capital owners in recent decades, American labor appears finally to be getting the upper hand (at least for the moment). 

A few recent positive developments involving the broader U.S. labor market include faster wage growth for those at the bottom of the income ladder and increased expenditure by corporations on capital goods (which should provide a boost to labor productivity). Furthermore, recent college graduates are encountering a historic jobs boom as companies boost their campus recruitment efforts.

Despite clear signs that we are in the midst of an extraordinarily robust job market in the near term, there are a few storm clouds gathering on the horizon that suggest that substantial challenges may lie ahead. There is a need to use this window of opportunity to initiate fundamental structural reforms in order to put American workers on a firmer footing. In addition, it is fast becoming apparent that a monetary policy reset is necessary to prolong the ongoing U.S. economic recovery.

A particularly serious challenge facing the labor market is the distinct possibility that the pandemic-induced downshift in labor force participation rates may linger for quite a while and may never fully recover. Several factors are limiting labor force participation. For instance, some workers have sought early retirement, and many women have been forced to exit the labor force in order to look after their children.

Such developments will have an adverse impact on U.S. growth potential. (Long-term economic growth depends on worker productivity, population growth and labor force participation.) Declining birth rates, significant curtailment of skilled legal immigration and reduced labor force participation rates pose a long-term economic threat.

Another labor market challenge relates to the growing skills mismatch. Tom Barkin, president of Federal Reserve Bank of Richmond, recently noted: “Even prior to the pandemic, we had a shortage of workers with the training and skills necessary to staff trucking fleets, manufacturing operations, nursing shifts, technology companies and construction crews. But now these shortages are ever more acute as demand for these sectors booms.”

There is a dire need for skilled tradespeople (plumbers, construction workers, electricians, etc.). But for a variety of reasons, the pipeline for these relatively well-paying professions has dried up. Even President Biden’s infrastructure goals are threatened by a shortage of trained workers. Restoring dignity to such careers is necessary to attract a new crop of trainees.

Too much attention has been devoted to getting high school graduates into four-year colleges and not enough to offering alternate pathways for attaining skill training and for obtaining high-paying jobs. Well-intentioned policies aimed at boosting four-year college enrollments are often misguided as they ignore the reality that high school graduates differ significantly in their level of college preparedness and personal interests. Such efforts have eroded the quality of college degrees (both grade and degree inflation are way up) and led to the commodification of higher education.

Location mismatches are also a growing concern. In response to the pandemic, many residents moved from dense, high-cost urban centers to suburban and rural areas. Some of those with the potential to work remotely have moved to different states. Such geographic mobility has created significant shifts in the demand for and supply of labor across different locations. An excellent new report from Goldman Sachs indicates that there has been a big increase in location mismatches in recent months.

Finally, there is a strong case for resetting U.S. monetary policy to prolong and sustain the ongoing U.S. economic recovery. There are growing signs that slack in the U.S. labor market has largely disappeared. A recent study by the Federal Reserve Bank of Dallas noted: “The weaker-than-expected August labor market report should not obscure the labor market’s ongoing and significant progress while recovering from the COVID-19 pandemic. Our analysis shows both overall and among major subgroups, the unprecedented labor market slack created in 2020 has been absorbed”.

The persistence of inflationary pressures and growing supply shortfalls in the presence of robust demand suggests that the Federal Reserve might already be behind the curve. There is a clear need to initiate tapering of the Federal Reserve’s asset purchase programs as soon as possible. An accelerated schedule to bring about an early end to asset purchases by next spring and a shift in forward guidance regarding the timing of policy rate hikes might be necessary to bring rising inflationary expectations under control and avoid a risky wage-price spiral.

The short-term outlook for the job market certainly appears rosy, and the relative gains (in the form of higher nominal wages and increased bargaining power) made by American workers is certainly worth celebrating. But reduced labor force participation, growing skill and location mismatches and sustained inflationary pressures suggest that economic headwinds are on the horizon.

Vivekanand Jayakumar is an associate professor of economics at the University of Tampa.