The great labour crunch

Across advanced economies and beyond, labour markets are tight with unemployment rates at or close to historic lows – 3.8% in the US, 5.9% in the EU (despite the eurozone being on the cusp of recession after this week’s data confirmed a Q3 GDP contraction), and 4.2% in the UK.  A similar picture is seen across small advanced economies.

Employment levels have recovered above their pre-pandemic levels in most advanced economies.  And job vacancy rates remain at high levels, even if they have come off their record highs.  Part of this tightness reflects substantial churn in labour markets through and since the pandemic, as people move between jobs and occupations.  Quit rates soared as people looked for better jobs, particularly moving out of sectors such as retail and hospitality. 

Relatedly, preferences around labour market engagement have shifted.  It is difficult to quantify this, but the pandemic experience reshaped the way that some thought about work; participation rates in some cohorts reduced (e.g. early retirement).  And there are generational differences in attitudes to work: from quiet quitting to the lie flat movement in China.  It is striking that employment has increased by much more than hours worked over the past few years, implying reduced average hours per employee.

This means that there are constraints on labour availability.  Business surveys from the US and the UK to New Zealand commonly report that lack of workers is a major constraint on expansion.

Indeed, there are many examples of labour supply related constraints around strategic projects in the US and Europe.  TSMC’s new semiconductor plant in Arizona is being delayed until 2025 because of a shortage of skilled construction workers.  There are similar issues in Germany, where the (heavily subsidised) influx of planned semiconductor facilities (TSMC, Intel, and others) are confronting substantial labour shortages amid an aging population.  Aspirations around industrial policy in many Western economies are constrained by the absence of workers.

The full note is available at: https://davidskilling.substack.com/p/the-great-labour-crunch