Jobs & Unemployment

The Biggest Reason for the Labor Shortage Is Not Being Talked About

Empty Office

In yet another sign of the times, Starbucks (SBUXannounced yesterday that they were raising wages for their workers across the board. There are some company- and industry-specific reasons why they are doing that, most notably a growing move towards unionization among their staff, but the main reason is one with which we are all too familiar: there is a labor shortage right now in the U.S. There has been a lot of discussion as to why that is so, but it usually omits one of the prime drivers of the problem.

At first, the issue was often put down to the effects of enhanced unemployment benefits but, as more data became available, the numbers just haven’t backed that up. As those extra benefits have expired or been removed, the gap between available jobs and people seeking work has not closed. If anything, it has continued to grow, prompting the kind of decisions that Starbucks just announced.

The other frequently raised issue is of workers’ attitudes to work after the shock of the pandemic. The argument here is that everyone rethought their work life after an enforced period of staying at home, and the idea of toiling for a subsistence wage became less appealing. Like the enhanced unemployment benefits argument, that sounds logical and may indeed have an impact, but it just doesn’t account for the severity of the current problem. People may not like the idea of working for low wages, but as unemployment benefits expire, so do savings for those lucky or prudent enough to have had any, and we all need money to cover the basics of living. People can only choose not to work for so long.

It is possible that for a while, some people decided that flipping burgers or dealing with rude, angry customers for minimum wage or close to it, while exposing themselves to a potentially deadly disease, wasn’t worth the effort. It is also possible that some decided to stay home and take the $300-600 a week in extra unemployment rather than work. Indeed, the  labor force participation rate has not fully recovered from the shock of the pandemic, which would indicate that is the case.

That, though, is an acceleration of a trend that has been with us for decades.

Civilian labor force participation rate

Increased automation, a host of wealthy baby boomers retiring relatively early, and some other factors, have all contributed to that trend, but until recently, it hasn’t been a big problem. That is because, even as those things have had an impact, America continued to fill job openings in the way it has for hundreds of years: by accepting immigrants.

That changed in 2016 with the election of Donald Trump.

Immigration reform was an essential platform of the Trump campaign, and while most of the attention was on things like the border wall and efforts against unauthorized immigration, that wasn’t all the administration did. They also set out to reduce legal immigration, a task at which they were, in the words of The Cato Institute, "wildly successful." To quote the same Cato piece, “By November 2020, the Trump administration reduced the number of green cards issued to people abroad by at least 418,453 and the number of non‐​immigrant visas by at least 11,178,668 during his first term through November 2020.”

One could argue that that was done with the noble intention of improving the lot of the beaten-down American worker, but it now looks like the policy had unintended consequences. Is it any surprise that, with that kind of reduction in immigrants to fill vacancies, we are now experiencing a labor shortage?

For the labor market to operate efficiently, it needs mobility and, whether you like it or not, in the modern world, that means across national borders as well as within a country. A policy that strangles that mobility, no matter what the motivation, creates problems. That holds up outside the U.S. too, with some of the worst labor problems internationally coming in the U.K. post-Brexit and in Australia, where immigration policy has tightened significantly over the last decade or so. UK jobs vacancies have hit a record recently, for example.

Labor issues are never simple. The market is one in human beings with all their attendant complex motivations, but some things about it are not that complex. If you reduce mobility by reducing the global flow of workers, you disrupt supply and distort the market. That creates problems; problems that lead to companies like Starbucks having to increase wages. Admittedly, it wasn’t an extensive, comprehensive study, but in the course of my research, I did a quick search for articles about the reasons for the labor shortage. There were plenty of results, but there was barely a mention of immigration as a part of the problem. Maybe that needs to change.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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