Why “labour shortages” don’t really exist

The story is consistent over time. When jobs are plentiful, people say there is a labour shortage. It is hard for bosses to find staff. But when unemployment is high, people still say there is a shortage. “There are 3m jobs available in America that are not filled because too many of our people don’t have the skills for those jobs," said Marco Rubio, now America’s secretary of state, in 2013, when the jobless rate was north of 7%. The story is also consistent across industries. Some economists say there is a lack of blue-collar workers; others worry about who will pick vegetables. Still others focus on care workers. Alex Tabarrok of George Mason University has written about “the extreme shortage of high-IQ workers". In sum, people always say there is a labour shortage. This tells you something: the term is slippery, perhaps even incoherent.

It makes most sense when related to the macroeconomic cycle. Demand for labour can run above supply, such as after the covid-19 pandemic, when high spending boosted demand for labour. In such circumstances, wages rise as firms compete for staff. Across the G10, average nominal pay is 20% higher than in 2019. For a while, higher nominal pay can eliminate labour shortages by encouraging work and discouraging hiring. But because economywide labour shortages are ultimately inflationary, higher wages do not bring demand and supply into line. Central banks must instead raise interest rates to reduce demand for labour.

The micro level presents a different story. Here, a labour shortage is a question of price and distribution, rather than scarcity. If a company complains about a shortage of vegetable-pickers, what it really means is that it cannot hire them at the wage it would like to pay. The term “labour shortage" thus implies a normative claim—that there “should" be more workers at the prevailing wage—rather than describing an economic reality.

When you dig into the data, evidence of shortages often melts away. Consider construction, a classic “shortage occupation" in many places. America’s homebuilders’ trade group talks of a “dire need" for new workers. In reality, over the past decade, the share of the American workforce involved in construction has risen from 4.5% to 5.2%, which does not scream “shortage". Maybe the “true" share of construction workers in America should be even higher. But this is hard to square with the data on wages. In the past decade earnings growth in American construction has been slower than the overall average. People simply do not want to pay more for their builders. As such, the market seems perfectly satisfied.

Even high wages are not necessarily proof of a labour shortage. Consider Erling Haaland, Manchester City’s star striker. Mr Haaland commands a huge salary because he scores so many goals. In a sense, then, there is a global shortage of Erling Haalands. But that is an absurd position. No amount of wage increases will create more of him. His ability to command a huge salary is a function of unique ability, not a failure of market supply. It is on this logic that Mr Tabarrok errs in saying there is an “extreme shortage" of high-IQ people. There is always scarcity of very high-performing individuals—that’s why they are valuable. Calling that a “shortage" is just relabelling market-clearing price differences.

A minority of professions do experience genuine labour shortages, but only when some non-market mechanism prevents the market from clearing. In Britain, for instance, there is both a shortage of doctors and a shortage of training places for doctors. The National Health Service has long faced recruiting difficulties. And yet the government, facing funding pressures, has long capped the number of places at medical schools. In America stringent occupational-licensing requirements make it difficult for workers to move to in-demand jobs. In 2020 the OECD noted that, across the rich world, driving instructors face some of the toughest licensing requirements. If you are ever struggling to find an instructor to help your child pass her driving test, blame the bureaucrats.

Another list will do the trick

Recognising the truth of labour shortages has important policy implications. At present officials are afflicted by shortage-itis. Australia maintains an “occupation shortage list" to monitor which industries need state assistance. Germany maintains a similar list and gives people in these professions preferential migration treatment. In America Joe Biden tried to tackle a perceived labour shortage in certain industries via apprenticeships. Sir Keir Starmer, Britain’s prime minister, wants to boost spending on training British-born workers to alleviate his country’s labour shortage. Businesspeople bleat so much about labour shortages in part because hefty subsidies are up for grabs.

Politicians could have more impact by getting out of the way. Economists are fond of the idea of allowing firms to bid for visas. This would ensure new workers flow to industries that have greatest need. Relaxing land-use rules would allow people to move to areas where jobs growth is strongest. Politicians should also loosen occupational-licensing requirements. Aside from that, central banks are responsible for managing aggregate labour shortages, by supervising the overall economic cycle. Next time you hear the cursed term, be suspicious. There’s only one Erling Haaland.

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