Labor Market Slack in Advanced European Economies & North America

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Report


Since the onset of the COVID-19 pandemic, a trend has emerged in several advanced economies: unfilled job vacancies have increased sharply even though employment has yet to fully recover. Three contributing factors could explain the trend, namely barriers to returning to work, changing worker preferences away from certain types of jobs, and sectoral and occupational job mismatch. The panelists recommended the need to make the labor market more inclusive by enlarging the labor force to include disadvantaged groups of workers. Such efforts would not only ease labor market pressures but also further support the recovery.

Key Points:

  • Labor market tightness. Panelists noted that the labor markets in Europe and North America are tighter than they were prior to the pandemic, as evidenced by a sharp rise in vacancies and vacancies-to-unemployment ratios. Vacancies have risen across all sectors, including in areas with more contact-intensive and lower-skilled jobs that were hit hard by the pandemic.
  • Causes. Panelists underscored that tight labor markets partly reflect reduced labor force participation, particularly by disadvantaged groups—including the low-skilled, older workers, and women with young children. The pandemic itself has persistently pushed low-skilled and older workers out of employment in Europe, while in the United States, the adverse impact of the pandemic on school closures and childcare availability has kept women with young children home. Lower immigration, particularly in the United States, also seems to have amplified labor shortages.
  • “Great Resignation.” Panelists highlighted that a growing share of workers in contact-intensive sectors have been moving into other jobs or leaving the labor force altogether, despite the concomitant rise in job vacancies. Furthermore, voluntary resignations have disproportionately risen in industries with larger shares of contact-intensive, physically strenuous, or less flexible jobs, resulting in pockets of labor shortages.
  • Wage growth. Panelists noted that tightness has pushed up wages, especially among low-pay jobs, helping reduce wage inequality in some countries such as the United Kingdom or the United States. Future demands for compensation for recent price hikes and/or sustained higher inflation expectations among workers would entail larger inflationary risks.
  • Impact of war in Ukraine on European labor markets. Panelists believed that the impact of the Ukraine diaspora on the labor market would be limited in Europe, as only ten percent of the refugees are working-age men, whereas the bulk of refugees is composed of women and school-age children. This would impose more pressure on the social systems instead, with the school and health systems affected by the diaspora.
  • Policies. Panelists agreed that to ease labor market pressures while making the recovery more inclusive, further wage increases will attract more disadvantaged workers back into the labor force. Controlling the pandemic itself is paramount as it would enable disadvantaged workers to fully reenter the labor force. Active labor market policies—including short-term training programs targeted at sectors that face labor shortages, particularly green jobs—could also help. So could labor laws and regulations that facilitate telework, a resumption of immigration and product market reforms to enhance competition.

Quotes:

“Decline of immigration in the US is an important factor of labor market tightness”. Lawrence Katz

“We do need reallocation of workers across sectors, particularly toward the renewable energy sector to favor the energy transition of economies.” Tito Boeri

“Inflation has been ahead of wage dynamics and real wages have declined. Wages are not the driving source of inflation so far”.” Lawrence Katz

Contributor: Luigi Briamonte

 

 

Photos