Chris Gray has a closer view than many of the labour shortages plaguing businesses across the developed world.
As UK managing director for Manpower, the recruitment agency, he is seeing British companies raise wages, pay for training, relax job requirements — in fact do almost anything “to find the arms and legs to do the job”, as he puts it.
Moreover, Gray does not think labour shortages will ease much next week when the UK ends the short time working scheme it paid out during the Covid-19 pandemic — even though around 1m workers still on furlough will then lose state funding. “It won’t move the dial,” he said.
A similar story is playing out in the US and the eurozone, where income support schemes are also ending without any clear sign of workers coming forward. The ensuing labour shortage has confounded companies, compounded pandemic-related supply chain problems, trimmed growth and, in some cases, boosted wages, which some economists fear could cause higher inflation.
So far shortages and wage pressures are clearest in the US. But they are also “a key supply-side risk for the eurozone recovery”, warned Daniel Kral, an economist at Oxford Economics.
Few expected this would happen. Restaurateurs and bar owners in the US, Greece, Israel, Britain and France complained they could not hire staff earlier this year, when many workers were still at home and being paid for by the state.
But all US states have now stopped the benefit schemes, and businesses say a lack of staff still holds them back. In low-paid sectors such as construction, haulage and catering, labour shortages are particularly acute.
The situation is similar in the eurozone, where countries are starting to scale back short-time work schemes such as France’s activité partielle.
“Fundamentally, I don’t think [the end of support schemes] will be enough” for labour markets to clear in the eurozone, said Carsten Brzeski, economist at ING.
Economists cite several reasons why job vacancies remain unfilled, despite a theoretically large pool of underemployed workers.
One is that the mix of jobs on offer has changed during the pandemic. Many people available for work may lack the skills for jobs in areas where demand is growing rapidly, such as IT and logistics.
“Furloughed workers in hospitality may not be able to drive a truck,” said Claus Vistesen of Pantheon Macroeconomics, a consultancy.
Another issue is that many workers appear to have dropped out of the labour force during the pandemic.
As of July, only 5 per cent of the eurozone’s workforce were on short-time work schemes, compared with a quarter at the peak of the pandemic. “There are simply not that many people left” on support schemes, said Jessica Hinds of Capital Economics.
Hinds said a bigger factor was whether people who had left the workforce chose to return. As of the first quarter of 2021, the eurozone’s active workforce remained 2.6m below pre-pandemic levels, while the US labour force still has almost 2m fewer people.
A third reason, say economists, is that Covid-19 amplified labour market problems predating the pandemic.
In the UK, Brexit has choked off inflows of migrant workers. Germany has an ageing population. In Spain and France, where double digit unemployment has persisted for years, certain taxes and poor training still create barriers to work even when staff are in short supply.
François Villeroy de Galhau, governor of the Banque de France, has called this “the biggest brake” on the economy. “There are no reforms more urgent and necessary than those which increase the available workforce,” he said this month.
An important question is whether labour shortages will lead to a wage price spiral that boosts inflation. That in turn hinges on the outcome of the different approaches the US and Europe used to support workers and companies through the pandemic.
The US paid benefits directly to workers, if they were laid off. Although US unemployment subsequently rose to its highest level since the 1930s Great Depression, this left companies free to restructure — potentially allowing the economy to rebuild more strongly.
The EU and UK took the opposite approach, subsidising companies to retain their staff, on the assumption this would allow businesses to restart quickly when lockdowns ended.
Both approaches cost governments billions. Yet today, US labour shortages are “on a different level” from Europe’s, said Adam Posen of the Peterson Institute of Economics.
As Larry Summers, former US treasury secretary, told the Financial Times last week: “We have a record high level of quits, a record high level of job vacancies and every employer in America is complaining how labour short they are.”
Stronger wage pressure could lead to US inflation remaining higher for longer, the OECD warned last week. The Bank of England also believes UK wages are rising faster than before the pandemic amid “a rapidly tightening labour market”.
Yet some economists view wage inflation as a good thing. In the eurozone, where inflation is less of a concern than in the US or UK, Oxford Economics’ Kral said labour shortages could force governments to boost training for the long-term unemployed and open up to migration.
Higher wage costs in northern eurozone countries could also make southern countries more competitive, he suggested, solving a long-term problem in the bloc.
Ignacio de la Torre, economist at Arcano Partners, also believes faster wage growth could help economies rebound. Although it might hurt company profitability, it would boost consumer confidence and spending.
“In the last forty, fifty, years capital has gained a lot of bargaining power,” he said. “We are in a historical process now where . . . labour gets more bargaining power.”