We’d better get used to labour shortages – they’re not going anywhere

Where are the workers? Employers on both sides of the Atlantic are crying out for people to take the jobs, and the labour markets in the US and UK are the tightest they have been for a generation.

There are jobs galore. On Friday, new figures showed that American payrolls had shot up by 467,000 in January, much stronger growth than expected. There are 11 million unfilled vacancies, and despite the hit from Omicron, unemployment was at a steady 4 per cent.

Here in the UK, the picture is similar. We will get new data next week but the most recent numbers show employment in December up 184,000 on the month, unfilled vacancies hitting a new record of 1,247,000, and unemployment at 4.1 per cent.

Is this good or bad? That depends on how you look at it. US employers have described it as a “nightmare” and if you are trying to run a business with serious shortages of labour, it probably is. But from the point of view of most working people, it’s great. If you don’t like your job, there will probably be another. And with prices already rising at 7 per cent in the US and projected to climb by a similar amount in the UK, we all need better pay.

However, if you stand back from the immediate concerns of employers and employees, there is a greater challenge – one that faces the entire developed world. How do we keep our economies growing and our standards of living rising as our population ages and the number of people of working age shrinks? What is happening now is mostly the result of the disruption caused by the pandemic, but there is a wider, underlying shortage of labour that seems likely to intensify in the years ahead.

The size of the working-age population has started falling in the UK. The Federal Reserve Bank of St Louis provides a good analysis of the data and for the UK, the number fell from 41,405,000 in the first three months of 2020 to 41,291,000 in the third quarter of last year. As far as I can see, that is the first time the size of the UK working population has fallen for a century.

Much the same has happened in the US. There, the number has declined from 206,875,000 in May 2020 to 204,817,000 last December. The detail of the numbers doesn’t matter. The broad picture does. We don’t know what will happen to immigration in the years to come, though there is certainly pressure for more people to move to the UK and US. And we don’t know what will happen to fertility rates, though here the evidence is of a sharp fall in fertility in 2020. That year saw the lowest number of births in England and Wales since records began in 1923. There seems to have been a similar collapse in the US.

Of course, the impact on the labour force of fewer babies being born will not show for another 20 years or so. But even if births do rise, as I expect they will, it seems likely that the years of a steadily rising workforce are over. That will happen just as the number of retirees will climb. The result will be that there are fewer people to pay for the care and pensions of the elderly, which explains the decision in the UK to increase national insurance contributions, scheduled to start in April.

For anyone starting out in the job market, it is a mixed prospect. There is huge demand for the services of the young and that is likely to continue. But they will have to pay a higher proportion of their income, maybe much higher, in tax. What we are getting now is a taste of what is to come.

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So what’s to be done? The maths can’t be changed, or at least not by much, but there are three ways of making a difficult situation much better. One is to increase the proportion of people of working age doing some form of work. At present, that varies widely. In Sweden, 90 per cent of people of working age are in the labour force; in Japan, the number is 86 per cent; in Germany 85 per cent; the UK is at 83 per cent, but in the US, only 77 per cent are of working age.

The second is to increase productivity, which also varies widely. The UK is in the middle of the G7 pack, lower than the US at the top, France and Germany, but higher than Italy, Canada and Japan. And the third is to keep older people in some kind of work.

This is all easier said than done. But the present labour shortage should be a wake-up call. Even when the pandemic disruption has passed, labour shortages are likely to persist. We had better get used to it.