The Minnesota State Fair is a wildly popular event, drawing millions of visitors over a 12-day period. In past years, the number of people wanting to work at the Fair has exceeded the number of jobs available by a factor of five or more. This year on opening day, the Fair was still short 400 workers, and vendors were looking to hire an additional 300 people.
This despite the fact that there are 10 times that many people that live within walking distance of the fairgrounds.
Elsewhere, a shortage of truck drivers is causing supply-chain issues, though pay for drivers is soaring, up as much as 35% from a year ago. The same story is repeated in industry after industry.
Talent is becoming increasingly scarce in America. In September, 183,000 workers dropped out of the labor force. Meanwhile, over 4 million people have left the workforce since the start of the pandemic. The consequences of this scarcity are everywhere. For instance, 51% of small businesses report having job openings they can’t fill, despite raising pay.
We now have the strange situation of over 10 million open jobs and 5 million fewer people employed than before the pandemic. Reasons for the shortage of talent include a fear of the virus, lack of childcare, stimulus payments, people looking for new types of work, and an overall decline in the supply of talent as the population ages and fewer people choose to attend college. These are all contributing factors, but the overall situation is the result of an economic policy mix that has reduced the supply of labor.
The Lessons of History
The shutdowns during the pandemic caused unemployment to surge, as always happens during economic downturns. In such times, policy action is needed to return the economy to full employment. That can happen in one of two ways.
The first is for the government to boost demand by increased spending and running up deficits, while holding interest rates low. Under this approach, first proposed by the economist John Maynard Keynes in the 1920s, a free-market economy is inherently unstable and only the government can bring about full employment following an economic disaster. Keynes predicted that as demand increases, producers will increase supply to meet that demand, hiring more workers and reducing unemployment in the process.
This is what is happening at present — massive spending of over $5 trillion to date, and very low interest rates.
The second way to bring about full employment is to create incentives to boost production — lower taxes that enable producers to keep more of what they produce and allow people to keep more of what they earn. This also entails fewer regulations and monetary policy that prevents inflation. It’s an approach that produces a more enduring recovery, since it’s not dependent on continued deficit spending and manipulation of interest rates.
The devastation caused by the pandemic required a response to get the economy back on its feet and help those impacted. But the economy had started growing rapidly by the end of 2020. Further spending did little to help boost growth and produced the inflation we see today.
Continuing the Keynesian approach required running up the money supply to increase demand, with artificially depressed interest rates to promote more spending. When applied in the 1970s, a similar approach resulted in inflation of over 14% and interest rates that reached 20%, yet did nothing to decrease unemployment. Massive spending also reduced incentives to work, as successive rounds of stimulus payments have done, effectively preventing the goal of full-employment being reached.
Why doesn’t a Keynesian approach work? Keynes assumed that all the money that the government pumps into the economy gets spent. But that is often not true because in times of economic uncertainty, people hoard money rather than spend it.
This is what has happened with the stimulus funds. Americans added $3.7 trillion to their savings during the pandemic. That may be why there was little change in labor availability when supplemental unemployment payments ended in September. And artificially low interest rates create perverse incentives for speculative investments that produce little long-term value.
This Too Shall Pass
In the war for talent, we’re running out of soldiers. It’s impossible for anyone to predict what will bring workers back into the labor force. Abandoning Keynesian policies would be a start, but that is not likely.
With inflation surging — income gains that averaged 4.6% for the year have been wiped out by inflation of 5.4% — there will be continued pressure on employers to raise wages even more to try and draw workers back into the labor force, and for more spending to help people impacted by declining real incomes. Perhaps with savings getting depleted, more will return to the workforce. Just don’t expect it to happen anytime soon.