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Understanding the Crisis of Labor Shortage Despite High Unemployment

The International Labor Organization expects the number of working hours to decrease by 2 percent in 2022 compared to pre-pandemic levels, i.e. a working-hour deficit equivalent to 52 million full-time jobs. Forecasts indicate that the global unemployment rate will rise to 207 million people by the end of 2022, exceeding the 2019 levels by about 21 million people.

These forecasts come with high unemployment rates coinciding with a decline in the labor supply and companies worldwide facing a “great wave of resignations”, leaving them struggling to find qualified employees. Data indicates that the global skilled workers shortage could reach 85 million people by 2030.

Causes and Drivers of Labor Shortage 

A recent survey by PricewaterhouseCoopers (PWC) revealed that 41 percent of the global workforce are considering quitting their current jobs, with some finding better jobs with better salaries or better work environments and others starting their own businesses. The survey also indicated that about 87 percent of businesses face challenges replacing the departing employees.

Between April and August 2021, about 20 million workers quit their jobs in the United States and about 40 percent of employees in Australia expressed their desire to look for a new job within the next six months. Additionally, one out of every six workers aged between 18 and 29 years decided to quit their jobs in Latin America. While these figures may differ from one region to another, they speak volumes of this crisis, which several factors contribute to. Below, we shed light on these factors.

The Demographic Factor: Age demographics is one of the biggest challenges facing the labor market in the current century. Between 2030 and 2050, the number of elderly people aged 60 or more are expected to double while the number of elderly people aged 80 or over will triple during the same period. Meaning more seniors will retire in the coming years and their vacant posts will need to be filled.

This could be alarming for business owners, particularly with the aging crisis coinciding with a decline in birth rates, which makes it difficult for them to find among youth and fresh graduates employees with high skills and the ability to withstand the unfavorable working conditions. Fertility rate statistics suggest that the situation won’t be any promising when it comes to birth rates. Families in advanced economies tend to consider having fewer or no children at all. Figure 1 shows the fertility rate in selected countries.

Figure 1:  Fertility rate (Number of children born per woman)

Source: World Bank, Total Fertility Rate

The above figure shows that fertility rates in Europe, Central Asia, the Eurozone, the United Kingdom, Canada, Australia, and the United States have been having a downward trend from 2010 to 2020, recording the lowest rate in Canada at 1.4 children born per woman. Data suggests that fertility rates in more than 70 countries are already below the average rate of 2.1 children per woman.

Covid-19 Repercussions: With the outbreak of Covid-19, the aging crisis proved to pose a direct threat to the global labor market, as it forced many elderly people to opt for early retirement due to health concerns. In effect, the pandemic resulted in mass dismissals of employees in most companies and industries, particularly in sectors affected by the pandemic, including the tourism and hospitality sectors. That is why some workers decided to move to other sectors or work remotely. However, after the pandemic showed signs of abatement and following reopening of the global economy, businesses started advertising vacancies but failed to attract job seekers who were not willing to return to work. For example, one out of every three employees in the hospitality sector decided not to return to work. Moreover, the pandemic contributed to changing the work preferences of employees. Many started to turn away from jobs that lack flexibility or require hard physical work or extensive and direct contact with customers, e.g. transportation, warehouses, wholesale and retail trade, hotels and restaurants.

Technology and Education: The integration of technological components in traditional industries is one of the causes of the current employment crisis. Machines and equipment have become more technologically advanced and artificial intelligence and automation have been integrated in the workplace without workers trained on these technologies. Statistics indicate that three-quarters of US employers find it difficult to hire employees with the required skills. This is demonstrative of the increasing gap between the requirements of the labor market and the educational product and the separation of education policy from economic and social development plans. Here emerges the need to direct individuals to the educational fields and specializations based on the needs of the labor market.

Immigration Turmoil: Covid-19 has resulted in the return of many expatriate workers to their countries of origin due to travel restrictions. Immigration unrest posed a challenge to countries that rely heavily on migrant workers such as the United Kingdom, the United States, Germany, Canada, and Saudi Arabia, with migrant workers accounting for 5 percent of the global workforce. For example, about 1.3 million migrant workers left the United Kingdom due to the pandemic and the Brexit transition. Canada saw a drop of 400,000 migrant workers in the first quarter of 2021 compared to previous years. Accordingly, migration challenges are exacerbating labor shortages, which are unlikely to return to pre-pandemic levels in many regions around the world.

• Decline in Wages: The high inflation rate is one of the considerable challenges facing the global economy, particularly after the outbreak of the Ukraine war, which contributed to the decline in the real value of wages, causing employees to demand higher wages. In some regions of the world, the increase of workers’ wage may not be enough to cover the cost of higher inflation. And since salary is a powerful incentive to change jobs, this may lead some employees to look for better paying jobs. In effect, many businesses could face difficulties raising wages due to the increased production and operating costs, resulting from the rise in the prices of raw materials, energy, and shipping and the decline in the exchange rate in many countries around the world, which makes the cost of importing goods more costly for business owners.

Raising Interest Rates: Tight monetary policy is seen as one of the indirect causes of the labor crisis, given the surge in bank deposits during Covdi-19 period, characterized by low consumer confidence in the economy, the launch of economic stimulus packages, the provision of unemployment benefits in some countries around the world, and the introduction of strict precautionary measures that encouraged individuals to increase their savings. After the abatement of the pandemic and the outbreak of the Ukraine war, central banks worldwide were forced to raise interest rates to contain inflation rates. The increase in deposits and the rise in interest rates encouraged citizens to leave their jobs or slow down in accepting a new job.

Influential Reverberations

The employment crisis is likely to cast a shadow over the global economy, particularly in light of the many challenges that may hinder the economic recovery phase that started in 2021. Significant repercussions of the labor shortage crisis can be reviewed as follows:

Damage to Economic Recovery: The persistent labor shortage could hamper the world’s ability to full recovery in a post-pandemic world, as it could negatively affect the productivity of companies and institutions that may have to hire unqualified people, which may harm the production quality or lead to an increase in wages that would harm companies’ profitability. Moreover, labor shortages may lead to disruptions in the supply chains and shortages in the supply of essential goods. In some countries, labor shortage has resulted in closure of some stores and restaurants or reduced working hours. A notable example of this is the fuel crisis that took place in Britain last September, with truck drivers’ shortage emerging as one of its main causes.

• Rising Labor Cost: The decreased supply in the labor market results in higher wage and labor costs and a surge in inflation. A recent analysis by the International Monetary Fund indicated that the labor shortage caused the overall US wage bill to rise by 1.7 percent between the second quarter of 2020 to the end of 2021. On the other hand, companies may have to raise the prices of their products sold in markets to offset the increase in wage costs, by passing on that increase to the end users, which could mean a new rise in global inflation rates.

Unconventional Measures: Some international companies were compelled to take unconventional measures to mitigate impacts of the employment crisis, with some companies hiring people with criminal backgrounds. For example, JPMorgan announced it hired workers with criminal records and people with disabilities to overcome the labor shortage. In the same vein, McDonald announced giving away iPhones to new staff members who remain in their position for at least six months, which is demonstrative of businesses’ dire need for employees.

In short, the severity of the labor shortage crisis became clearer with the abatement of Covid-19, the reopening of global economies, and the return of demand to pre-pandemic levels. Such labor shortage coincided with high unemployment rates. If this is any indicator, it speaks volumes of the current imbalance in the global labor market.

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