Tightening U.S. Labor Market Continues to Surprise

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The U.S. labor market has tightened faster and farther than anyone predicted, accelerating the onset of serious talent shortages which may define the economy for years to come, according to a new Executive Action Report from The Conference Board. Faster Than Expected: The U.S. Labor Market Continues to Tighten updates a major report on global labor shortages published September 2014, which projected U.S. unemployment (then 6.1 percent) would drop to its “natural rate” of 5.5 percent by mid-2015. In the event, unemployment reached that level in February and continued falling—to 5.3 percent in June.

“Ten months ago, our projections were considered radical for a workforce and economy still scarred by the Great Recession,” said Gad Levanon, Director of Macroeconomic Research at The Conference Board and a co-author of the report. “It turns out even we were too conservative. Having arrived slightly ahead of schedule, a drastically tightened U.S. labor market is here to stay, anchored by unprecedented slowdowns in both labor-force and output-per-worker growth. The trajectories of these long-term trends won’t be easily altered, which means American workers should finally see a return to healthy wage gains in the year ahead. But with 4 percent unemployment plausible by mid-2017, labor shortages may soon jeopardize profits and constrain further growth.”

According to Faster than Expected, a “perfect storm” confluence of three factors is at work:

• Baby-boom retirement. After stalling during the Great Recession, retirement has skyrocketed in recent years. The number of retires is now increasing by more than one million annually, a trend likely to continue for the next 15 years.
• Low labor-force participation among working-age population. During the Great Recession, the proportion of prime working-age (25–54) people not in the labor force (NILF) rose from 17 to 19 percent, and has yet to drop as expected. Discouraged workers—those who want a job but have given up looking—fueled the initial rise but their numbers have been shrinking since 2011. Instead, a growing proportion of NILF adults are those do not want a job, such as full-time students, family caretakers, and early retirees.
• Anemic productivity growth. In the past five years, non-farm labor productivity in the U.S. has grown just 0.6 percent annually, compared to 2–4 percent in the decade prior to the Great Recession. In other words, the exceptional jobs growth seen over the past year failed to produce corresponding gains in output and GDP—thereby necessitating more hiring. (For more, see another recent report from The Conference Board, Prioritizing Productivity…)

Among the key impacts as U.S. labor markets continue to tighten:

• Difficulty hiring qualified workers. During the Great Recession, employers not only saw a surplus of candidates for many job openings, but could often even “upskill” the requirements needed. This may have created impossible expectations—the proportion of firms unable to find qualified applicants for job openings is already back to 2007 levels.
• More workers quitting their jobs. As unemployment dips near 5 percent, “quit rates” are rebounding correspondingly, after hovering well below 2 percent since 2008. Firms that failed to engage their workers during the downturn may find them defecting in droves.
• Faster wage growth on the horizon. Wages have been the last shoe to drop in this recovery—indeed, stagnant paychecks may have made signs of a tightening labor market seem like a mirage for many workers. This is likely to change soon, with such key indicators as the Employment Cost Index on the rise. New hires, young workers (21–25), and those at small companies already saw significant acceleration in 2014.
• Release of pent-up demand in household formation. With their prospects improving, young adults who remained in—or returned to—parental nests in recent years are poised to strike out on their own. This may unleash a stronger recovery in the housing market.
• Age of record corporate profits at an end? Companies who prospered from years of stagnant wages and a buyer’s market in talent may soon find their bottom lines threatened. Like the economy as a whole, investment in productivity-boosting innovation will be critical for their continued success at a time of minuscule labor-force growth.

About the Conference Board

The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world’s leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conference-board.org