Tight Jobs Market Is a Boon for Workers But Could Add To Inflation Risks

IMF Blog, March 31, 2022

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Labor shortages have pushed up wage growth, benefitting low-wage workers but adding to inflation risks.
By late 2021, there were "50 percent to 80 percent more unfilled jobs in Australia, Canada, the United Kingdom and the United States than there were prior to the pandemic."
Open vacancies were at or above their 2019 levels in other advanced economies and have risen steadily across all sectors, including contact-intensive sectors such as hospitality and transportation.
Increases in vacancies have been largest for low-skilled jobs.
The sharp rise in unfilled vacancies partly reflects a strong economic recovery in advanced economies until the start of the Ukraine crisis, with firms recruiting en masse to cope with booming demand.
A new IMF Study provides additional analysis of the causes and implications of persistent vacancies.

Health concerns related to the pandemic have kept some older and lower-skilled workers previously employed in contact-intensive industries outside of the labor force, shrinking the pool of available job seekers.
In the median advanced country:
- "low-skilled workers account for over two-thirds of the gap between aggregate employment and its pre-pandemic trend."
- "Older workers, as a group, contribute about one-third of this employment gap."
In some countries (for example, Canada and the United Kingdom), the decline in immigration has amplified labor shortages among low-skill jobs.
COVID-19 may have changed workers’ job preferences:
- In the United States, resignations have risen beyond their historical relationship with vacancies, suggesting workers search for better working conditions.
- In the United Kingdom, resignations have risen the most for low-wage jobs that are contact-intensive, physically strenuous or offer little flexibility (transport and storage; wholesale and retail trade; hotels and restaurants).

Labor market tightness (measured by the ratio of vacancies to the number of unemployed workers) has pushed up wage growth across the board.
The impact on wage growth in low-wage sectors has been over twice as large, at least in the United States and United Kingdom, because:
- "wages are over twice as responsive to tightness in low-pay industries," and
- those industries have seen larger increases in tightness than other industries.
Estimated effects:
- "the annual growth rate of nominal wages in low-pay industries increased by 4 to 6 percentage points between mid-2020 and late 2021 because of rising labor market tightness," helping reduce wage inequality in some countries.
- "The overall impact of increased tightness on wage inflation has been more moderate so far, at least 1.5 percentage points in both countries."
The modest aggregate effect reflects the small overall share of low-pay industries (and jobs) in total labor costs.
If labor market tightness persists, it is likely to keep overall nominal wage growth strong going forward.
Inflation risk pathway:
- Impact on inflation is expected to be manageable unless workers demand higher compensation in response to recent price hikes and/or inflation expectations rise.
- Central banks should continue to signal their strong commitment to avoid any price-wage spirals.

Public-health measures:
- Curbing COVID-19 outbreaks would enable older and low-wage workers to reenter the labor force, easing labor market pressures and inflation risks.
- Keeping schools and daycares open is important for women with young children to fully return to work.
Active labor market policies:
- Well-designed programs could speed up job matching, including short-term training to build skills required for new fast-growing digital-intensive occupations (technology and e-commerce) or traditional jobs with acute shortages (truck drivers; care workers).
Labor regulations and work arrangements:
- To accommodate shifting worker preferences, labor laws and regulations need to facilitate telework.
Migration policy:
- Where a decline in immigration amplifies labor shortages, resumption of immigration could further "grease the wheels" of the labor market.

Tighter labor markets in several advanced economies have increased pay, especially for low-wage workers, with a manageable impact on price inflation to date (the surge in inflation has predominantly been driven by other factors).
Some workers who left during the pandemic have yet to return; others have lingering concerns or new expectations that restrict labor supply.
By doing more to help these workers reenter the labor force, governments can make the labor market recovery more inclusive while curbing inflation risks.

Romain Duval, Myrto Oikonomou, Marina M. Tavares; March 31, 2022.