the economy

America’s Labor Shortages Are Good, Actually

Photo: Mario Tama/Getty Images

Throughout the United States, “Help Wanted” signs are becoming nearly as ubiquitous as the stars and stripes. The number of job openings in the U.S. hit 11 million in December, which means that there are now roughly two unfilled positions for every involuntarily unemployed American.

This is a splendid state of affairs for jobless workers trying to get a foothold in the labor market. But it can be an irritating one for the much larger population of Americans who never lost their jobs during the COVID recession and have little patience for harried waiters, long coffee-shop lines, and understaffed child-care centers.

Indeed, though labor shortages are present throughout the economy, they are disproportionately concentrated in service-sector industries with high levels of “person-to-person” contact. Which is to say, help is hardest to find in the parts of the labor force that are most visible to consumers.

Many disgruntled customers have attributed the lack of workers — and thus declining service quality — at their preferred fast-food chains, hotels, and bars to rising laziness and/or welfare benefits. In truth, the service sector’s labor crunch is primarily a testament to the economy’s strength and dynamism.

Nevertheless, “people don’t want to work anymore” remains a common sentiment. And in Washington, some Republicans are trying to weaponize such notions in their fight to slash social spending. In recent days, Florida congressman Matt Gaetz has been lobbying his party to impose work requirements on Medicaid as a part of any legislation that raises the debt ceiling. Gaetz’s plan is partly aimed at cutting federal spending by reducing the number of Americans eligible for public health insurance. But he has also characterized the policy as a solution to the economy’s labor shortages, suggesting that the Affordable Care Act’s expansion of Medicaid has turned a growing number of Americans into full-time loafers.

Gaetz’s Republican colleague Byron Donalds praised the idea in an interview with Semafor, saying, “If you’re able-bodied and you can gain employment, why are you on Medicaid unless that was just a pure poverty situation?”

Alas, the idea that America’s labor shortage derives from the government giving too many poor, jobless people access to basic medical care is baseless. Very few Americans are content to be unemployed and impoverished so long as they can see a doctor every once in a while. As of 2018, 60 percent of Medicaid recipients were employed, while 80 percent of jobless recipients were either in school, ill, disabled, or caring for children or needy family members. A review of economic literature published that same year found that “access to affordable health insurance has a positive effect on people’s ability to obtain and maintain employment.” In other words, rather than discouraging employment, ensuring that a jobless worker is able to secure treatment for their ailments actually increases their likelihood of contributing to the economy.

The Trump administration nonetheless decided to test the accuracy of this research, allowing Arkansas to kick 18,000 people off Medicaid until they provided proof of employment. Many of these individuals were actually employed but had failed to complete the paperwork necessary to prove it. In any case, a 2020 study of the policy in Health Affairs found that Arkansas’s experiment with Medicaid work requirements did not increase employment among the affected population.

In reality, America’s labor shortages have little to do with any extant social welfare program except, perhaps, for Social Security. The U.S. labor-force participation rate — the percentage of Americans who have a job or are looking for one — has declined since the pandemic. But this is almost entirely the result of COVID nudging older workers into retirement. Most of the workers who exited the labor-force in recent years are over 70 years old, as the Niskanen Center’s Matt Darling notes.

One could argue that it is a serious problem that so many septuagenarian Americans can afford to retire. But that is a very different (and more politically toxic) argument than the one congressional Republicans wish to make.

Regardless, the primary source of understaffing in the service sector has nothing to do with existing welfare programs. The main reason why baristas are in short supply is not that the workers who once staffed such positions are sitting on their couches, but rather that they found better jobs in more productive sectors of the economy.

As the Washington Post reports, there are nearly 2 million unfilled job openings in the leisure and hospitality industry, which presently commands 500,000 fewer workers than it did in 2020. That deficit is far larger than those of many white-collar industries. Anecdotal evidence and wage data both suggest these are not independent developments. After service-sector workers lost jobs en masse during the pandemic’s early days, many successfully pursued better-compensated professional employment. The temporary enhancement of unemployment benefits that Congress enacted in 2020 might have abetted this reshuffling by enabling laid-off workers to extend their job searches until they secured suitable positions. But that is precisely how a “pro-work” unemployment insurance system is supposed to work.

This shift may be unpleasant for middle-class consumers. But it is actually a sign of the economy’s health. In the wake of the 2008 crisis, the federal government failed to offset the collapse in economic activity with sufficient stimulus. As a result, for much of the ensuing decade, low-skill labor was highly abundant and exploitable. With few job opportunities to choose from, many workers were willing to tolerate low wages and scant benefits. This led to an expansion in labor-intensive segments of the economy that operate on thin profit margins, such as restaurants: In an economy where labor is cheap, such businesses are more economically viable.

Now that consumer demand is robust and unemployment is at a half-century low, many former service-sector workers no longer have to settle for jobs at firms whose business models hinge on low wages. Instead, they’ve managed to find roles in more profitable (and therefore higher paying) parts of the economy.

In the aggregate, this phenomenon offers many benefits. More profitable segments of the economy are often more efficient and productive, so reallocating labor toward them could make the nation as a whole richer. At the same time, a relative reduction in low-wage jobs mitigates inequality, both because workers formerly employed in low-wage industries now earn more in higher-wage ones and because their erstwhile employers must offer more generous compensation packages in order to attract labor. As a result, income inequality is falling. 

This said, some enterprises with low profit margins are nonetheless socially vital. It is difficult to generate high profits or large productivity gains in the child- and elder-care sectors. For this reason, both industries pay poorly and thus have struggled to retain workers in a healthy labor market. In the past two years, the child-care industry has lost 100,000 workers, often to higher-paying parts of the economy. That is a real problem. But it’s one that stems from too little social spending, not too much. When the profit motive fails to incentivize socially necessary forms of labor, the government must step in and provide such an incentive. If we want to have a healthy, high-growth economy and widely accessible, affordable child care, we will need to subsidize the salaries of child-care workers.

It’s possible that consumers who prefer abundant and cheap pseudo-servants to shared prosperity will soon get their wish. As the Federal Reserve’s interest-rate hikes nudge the economy toward recession, employers have been regaining leverage over workers. Layoffs are up significantly this year in the tech and finance sectors, potentially reducing opportunities for workers to cycle out of low-wage industries into professional ones.

If such job losses grow more widespread, then fewer consumers will be able to afford restaurant meals or upscale coffee drinks, and fewer workers will be able to turn down employment at such establishments. “Help Wanted” signs may therefore fall from downtown windows, and securely employed middle-class Americans may enjoy shorter lines, cheaper Uber fares, and more attentive wait staff.

If they do, however, they should understand that their heightened comfort does not reflect the economy’s health but rather their fellow Americans’ desperation.

America’s Labor Shortages Are Good, Actually