Fears of Economy-Wide Labor Shortages Are Completely Groundless

Given how the U.S. media has evolved it’s always good to be a contrarian if you want to get news coverage. Even if you are wrong. Perhaps even better if you are wrong.  Case in point is a new interview with Minaynville’s Conor Sen on Breakout, who claims that we're less than a decade away from the economy’s biggest challenge: not too few jobs for American workers, but rather a workforce too small to fill the demand.

This is not a new perspective, although he’s probably the first to say this since the Great Recession. In 2001, Elaine Chao, President Bush’s Secretary of Labor, warned that, “Our new challenge is a scarcity in the one fundamental resource that drives every economy in the world: the workforce ... If the coming worker shortage in the next several years is not addressed, the federal budget, the economy, and working taxpayers will pay a huge price.” Business Week concurred, stating “another big freight train is coming down the track in the U.S. economy. That’s the tremendous long-term shortage of labor we are facing.” The same argument was used to argue the U.S. economy needs the offshoring of jobs to low wage nations to cope with an impending labor shortage.

When looked at from an innovation economics perspective, it is clear that a worker shortage is not only not likely it’s simply impossible, since by definition the output of workers must equal their consumption. It is possible to have a worker surplus, which is what happens when the unemployment rate rises above its frictional rate as it has been for almost four years now. It is even possible to spot occupational shortages, as has been the case with some occupations like computer scientists and engineers. But the converse is not possible. There can be no such thing as a negative unemployment rate. That would mean that part of the productive capacity of the economy is in use more than once, which is impossible. In other words, the demand for labor can never exceed the supply of labor. This is because labor demand is determined by what people consume and that in turn is determined by the amount of goods and services the workforce produces.

In short, a society cannot consume more than it produces, at least over the moderate to long term. Those who believe in labor shortages believe that if companies had more workers they would produce more. But that is only true because the added workers become added consumers. Sen is basing his dire prognostication on the notion that once retirees leave the workforce in droves that companies won’t be able to find the workers they need. I hate to tell him this but when people retire two things happen: first, they spend less money because their incomes go down and so the demand for labor from their spending goes down. Second, a greater share of their income comes from transfer payments which come from people who are working, who then have less after-tax income to spend. Therefore, their consumption goes down and the number of jobs needed to support that consumption. So in other words, the baby boom retirement will not solve our unemployment problems. It will however, make us all relatively poorer since a greater share of Americans will not be working. Time to raise the retirement age to 70!