Wichita State University’s Center for Economic Development and Business Research was recently asked (by Wallet Hub) about labor market issues and provided the following information on what staff are observing:
Why do employers have difficulty filling positions?
The three driving forces behind employers experiencing a shortage of qualified applicants are demographics, an overheated economy, and labor market friction. First, the growing population of the United States, combined with immigration, has restricted the labor supply. In demographic change, which has been well publicized, there are baby boomers leaving, leaving behind a labor shortage.
The second thing to consider is the economic state of the economy. After four years and a pandemic, we dimly remember what the economy looked like in 2018. It is important to note that the economy was approaching full capacity. The pandemic itself brought parts of the economy to a halt, but did not constitute a correction within the market. Thanks to the injection of federal funds, the economy rebounded quickly, bringing us back to an overheated economy where businesses have already absorbed all the high, medium and low quality labor. When we look at the percentage of population employed (employment-to-population ratio), Kansas is back to typical pre-pandemic levels by mid-2021. So, in 2022, we are seeing increased competition among employers for the remaining workforce.
The third perspective, which doesn’t seem to get much attention, is that there’s a lot of pressure in the labor market. Businesses have changed products and processes, requiring a different mix of occupations, skills and knowledge to produce goods and services. This sudden shift in demand, along with rising house prices, mortgage rates, cost of education, uncertainty and time needed to retrain, add friction to labor market capacity. to adapt to demand. However, the reality is that the job market responds quickly and it will take years for households to relocate and gain the education and experience that businesses demand today.
What are the main factors influencing high turnover rates in the labor market?
Now that the economy has returned to full employment and the demand for labor is greater than the supply, market power has shifted. Market power is akin to housing, which moves between buyers and sellers. The difference is that companies have had monopsony power for over a decade, and HR teams don’t know how to respond to this paradigm shift.
From a household perspective, job opportunities haven’t been this bright for a long time. When evaluating a person’s skills and experience as well as the work environment and compensation, part of the labor market uses the increased power to advance in their career, creating a turnover effect raised.
What will be the economic impact, if any, of this trend?
The impact from the perspective of households is positive in the short and long term, as there do not appear to be any significant policy or structural changes on the current horizon that would reduce demand and the subsequent power they currently have over businesses. The advantage is that there is likely to be upward mobility, where people in low- and medium-skilled jobs will have the opportunity to progress and gain experience and increased income.
One would expect the impact of vacancies to have a negative effect on the business. In the short term, some businesses will experience difficulties because they will not find the workforce to meet the demand; however, we might need to look at the labor market differently since we are at full employment. It’s not that households don’t want to work; they are voluntary, provided that the remuneration and the environment correspond to their expectations.
The impact on companies is that they have to change their perspective. Assume that labor remains an essential element of competitiveness. In this case, they must increase compensation to attract employees, train less qualified staff to allow upward mobility or add technology to increase the productivity of current employees. These efforts will reduce corporate profits, which will likely rattle weaker players and industries.
How can employers attract and retain employees during this troubled time?
The manufacturing and service sectors have dramatically changed their compensation plans over the past two years. Although there has been a reluctance to continue this pace of change with the high level of uncertainty, the pressure will likely continue through 2023 and beyond. Kansas businesses shared that the return on investment to attract labor in a tight market has had diminishing returns over the past six months. Direct competition with larger companies or markets made its cost prohibitive; instead, companies have found it more profitable to focus on improving their internal environment and making technology investments.
In your opinion, will this imbalance in the labor market continue to be a problem throughout 2022 or will it be resolved more quickly?
A tight labor market is likely to persist, meaning that finding and retaining labor will remain difficult for some time to come; however, three things will help relieve struggling employers. First, a recession will ease some labor market pressures. Second, the labor market will continue to adjust by moving and continuing to study. Third, businesses will be forced to invest in technology and use labor more efficiently than they have in the past.