Can we expect a “Forever Labor Shortage”?

Ever since the pandemic, American companies big and small have been scrambling to find enough workers to stay fully staffed. They’ve been forced to offer big salaries and generous perks, while employees were free to shop around for better offers or simply walk off the job to join the Great Resignation. But now, layoffs are up and job openings are down. The economy is slowing, and the Federal Reserve is hiking interest rates at the fastest pace in decades. By any objective measure, the balance of power in the job market should be tipping back to employers.

Strangely, though, it isn’t. Ask pretty much anyone who’s hiring these days, and they’ll tell you something curious: It remains incredibly hard to find and hire enough qualified people for the roles they’re desperately trying to fill. Somehow, workers still hold the power — and a massive shift that’s underway in the labor market could keep it that way forever.

The shift boils down to demographics. Ever since the baby boom that followed World War II, companies have enjoyed a never-ending supply of workers to tap. Hate your job? Fine — we’ll just replace you with one of the hundred others who would be happy to fill your shoes. The abundance of workers made them cheap — and disposable.

But now, those baby boomers are retiring in droves, and companies are suddenly finding themselves without an endless reserve of available bodies. “The labor shortage we’re dealing with today is likely to remain this way — and perhaps get even worse,” says Jay Denton, the chief analytics officer at LaborIQ, which provides salary analysis to employers. “It’s going to continue to be really hard to attract people and get them into new jobs.” We’re entering what is shaping up to be the Forever Labor Shortage.

It may seem like ancient history today, but the baby boom that followed the Second World War spurred a massive shift in the US labor market. As the boomers came of age, the economy was suddenly flush with millions of new workers looking for jobs. The working-age population jumped by 17% in the 1960s and by another 19% in the following decade. If you were looking to hire, times were good.

But the boomers, unlike their parents, didn’t have many babies themselves. The pill and the legalization of abortion sent fertility rates cratering — from 3.7 babies per woman in 1960 to 1.8 babies a decade and a half later. For a few decades, an influx of women and immigrants into the workforce kept the labor pool expanding. But by 2000, the rising supply of female workers reached its peak. And after Donald Trump took office, immigration took a nosedive. That meant there were no new workers left to hire, just as the first of the baby boomers were starting to retire.

Then COVID-19 put the labor shortage into hyperdrive. Immigration came to a standstill, the boomer retirement wave began in earnest, and millions of younger boomers decided to tap into the stock boom and retire early. “All these tailwinds were pushing in the same direction, and suddenly they were all stopping at the same time,” says Aaron Terrazas, the chief economist at the job-search site Glassdoor. “The slow-moving demographic tidal wave is finally cresting.”

In April, the unemployment rate declined to its lowest level since 1969 — meaning there are few available workers left to hire. Despite all the talk of how “no one wants to work anymore,” there’s actually a higher share of 25- to 54-year-olds with a job today than before the pandemic. And the shortage is just getting started. The Congressional Budget Office projects the potential labor force to expand by a mere 3.6% between 2022 and 2031 — one-eighth of the pace in the 1970s. Over the following decade, that growth is projected to slow even more, to 2.9%. That means employers face decades of an essentially stagnant labor pool.

To attract enough workers, employers will also be forced to provide better benefits and working conditions. Terrazas points to the “big mindset shift” taking place in the trucking industry. To attract more drivers, some companies have started to break up their long-haul routes, allowing drivers to do shorter runs instead of forcing them to endure grueling, cross-country shifts. “When labor supply is plentiful, it’s easier to do the business practices that are optimal for the business,” Terrazas says. “But when labor is scarce, companies need to be more active in listening to what their employees want.”

Another effect of the labor shortage: In the years ahead, younger workers can expect to receive faster promotions as older bosses retire. Last year, by one estimate, 29% of managers — and 40% of CEOs — were 55 or older. As those old-timers begin to collect their gold watches and head for Florida, a generation of younger workers is going to find themselves elevated at a rapid clip. “There’s going to be a lot of opportunity for career progression,” Denton says.

But perhaps the biggest change prompted by the labor shortage won’t be how employers hire — it will be who they hire. Facing a constrained supply of workers, companies will be forced to employ those they have long shunned or ignored. The federal government is relaxing drug-testing requirements for job candidates, and more businesses are hiring people with criminal records. Companies are also making jobs more flexible, to attract mothers with young children and people with disabilities. In the Forever Labor Shortage, all labor is going to be in demand.

But here’s the thing about this new age of labor scarcity: Employers aren’t going to take it lying down. The labor shortage makes workers more expensive, and that’s not a price companies are willing to pay. “High prices spark innovations that expand supply and ultimately lower prices,” Terrazas says. “Some of these innovations will be small, and some of them will be really big.”

So what kind of “innovations” will employers introduce? Some will turn to a tried-and-true tactic: offshoring. If businesses can’t find enough workers at home, they’ll just look overseas. Denton expects a lot of companies to say, “Hey, we just don’t have the people to do what we need to do here, and we’re going to find it where we can.” As I wrote last year, tech companies are already moving their software-engineering roles abroad, hiring coders in places like Latin America.

Other companies will attempt to eliminate the need for workers altogether. Take leisure and hospitality, a sector that no longer enjoys access to a steady stream of young, low-wage workers. Restaurants have started replacing servers with app-based ordering systems, and hotels have reduced the need for housekeeping staff by doing away with daily room cleanings. Those are changes businesses could easily have made in the past — mobile apps, for example, have been around for more than a decade — but they didn’t think them worth the investment until an acute staffing shortage forced them to rethink the way they operated. Now the question is: At what point do these adaptations-by-necessity end up eradicating entire occupations for the next generation?

That means the Forever Labor Shortage will be more an ongoing battle than an enduring peace. Power never changes hands without a struggle. Millions of workers are going to benefit from the new demographic shift — but the greater the reward to employees, the greater the backlash from employers will be. “There’s a risk to this idea that the labor supply is perpetually going to be tight moving forward,” Terrazas says. “It’s a mistake to assume the line is always going to be upward to the right. There are going to be blips — potentially big blips — along that path.”

Aki Ito is a senior correspondent at Insider. 

Would you benefit from a CEO peer group?