Labor Shortage Means Employers Will Pay More for Talent

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By Rich Miller and Shobhana Chandra

July 28 — American workers may be on the cusp of grabbing a bigger bite of the economic pie after decades of getting fewer and fewer crumbs.

A significant slowdown in labor-force growth in the U.S., China and elsewhere will put a premium on finding workers in the years ahead. Companies will have to pay up to get the people they want with the skills they need to keep expanding their businesses.

“We're going from a world of generally too much labor to a world of labor shortages,” said Mark Zandi, chief economist at Moody's Analytics Inc. in West Chester, Pa. “When we look back 10 years from now, the labor share of income will have hit bottom now.”

Workers' gain will be employers' pain, as company profits are pinched by rising salaries. Stock-market investors also may lose out as they're forced to adjust to a weaker earnings outlook, said Gad Levanon, a managing director at the Conference Board in New York. Income inequality might even be curbed, as the rich reap less in the way of capital gains while employees earn more in wages, he added.

That vision stands in sharp contrast to the scenario sketched out by technophobes and technophiles alike—and popularized by such magazines as The Atlantic—that sees increasingly sophisticated robots pushing out workers. “Technology will soon erase millions of jobs,” reads the cover of The Atlantic's July-August issue, promoting an article inside headlined “A World Without Work.”

Driving Force Is Demographics

In the world of the future as seen by Zandi, demographics rather than technology will be the driving force, and man, not machine, will come out on top.

In perhaps an early sign of workers' resurgence, labor's share of income of U.S. non-farm businesses—paid out in salaries and other employee compensation—rose to 56.7 percent last year from a post-World War II low of 56.4 percent in 2013, based on data from the Labor Department.

Since 2000, that measure shows workers have seen their slice of the economic pie shrink by more than 6 percentage points, as they found themselves increasingly competing with lower-cost labor from China and other poorer countries.

That looks like it's about to change—and the reason is simple demographics. Thanks to declining birth rates in much of the world, the global pool of young workers ages 15 to 24 is contracting by about 4 million per year, according to the Geneva-based International Labor Organization.

“We will see a massive slowdown in labor supply in the coming years,” said Ekkehard Ernst, senior economist at the ILO. “Wage growth will have to accelerate, especially in those high-skill occupations where there is high demand.”

Many Fields Have Worker Shortages

Technology workers are the obvious beneficiaries. In occupations requiring computer or mathematics proficiency, there were five times as many U.S. jobs posted in 2014 as there were unemployed people with the skills to fill them, according to calculations by the McKinsey Global Institute in Washington.

It's not only those in glamorous Silicon Valley fields who are making out. Other, more nitty-gritty industries are experiencing shortages. What's happening in those trades is a microcosm of what's to come in the job market as a whole: an aging, slower-growing labor force with fewer and fewer new workers.

In trucking, young drivers aren't joining fast enough to replace retirees, while federal regulations bar entry for those under 21.

Still Trucking

For David Boyer, a 62-year-old driver with ABF Freight System Inc., it means staying longer in a job he still enjoys after almost 45 years. He made $108,000 last year, covering the route between Virginia and Tennessee three times a week.

“When the money is good, it's hard to walk away,” Boyer said. “It's just a matter of time before more guys get up to the 60s and more people retire. We're going to end up with a bigger shortage. The trucking industry is grasping this, they know it's coming.”

For the U.S. as a whole, the labor force has grown just 1.6 percent since the recession ended six years ago, as aging Baby Boomers—born between 1946 and 1964—enter retirement. That compares with an advance of more than 10 percent in the prior decade, according to DOL data.

Not everyone is convinced that workers' fortunes are about to turn around. While demographics will aid workers by constraining the supply of labor, it won't be enough to offset the pressures coming from globalization and technological advance, said Alan Blinder, a Princeton University professor and former Federal Reserve vice chairman.

In their 2011 book “Race Against the Machine,” Erik Brynjolfsson and Andrew McAfee of the Massachusetts Institute of Technology argued that many people will be left behind as increasing innovation makes their jobs obsolete.

Technology Enables Worldwide Recruiting

Technology allows even smaller companies to look worldwide for the workers and skills they need, said Jonas Prising, chief executive officer of ManpowerGroup Inc., the Milwaukee-based staffing company. That will restrain salaries even as the labor market tightens. “Wage inflation will go up, but you are not going to see runaway” increases, he said.

The role of globalization is limited, though, because it's not only the U.S. where the job market is tightening. Countries including Japan and Germany have seen their workforces top out. Even China faces what Feng Wang, a professor at the University of California in Irvine, calls an “aging tsunami” that eventually will lead to a contraction of its labor supply.

“The global labor market situation is changing quite a lot,” said David Lam, research professor at the University of Michigan's Population Studies Center in Ann Arbor. “People haven't quite picked up what's happening.”

That ebbing competition from abroad is good news for American workers, according to Lam. “The intense downward pressure on wages that's come from the rest of the world is going to ease off a bit,” he said.

Gains May Be Shared Broadly

What's not clear is whether the gains will go mostly to the higher-skilled or be more broadly shared.

David Autor said he's hopeful the latter will prove to be the case. “The slowing labor supply creates a scarcity of labor,” including possibly the lesser educated, the Massachusetts Institute of Technology professor said.

The aging population also creates demand for people to take care of the elderly, said Susan Lund, a partner at McKinsey. And many of those jobs, such as health-care workers and physical therapists—can't be easily automated “until we have robots like the Jetsons,” she said, referring to the 1960s animated Space Age television show.

Autor, for one, contends that fears of machines replacing workers and creating a mass destruction of jobs are in any case overblown. Advances such as robotic exoskeletons—power-enhancing suits that enable the wearer to carry out previously difficult or impossible tasks, such as lifting heavy objects—may actually be a boon rather than a hindrance.

“Technology will allow older workers to work longer and do more physically demanding jobs later in life,” he said. “That could actually be helpful.”

Margins Threatened

What's good for workers may be bad for business and its shareholders. A rising labor share of income amid a tightening job market poses a significant threat to corporate profit margins, according to research by Credit Suisse.

The scarcity of older, experienced, more efficient employees, especially in high-technology industries, signals “an increase in their compensation growth,” said Amlan Roy, the bank's head of global demographics and pensions research in London. Unless stronger productivity expands the economic pie, owners of capital could lose out to labor, he said.

“The U.S. labor market is tightening faster than expected,” said Levanon of the Conference Board. “Wage growth will increase, and corporate profits are likely to suffer.”

To contact the reporters on this story: Rich Miller in Washington at; Shobhana Chandra in Washington at

To contact the editors responsible for this story: Christopher Wellisz at; Carlos Torres at

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