6 Ways a Tight Labor Market Will Impact Consumer and Societal Behavior

By Karen Lam

By now we’ve all been there. Seeing a “We’re Hiring” sign in store after store, restaurant after restaurant, billboard after billboard, and even while listening to ad after ad on the radio, television, YouTube or Pandora.

Most economists initially believed this would just be a Covid quarantine problem, yet almost two years after shutdowns ended, the labor market in the US continues and is expected to stay with essentially no real unemployment.

Understanding why workers are missing from unfilled jobs is only half of the equation. This now longstanding reality has and will continue to change consumer behavior, business and public policies in ways that are markedly different from just a few years ago. These are some of the most resounding changes that are underway:

Sticky Inflation

Much has been said about the impact of oil and gas prices on inflation. While energy prices undoubtedly impact just about everything, so do labor costs. The Federal Reserve of Atlanta’s wage tracker data for the summer of 2022 showed that wage-earners in the lowest quartile for earnings are enjoying average rises of more than 7%, the highest since the survey started in 1997. Without a similar increase in productivity, which has yet to materialize, high wage growth and low unemployment alone will continue to produce inflation. As a result, the Federal Reserve expects inflation to continue to be significantly above 2% until the end of 2023, even with its plans to raise interest rates in an aggressive manner. Consumers themselves don’t disagree. The latest University of Michigan sentiment index showed consumers expect their costs to rise 5% over the next year.

More Paid Overtime

Covid-induced labor supply disruptions pushed employers to respond to workers’ needs for higher-quality jobs by raising wages and boosting benefits with more robust paid leave policies or flexible work arrangements. Now, the continued lack of workers available for hire, combined with quality of life and family care time remaining higher needs for employees, are compelling companies to need to offer more attractive overtime pay to their existing staff.

More Outsourcing and Hiring Abroad

The challenges of hiring productive workers nationally, coupled with a stronger US dollar which makes hiring services abroad less expensive, will continue to drive many companies to ramp up outsourcing of a wider array of activities to foreign companies and direct employees abroad. While the quality of work from outsourced activities can sometimes be inferior, remote work from in-house employees that the pandemic forced has also opened up the minds and habits of managers to collaborating with someone who is not onsite. From there, the differences become much less impactful between working with someone who is across town to someone who is across the border or the ocean, assuming quality and productivity are either outweighed by wages, are similar and/or are not mission critical.

Remote Work is Here to Stay

Historically low unemployment and more of a push towards work-life balance has increased the leverage that employees have with their employers, who even if they prefer on-site labor, don’t have much of a choice other than retaining and hiring skilled workers who prefer to work remotely. Remote hiring has also become a big antidote to not finding the types of workers needed for a position, since companies can recruit candidates from anywhere in the country or world, instead of just from zip codes close enough to their locations. Over the months and years since the pandemic began, most employers and employees are also becoming better suited to remote work arrangements, which also offer indirect productivity gains in the form of lower real estate and infrastructure expenses.

Changing Attitudes and Policy Towards Immigration

One of the fundamental reasons for the labor shortage itself has been a tighter real and perceived immigration policy, which has yielded a lower number of immigrants over the past 5 years, particularly among highly skilled workers. The shortage of workers at all levels has and will continue to make both illegal and legal immigration less of a concern among voters who previously saw immigrants as ‘’taking our jobs”. According to the US Chamber of Commerce, even if every unemployed person in the country found a job, we would still have 5 million open jobs.

This reality is trickling up towards policy makers. Case in point is that Hispanic voters as a bloc are shifting support more towards Republican and Pro-Trump candidates, given that their political platforms are no longer putting anti-immigration at the forefront. Employers on the other hand have and will continue to lobby policy makers on all sides of the aisle for more access to immigrant labor of different skill and educational levels.

Work and Service Quality is Down

When there is a labor shortage, companies overuses its existing employees, resulting in work and service quality decreasing. In economics, this is known as the “output gap”. This is also accentuated by what are now known as the “Great Resignation” or the “Great Reshuffle”, where previously seasoned and skilled employees are replaced by often poorly trained or inexperienced peers. With the same effect, as of October 2021, the pandemic drove more than 3 million adults into early retirement. Regardless of the reason, replacing employees, often managed remotely, are often less productive and provide inferior service to customers.

Employers Will Take Human Resources Front and Center

Along with improving productivity rates, the next step in addressing the labor shortage is to implement solutions to attract new workers and retain existing employees. Platforms such as Glassdoor are now making it easier for past and current workers to transmit employer quality to job seekers, making it all the more pressing for companies to take a more long-term approach to employee satisfaction.