Does the U.S. Have a Labor Shortage? Maybe

Do we have a worker shortage? Maybe.

For months, I've planned to write a column on the future of the U.S. labor market. Stacked on my desk are reports on "the gig economy," "independent workers," "contingent workers," "freelancers" and the like. All signify a new, less secure labor market. Workers won't have long-lasting career jobs, as the old post-World War II employment model promised. Now it's survival of the fittest. Workers who can adapt to constant change will thrive. As for everyone else, tough luck.

I never wrote that column.

The main reason is that I never felt certain that this widely prophesied labor market would prevail. Indeed, the postwar employment model might make a comeback. Demographics — the ongoing retirement of the massive baby-boom generation — would make experienced and competent workers prized resources. Because the labor force would be growing only slowly, many companies would try to stabilize their employment by offering career jobs with better wages and benefits.

I still don't know which of these models will triumph: the first reflecting a management belief that workers must be hired and fired as business conditions dictate; the second based on the notion that good workers will be scarce for the foreseeable future and smart companies will do their best to train and retain them. But I do know two things.

First, market power is swinging from companies to workers. The supply of new workers is meager, barely offsetting the loss of retiring baby boomers. Look at the numbers. From 1950 to 2016, the U.S. labor force (the number of workers multiplied by their hours on the job) grew an average of 1.4% a year, reports the Congressional Budget Office (CBO). Now the CBO projects annual growth of only 0.5%, about a third of the post-1950 average.

Second, the business cycle compounds the effect. At 4.3%, the unemployment rate is at its lowest in 16 years, and there are some places where the unemployment rate is 2%, reports The Washington Post's Danielle Paquette. (In reality, this means many unfilled job openings; she cites 40 at one manufacturer.) Still, about 5.5 million people say they'd like work but are not counted in the labor force, because they haven't been job-hunting.

If companies compete fiercely for scarce employees, workers would benefit. Companies would increase wages and fringe benefits or risk losing their best employees to firms with more generous compensation packages. The labor share of the economy — that is, workers' earnings as a share of the economy's total production (gross domestic product) — would rise. Between 2000 and 2012, it fell from 63 to 57% of GDP, an appalling drop. Since then, it's edged up to 58%, providing modest evidence of a shift in bargaining leverage.

Other outcomes are possible. Companies might raise labor costs and then pay for the increases by boosting prices. To prevent the economy from "overheating" through higher inflation, the Federal Reserve might then tighten credit more than is now expected. The danger is a premature recession. It would be better if competitive markets impeded firms from passing higher labor costs through to prices. Companies would have to absorb the cost of wage increases through business efficiencies (aka, "productivity") or thinner profit margins.

I have no idea which of these possibilities — or some variant — will occur. But the larger point is that the looming worker "shortage," which is often presented as a problem, is also an opportunity. We need a new model — a set of widely held expectations — to regulate relations between firms and workers (or, if you prefer, between capital and labor). Workers need more training, as well as higher pay. But the model should be informed mostly by common sense and market realities, not government regulations.

Industries vary. Not for everyone is the planned disorder of the "gig economy." But neither can we resurrect the calm economic growth of the 1950s, when large American corporations seemed to control their markets. That was the basis of the postwar contract between capital and labor. The goal now is to convert the worker shortage into a better-paid, better-trained and more productive labor force.

Even with its slight recovery, the labor share of national income is too low. The beauty of the present moment is that what workers want and what companies need are converging. The steps that corporate managers and business owners might take as a matter of decency can also be justified as a matter of necessity.