Recently, I had the pleasure of speaking with Ron Hetrick, a leading labor economist at Emsi, whose new report gives important insight into our current labor market predicament, how we got here, and where we might be going. This is part II of our two-part Q&A on the labor shortage. You can find part I here.

Orrell: In looking at the different population groups that
comprise the labor shortage, what is the role of people who retired? How much
of the shortage is due to retirements?

Hetrick: You
can see of our over four million who have left the labor force, 2.4 million are
55-plus. And it’s my feeling that, based on the excess retirement numbers,
probably around two million of these people are never coming back, but that
still leaves about two million who could potentially return to work.

The problem
is we need about 3 million to close the gap on our population growth. So that’s
just to get us back to where we were as an economy prior to the pandemic and on
a steady growth rate. I’m not quite sure where those people are going to come
from.

Has savings kept some workers on the sidelines?

Our personal
savings rate had been flat since the 1950s. It ballooned to unprecedented
levels over the past two years. But, right now, the personal savings rate is
equal to where it was prior to the pandemic. So people have now, for the first
time, spent down their pandemic savings, as far as we can tell. That said, as
of January, there were still eight million people saying they were paying their
basic expenses, at least in part, with stimulus checks. Also, personal income
is noticeably higher than what it had been before the pandemic.

Fear was a
realistic driver for some people not to work, but the fear people had of
COVID-19 or vaccines is probably easing and now may likely shift to a fear of
not being able to meet their financial needs. Inflationary pressures are, in a
sense, also good for getting people back into the labor force as the buying
power of savings and credit card debt become less effective.

What role could immigration play in filling in the gaps?

Immigration was the way that we were accounting for the birth gap. And now there is record low immigration. Something has to break. As the new paper shows, immigrants fill the key lower-skilled jobs our country is desperately trying to fill. It’s quite simple really. There are only two ways to grow our labor force: getting our disengaged people at home back to work or getting people from abroad. That’s it. So far, we’re not having much success getting people re-engaged. Immigration is the answer to that but it is not popular politically, and, as the new paper discusses, immigration will be increasingly difficult because other countries also have aging populations and low unemployment. Mexico’s unemployment is actually lower than ours right now and they are the primary contributors to our immigrant numbers.

What is the role of demand in this situation?

We have more
demand than we’ve ever seen, personal income has soared and consumer spending
is the biggest driver of GDP. But we can’t generate supply. If you could fill
the 850,000 manufacturing positions that we have open as well as the millions
of other openings, which are hovering at record levels, GDP could be a full
percentage point higher than it is right now.

The only thing holding us back from really exploding economically is the fact that we don’t have people. We are paying people more, and employers are putting that into product prices.

If I show you new orders for manufacturing (excluding aircraft and defense), it’s way up into record territory and growing. But, if I show you industrial production, it’s flat. Because we have everybody trying to buy things, but too few people in manufacturing. There are too many dollars chasing too few goods and services. That makes for inflation not only because of wage increases, but supply chain disruptions. We aren’t running out of resources, we simply don’t have the labor force to cultivate and process the resources we have.

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