In addition, many working-age Americans have become more selective in terms of the jobs they are willing to consider, or have decided to stop working altogether. Of course, how selective people can be depends on how long they can survive without a paycheck. And in the last 20 months, a significant share of households was able to increase their savings because of reduced spending, enhanced government support and a large increase in home and stock prices. But these savings will not last forever. The most likely scenario is that many Americans will return to the labor market in the coming months, leading to some easing in labor shortages.
That said, there is a significant chance that the dearth of workers will continue into 2022.
The US needs to find ways to raise the number of workers through larger and more economically motivated immigration policies, and higher labor force participation. For example, the federal government can make labor market needs for specific skills a larger consideration in immigration policy. And companies should attempt to hire more workers from demographic groups that typically participate less in the labor force.
If we do not address these issues, a continuing labor shortage would pose a serious risk to the 2022 US inflation and economic growth outlook. First, wages for new hires will continue to rapidly grow. That, on top of an escalating cost of living, will increase wage growth for workers who stay in their jobs. Across the board, higher annual raises and special adjustments to retain workers are likely to further increase companies’ overall labor costs.
For the first time in decades, the scenario of a wage-price spiral, where higher prices and rising wages feed each other, leading to faster growth in both, could actually hinder economic growth. In such an environment, the Federal Reserve will be forced to raise interest rates multiple times in 2022 and materially slow GDP growth by more than what is already currently being forecasted.
Without policymakers, business leaders and thought leaders more clearly recognizing the current dangers that labor shortages pose, the US risks not being able to fully recover economically from the pandemic for the next couple of years.