Complaints about a labor shortage ignore 5 decades of declining wages

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  • Labor shortages have slowed the recovery, but they are only shortages at the wages now on offer.
  • Wages and salaries have steadily made up a smaller and smaller share of GDP since peaking in 1969.
  • Businesses are starting to lift wages – and solve the labor shortage – as Americans hold out for more pay.
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What is a labor shortage, after all? Maybe it’s just a shortage of labor at a low wage.

As the American economy reopened, numerous businesses that found it difficult to hire are raising their minimum wages to attract talent. For the better part of five decades, that was not the norm.

While job openings stood at record highs at the end of March, April data showed a sharp deceleration in hiring. Businesses, particularly those in the service industry, said it was hard to find workers despite about 10 million Americans still being jobless.

Republicans quickly blamed the federal supplement to unemployment insurance for the disappointing jobs report, saying the program disincentivized work. Democrats maintained their support for the benefit and pointed to expensive childcare and COVID-19 fears for the shortfall.

Yet neither party looked to what might be the simplest explanation: Americans are tired of substandard wage growth. Wages and salaries have steadily made up a smaller share of US gross domestic product since peaking at 51.6% in 1969. The figure stood at 43.4% in 2019 and sank to a series low of 41.9% as recently as 2014. Put simply, US economic growth has benefitted the American worker less and less since the late 1960s.

Other data suggest low wages are keeping jobless Americans from taking up work. Ahead of the April report, Federal Reserve Chair Jerome Powell said that, while there weren’t yet signs of a labor shortage, accelerating wage growth would be a key sign of a “really tight labor market.”

That wage growth started to arrive in April. Average hourly earnings rose $0.21 month-over-month, roughly doubling the typical one-month gain seen before the pandemic. The bounce signaled businesses were willing to pay up to fill open roles.

A handful of companies have been more explicit with their wage hikes. Chipotle raised its average wage earlier in May, saying the change would help in hiring 20,000 workers through the year. McDonald’s followed soon after, raising starting wages at its corporate-owned locations as it aims to hire 10,000 workers over the next three months.

Americans have also been more outspoken in seeking higher wages. The reservation wage – the level of pay at which an unemployed American would take a job – rose 26% year-over-year in March for workers without a college degree. That compares to an average 2% climb over the past six years. Reservation wages also sharply increased for Americans earning less than $60,000, according to the Federal Reserve Bank of New York.

Economists have spent months decoding what the post-pandemic economy would look like. Powell repeatedly warned this year the US wouldn’t be returning to the economy of 2019, and that some jobs might never come back. Countries need to “think well in advance” of a post-pandemic economy so it can create the right jobs for the new normal, Kristalina Georgieva, managing director of the International Monetary Fund, said in April.

Yet the latest data suggests that, particularly in lower-paying sectors, Americans won’t return to an era of stagnant wage growth.