By  Jim West, PhD, professor of business and economics

The United States is experiencing perplexing labor shortages often referred to as the Great Resignation. The suffering and isolation caused by COVID gets a lot of the blame, yet the shortages may be better explained by longer-term demographic, technological, and government-policy changes. The pandemic and subsequent policies are merely the accelerant. I will use some tried-and-true economic tools, including opportunity cost, creative destruction, externalities, and good old supply and demand to try to shed more light on this troubling dilemma.

First, many in the baby boom generation have enjoyed strong income and asset growth over the past four decades, including two-income households, booming investment funds (e.g. 401Ks), and real estate appreciation. In light of the pandemic, this leads many to reevaluate their career and life plans. They increasingly conclude, “enough is enough” and are choosing earlier retirement and enjoying the good life. Boomer wealth has also eased the financial stress for their children, who increasingly choose work from home, gig economy employment (short-term contract jobs such as driving for a ride-sharing service, freelance work, fitness training), and leisure over stressful jobs.

Other demographic drivers of the labor shortages reflect population growth rates at or below replacement levels. While our great grandparents had six or eight children, many young people today are marrying later, if at all, and weighing critically the opportunity costs of having many, or even any, children. The population boom, so sensationally feared just a few decades ago, has diminished significantly.

Immigrant labor coming to the United States, curtailed by the virus, also unveils a longer-term trend. Economic growth opportunities available in the home countries of potential immigrants are reducing the flow of needed workers to the United States. While the U.S. is still most popular, it is not the only immigration destination.

Massive government spending programs contribute to labor shortages. While increasing consumption, welfare spending also leads workers to find the opportunity-cost of taking a job costly as they may lose benefits. Likewise, policies suspending contract enforcement, (e.g. student loans, mortgages, and rental agreements), disincentivize job seekers.

Deficit spending, monetized by a compliant central bank, increases inflation, driving wages higher to a point where businesses, especially small ones, cannot compete for workers. Small business closures abound. Growing debt also drives higher taxes, further discouraging growth.

The rapid technological change of recent decades both creates and destroys jobs A workforce can realign only so fast as technological change exposes the gap between skill sets and job openings. Where once it was cheap labor that threatened jobs, now it is also the rise of the robot class.

Lastly, a revised view of the opportunity-cost of two working parents, along with the unavailability of low-cost childcare and the uneven quality of schools, are being reevaluated by parents. Home schooling and stay-at-home moms and dads are leading many to choose family time over work time. Workers are demanding more job flexibility to accommodate family, which some employers simply cannot afford.

What can be done? There are several unknowns in this equation. Many see the “creative destruction” of a free-enterprise system as the best option. This process encourages entrepreneurial free markets with a smaller, less-expensive decentralized government and limited welfare safety net. The alternative, favored by others, sees more centralized economic power as a quicker and less disruptive solution. History has proven this top-down command structure to have many, many negative externalities. This divergence of views presents a great challenge and opportunity for university educators and students!

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