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30 Mar. 2015 | Comments (0)

Six months after our major report on looming labor shortages in the US and other advanced economies, it’s time to take stock. How is the labor market doing, where is it going, and what does it all mean for employers, workers and even for families? If anything, our projection of rapidly tightening labor markets was too conservative. Employment growth in the past six months has been exceptionally strong, averaging almost 300,000 new jobs every month—this despite GDP growth that is still growing at just 2.5 percent, well below the rate in previous expansions. The combination of slow GDP growth and strong employment growth makes for unusually weak and perhaps even weakening labor productivity growth. The downward trajectory is dramatic: In the past five years, labor productivity in the non-farm business sector increased by just 0.75% per year, as opposed to 2-3% in the decade before the great recession. The average for 2014 was essentially zero. In the most recent two quarters, productivity growth has been negative. Meanwhile, the baby boomers have continued to retire in large numbers and will continue to do so for 15 more years. Retirement plus slow productivity growth adds up to a tightening labor market. In February unemployment fell to 5.5%, which is in the range of what economists consider its natural rate. The tightness in the labor market varies across occupations and locations. Surprisingly, many jobs that are already experiencing shortages are blue-collar ones, such as Vehicle Mechanics, Installers and Repairers and Plant and System Operators. On the other hand, some highly skilled STEM occupations, such as Scientists and Engineers, still have unemployment rates well above their norm. Some states, including those that suffered from housing crises, remain well above normal unemployment rates and thus unlikely to have labor shortages anytime soon. But in the resource-rich heartland, from North Dakota to Texas, unemployment rates are below normal, which suggests that tight labor markets already exist there. The large drop in oil prices may change this picture. We already see evidence of more layoffs and weaker hiring in oil-producing states, especially in oil-related occupations and industries. This could be the harbinger of overall weakness in the oil-producing states. The tightening labor market has already affected hiring and retention. The perceived difficulty of hiring qualified workers is a measure that has already reached pre-recession rates, while the time needed to fill job openings is the highest in at least 15 years. Perceived difficulty of hiring is partly due to employers raising skill requirement for job openings during and after the recession. Meanwhile, employee retention rates are declining due to increased employment opportunities. While quit rates are still below 2007 numbers, they are moving up quickly. Still slow to recover is wage growth, which is higher than in 2009-2010, but remains historically low. But signs that wage growth is accelerating (among smaller companies, new hires, and younger workers) mean it is just a matter of time before this indicator accelerates for the whole workforce. The tightening of the labor market is likely to continue during the near term. Within two years, the unemployment rate should be close to 4 percent, and the US labor market will be extremely tight. Low retention rates and faster wage growth are likely to put downward pressure on corporate profits, adding to headwinds such as slow productivity growth, higher interest rates, and a stronger dollar. For workers this is good news. They are more likely to have a job, and one they are happy with, and finally to see faster wage growth. This is especially true for young workers who suffered in recent years. Their improving labor market may also help to release the largest remaining pent-up demand in the US economy: household formation. Partly as a result of the weak labor market, young workers were slow in creating their own households, which slowed recovery in the housing market. This is about to change. Stay tuned.  
  • About the Author:Gad Levanon, PhD

    Gad Levanon, PhD

    Gad Levanon is the founder of the Labor Market Institute and is leading the Help Wanted OnLine© program for The Conference Board. His research focuses on trends in US and global labor market…

    Full Bio | More from Gad Levanon, PhD

     

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