What’s Causing the Labor Market Shortage?

In 2021, a staggering 47.4 million workers quit their jobs. For comparison, 42.1 million quit their jobs in 2019, which was then considered the tightest labor market in history. However, this does not explain the labor market shortage the U.S. is currently experiencing—at the end of April 2022, there were 11.4 million job openings—because since November 2020, hiring rates have actually outpaced quit rates.

Many have been quick to blame the massive amount of worker resignations, popularly called “The Great Resignation,” for the record levels of job openings. This has been particularly common among employers bemoaning the difficulty of finding enough employees to fill positions. But as the data shows, The Great Resignation is really a misnomer. It would be better described as “The Great Reshuffle,” as workers leave their jobs in droves for better opportunities elsewhere. Yes, many workers are resigning—but they are by and large getting hired by other employers quite quickly.

Become a Subscriber

Please purchase a subscription to continue reading this article.

Subscribe Now

In reality, the reasons behind the tight labor market are manifold, and the fault lies with both employers and with workers—more with the former than the latter. And, of course, politicians and policymakers have their share of the blame as well.

There have been claims from all quarters that the shortage in employees is down to the fact that “people just don’t want to work.” However, the data does not bear this out. The labor force participation rate, defined by Investopedia as “the number of people ages 16 and older who are employed or actively seeking employment, divided by the total non-institutionalized, civilian working-age population,” is now roughly the same as it was as far back as October 2013, when it dipped below 63% for the first time since March 1978, according to data from the St. Louis Fed.

The participation rate reached an all-time high of 67.3% in January 2000 and remained around that level until the 2001 recession, when it began a steady downward trend that was accelerated by the financial crisis of 2008, otherwise known as the Global Financial Crisis.

The rate appeared to have bottomed out at 62.4% in September 2015 and was beginning to trend upwards—before, that is, the worldwide COVID-19 pandemic halted this progress and the rate plummeted to 60.2% in April 2020. But, since then, it has again been on the rebound, and as of May 2022 it sits at 62.3%. If anything, more people are participating now than at any time in the past two years—and just as many are participating now as in 2015, when no one was complaining about people not wanting to work.

Thus, we must look elsewhere to explain why the labor market is so tight.

Yes, people are demanding more money for their services. But this is to be expected considering the record levels of inflation of late. And yet, while the average annual salary increase has reached 4.8%—significantly higher than a standard 3%-3.5% cost of living adjustment—it is still not enough to keep pace with an inflation rate north of 8%. So it seems workers would be justified in demanding more pay from their employers.

One contributor to the labor market shortage that can actually be pinned on workers to some degree is the fact that the pandemic has left many questioning whether they even like their jobs. These workers often become “epiphany quitters” after they realize, as one Indeed survey puts it, that “life is too short to stay in a job they [aren’t] passionate about.” In fact, that survey showed that, among people who voluntarily resigned from at least two jobs since March 2020, 92% did so due to lack of passion for the jobs.

Naturally, the number of resignations resulting from lack of passion cannot be entirely blamed on workers. After all, companies play a large role in creating positions that have meaning beyond a paycheck and that inspire passion in their employees. But regardless of who is to blame, one thing is true: if enough qualified workers leave jobs because they lack passion for them, then there will almost certainly be a number of vacancies for which there are no qualified applicants to fill them.

There are millions of open positions, and millions of job seekers to fill them, yet many open positions have remained thus for months—or even years. This is because there is a mismatch between the workers available—the skills they possess and the demands they have of employers—and the ideal employees that companies want to hire.

Many of the factors contributing to this mismatch can be attributed to the pandemic, but a large portion can also be blamed on the ongoing unrealistic expectations of employers.

Job seekers have long criticized companies for these unrealistic expectations, which range from requiring years of experience for entry level positions, to demanding that employees be available 24/7, to obligating that employees work in-person when a job could be done just as well—if not better—remotely. And, even when employers may be willing to be flexible on some of their demands, given the right candidate and circumstances, many candidates are often filtered out of the hiring process by automated hiring software before their applications even come across the desks of hiring managers.

The pandemic also inspired more workers to retire, and many of them are not planning on coming back. Goldman Sachs has noted that 2.5 million of the 5 million workers missing from the labor force are retirees, and 1.5 million of them are early retirees. Analysis from the St. Louis Fed found that more than 3 million people "likely retired earlier than they would have otherwise" during the pandemic.

The pandemic has also affected the labor shortage more directly than just motivating early retirements. S&P global economists found that 1.4 million workers may not return to the workforce until “pandemic-related issues are resolved.” Among these issues are some employers requiring employees to be vaccinated, which has deterred the vaccine hesitant.

And we cannot forget, bleak though it may be, that more than 1 million Americans died directly from the virus itself.

In a final pandemic-related effect on the labor shortage, COVID has also altered the demands that employees have of their employers related to where they physically work. An August survey by Business Insider showed that 37% of respondents looking for a job said remote flexibility would attract them most in a job offer or incentivize them to expand their job search, outranking higher wages as an incentive.

There are many reasons for this uptick in the desire among employees to work from home. Some, no doubt, just want to work from a location they personally find more comfortable. But this is far from the primary motivator. Some likely value the elimination of their commute, which saves them time, money, and frustration. Others favor working from home because they feel they do better work there—often blaming the increasingly common open-concept floor plans of many offices for distracting them. And still others simply cannot work from anywhere but home now due to caregiving situations that did not exist before the pandemic; some workers have been forced to stay at home to take care of elderly loved ones, or to take care of their young children because they have been unable to find or afford childcare, which has still not recovered to pre-pandemic levels.

"We've seen a very slow recovery in the daycare industry, and that has a significant impact on the rest of the economy—because it means that parents can't return to work," said Daniel Zhao, a senior economist at Glassdoor.

And finally, a great deal of the current labor shortage is tied directly to immigration policies. "There are about 1.2 million adult foreign workers or work-eligible immigrants who are just not here because of the restrictions that have been imposed during the pandemic," said David Bier, Associate Director of Immigration Studies at the libertarian think tank Cato Institute in October 2021.

But the immigrant shortage, and its effect on the labor shortage, is not just down to the pandemic. Even before the pandemic restrictions, immigration slowed because of restrictive Trump-era policies. Reporters Jason Lalljee and Andy Kiersz from Business Insider found that if the pre-2016 net international migration trend had continued, there would have been 2.1 million more immigrants to the U.S. between 2017 and 2020.

These twin dampers on immigration have accounted for perhaps the largest chunk of missing workers in the country, which has had a dramatic effect on industries like construction. This is particularly significant given rising home prices and the tight housing market.

In the end, it’s impossible to blame any one factor or group of people for the current labor shortage, and thus it will take efforts from all—or most—parties involved to extricate the country from the current predicament.

Employers will need to reevaluate their hiring processes, and in particular what they are currently requiring of new hires, if they hope to fill their vacant positions. They will need to stop weeding out candidates, whether manually or through the use of often artificial intelligence-powered software, that do not exactly fit the bill. They should also consider whether they themselves could feasibly train and teach to new hires some of the skills they are currently demanding of applicants.

Policymakers and politicians will need to reevaluate both immigration and minimum wage laws. We are short millions of workers due to unnecessarily strict immigration policies, and workers are finding it increasingly hard to make ends meet despite working full-time as inflation stays high and wages for many sectors of the economy have remained stagnant for years. After all, companies beholden to shareholders and motivated primarily by profit are not likely to increase wages when they do not have to.

Meanwhile, there is little that workers and job seekers need to, can, or should do to address the labor market shortage. While the market remains tight, they hold more bargaining power than they have in decades. They are able to demand higher wages and more benefits without worrying about being replaced by someone just as qualified who is willing to work for less.

It’s easy to say that job seekers should lower their expectations and take what they can get. But there are currently roughly 0.5 unemployed workers for every job opening, meaning there are essentially two jobs open for every one unemployed person. Even if we were to reach an unemployment rate of 0% (which every economist agrees is essentially impossible), only half of the open positions would be filled.

Clearly, policymakers must act to increase the absolute number of workers in the economy, and employers must act to improve their appeal to the job seekers who are already here.