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The Intertwined Nature of Our Pressing Economic Problems

Photo: Cargo port crane

As the global economy has begun to recover from over a year of Covid-19-related crisis, employers are finding it surprisingly difficult to get employees back to work. Millions of Americans have quit their jobs, and unlike previous recessions, laid-off workers are hesitant to return to work. The shortage of workers in the labor force poses a massive threat to the success of the recovery by contributing to massive inflation and supply chain shortages across the country. The far-reaching adverse economic implications of these issues make addressing labor shortages a pressing policy issue for the Biden administration. This article will first evaluate the nature and scope of the three issues at hand (labor shortages, inflation, and supply chain breakdown), before concluding with potential remedies to this growing crisis.

Typically, as the economy recovers from a recession, workers are quick to return as job openings appear. However, this has not been the case in the wake of the 2020 recession. In fact, the opposite has occurred. In what is being dubbed the “Great Resignation,” Americans are quitting their jobs in droves. 4.3 million workers left their jobs in August 2021 alone. Labor force participation is currently hovering just below 62 percent, which is the lowest rate since the 1970s (excluding the peak-pandemic shutdown period). Initially, some argued that pandemic unemployment benefits were responsible for the widespread resignations, but the states that have cut enhanced benefits have seen little increase in labor force participation. Further, workers have remained on the sidelines even as employers have increased wage offerings: Compensation increased 1.5 percent in the third quarter of 2021, the highest jump in 20 years. Rather than wage issues, a lack of childcare options, burnout, and a desire for increased flexibility appear to be driving the labor shortages. Within the childcare industry, staff shortages have led to closures of many facilities, which in turn has left millions of parents responsible for taking care of their children themselves. In a recent US Census Bureau household survey, almost five million jobless Americans cited caring for their children as their primary reason for being unemployed. Other Americans have cited long hours and general dissatisfaction as reasons for their job burnout and ensuing resignations. Additionally, some argue that the pandemic has fundamentally reshaped the way people view their economic lives. Dr. Anthony Klotz, a Texas A&M professor, argues that pandemic “epiphanies” have led many to choose to “stay home with family, to start a business, to pursue a hobby” or “perhaps retire early.” 

Simultaneously, America is in the midst of a supply chain breakdown. As the holiday season approaches, disruptions in the shipping and trucking industries are creating scarcity and delays in delivery of goods and massive backups at international ports. Online freight marketplace Freightos reported that “China-US ocean shipments took an average of 73 days” last month, which is 83 percent longer than in September of 2019. As Peter Goodman of The New York Times reports, “just about anything that is produced or manufactured” is in shortage, from “chemicals to electronics to running shoes.” While the causes of this crisis are complex, essentially, demand for goods skyrocketed during the pandemic as consumers re-allocated money previously spent on services that were shut down. Firms have struggled to meet this demand, in large part due to the exodus of workers from the workforce. Patrick Fay, president of international logistics company BOC International, attributes the “global congestion” in the shipping industry to a lack of workers like forklift operators, distribution center employees, and truck drivers, who are essential to keeping goods moving through the supply chain. As Angela Yang from The Boston Globe reports, a “shortfall of truck drivers is one factor clogging every facet of the supply chain right now.” The American Trucking Association had estimated in 2019 that the industry would be short at least 60,000 drivers, and that number has since increased due to drivers leaving the workforce during the pandemic. Without sufficient numbers of truckers, goods are frequently stuck at ports, waiting to be transported to distribution centers for extended periods of time. Across the board, labor shortages are negatively impacting crucial components of the global supply chain.

Labor shortages and supply chain disruptions are intrinsically linked, and combined, the two issues are partially responsible for recent increases in inflation rates. In September, the consumer price index rose 5.4 percent compared to the year prior, according to the US Bureau of Labor. That increase is consistent with reports from June, July, and August, indicating that the nation is now in a period of rapid inflation. Spikes in food and shelter rates are largely driving price increases, which together contributed to more than half of the monthly inflation in September. However, inflation has become widespread across all areas of the market, including gas and new car prices (up 42 percent and 8.7 percent from last year, respectively). Raphael Bostic, president of the Federal Reserve Bank of Atlanta, attributes the “currently elevated inflation” to “disruptions in supply chains and labor markets.” In the service industry, wage increases meant to entice workers are driving firms to pass increased costs on to consumers. Restaurants, struggling to hire waitstaff and kitchen help, are increasing menu prices to offset the cost of higher pay offerings. Similarly, supply chain issues have caused shipping costs to increase dramatically. For example, the cost of shipping a single container from Shanghai to New York has increased by 650 percent since the pandemic began, forcing many companies to transfer this massive cost increase onto buyers. Further, many industries are experiencing scarcity throughout the market. For example, the automobile industry is having difficulty securing parts, and businesses are paying a premium for parts that are particularly scarce. Once again, the consumer ends up covering the higher production costs through increased retail prices. 

Given the widespread adverse impacts of the labor shortage, the Biden administration must make getting people back to work a top priority. In the past, simply raising wages would have been sufficient, but as discussed above, increased wages have not stopped workers from quitting in 2021. Thus, the Biden administration faces a unique challenge from a policy perspective. Potential solutions include removing barriers to hiring, increasing subsidies for the childcare industry, and eliminating barriers to legal immigration. First, in industries like trucking, which is facing a lack of new drivers, potential candidates face a daunting list of licensing requirements. For many, commercial driving qualifications can be difficult to surmount, between a clean driving record, background checks, drug tests, and other requirements. Here, there is an opportunity for an initiative to help prospective drivers navigate this lengthy ordeal. While these regulations are important for safety reasons, making the qualification process more accessible to younger people will help increase the flow of new drivers to replace older, retiring drivers. Second, the dire situation of the childcare industry must be addressed. As mentioned above, facility closures are widespread due to staffing shortages and loss of revenue during the pandemic, which is preventing millions of parents from working. Thus, a government-funded program to recruit and train new childcare workers is desperately needed. If successful, a more robust childcare system should allow millions of Americans to go back to work in their own respective fields.

Finally, the Biden administration should work on immediate immigration reform to allow more immigrants to enter the country on work visas and take low-wage positions that many Americans have proved reluctant to fill. During the pandemic, immigration slowed to a standstill, restricting the amount of foreign workers that could enter the country. Currently, there is a Congressionally-limited supply of H-2B temporary visas, and a massive backlog in the permanent employment-based green card visa process. Now, as Nicole Narea of Vox argues, increasing the number of H-2 visas and green cards could help “solve a labor shortage Americans have been unable to fix on their own,” because immigrants are both willing to fill open jobs and willing to go to where the jobs are. Bringing in foreign workers could provide a quick reprieve for many industries in critical need of new employees.

Ultimately, until steps are taken to return laborers to the workforce, it is likely that we will continue to see a strained supply chain and high inflation rates across the market.

Photo: Image via Unsplash (Kyle Ryan)