The Myth of the Coming Labor Shortage

Richard Freeman says not to expect the future labor shortages that many are forecasting:

Is A Great Labor Shortage Coming? Replacement Demand in the Global Economy, by Richard B. Freeman, NBER WP 12541, Sept 2006:

The sky is falling down, the sky is falling down ...
I must go and tell the king ...
A great labor shortage is coming.

In the early 2000s, the business press and media began reporting that the US labor market was on the verge of a major transformation. The retirement of baby boomers and slow projected growth of the labor force were going to create a great labor shortage. Policy-makers should forget about the sluggish real wage growth of the past three decades, the deterioration in pensions and employer provided health care, the “jobless” recovery from the 2001 recession, and fears of job loss from off shoring or low wage imports and focus on helping business find workers in the coming shortage. ...

In this paper, I assess the shortage claims and the labor supply and demand projections on which they are based. I conclude that there is no more reason to believe that the US faces a great future labor shortage than that Chicken Little got it right about the sky falling down. The retirement of baby boomers and slow growth of the US work force, on which the shortage claims are based, will most likely have modest and hard to detect impacts on the job market. I argue that increased supplies of skilled labor in low wage countries will impact US workers more than slower increases in domestic labor supply.

...

If the analysis of this paper is correct and the economic sky will not fall down in the face of a slower growth in the US work force, why have so many persons concerned with the well being of the US economy warning about the great coming labor shortage?

I suspect that ... fears of a coming shortage fit with the concerns of various groups. Future shortage or not, business will benefit from policies that increase labor supply to drive down labor costs. Advocates of education and training see the shortage analysis as a way to gain national support for increased spending on training that will benefit workers. Politicians can use the shortage analysis to avoid dealing with policies like minimum wages, mandated health care spending, labor law reform, or enforcement of labor laws, and the like, by endorsing “win-win” education and training policies while sidestepping the fact that someone must pay for these investments. ...

I [also] believe the [reason] shortage analysis appeals to some is that it offers a more optimistic framework for analyzing the economic future than the view that the biggest problem facing US workers is competition from low wage labor overseas is. If the doubling of the global work force has weakened the position of workers in the US, the country has to deal with issues regarding the rules of the global economy, ways to increase savings and the supply of capital, ways to retain good jobs and sectors and to distribute the gains from globalization to labor as well as capital while deterring protectionism.

That the coming labor shortage is more myth than reality does not invalidate some of the policies that shortage analysts endorse to help the economy progress. More and better schooling and job training and greater provision of occupational information may be critical to the nation’s preserving comparative advantage in high tech sectors under the global competition vision of the future. There is arguably greater need for those policies if global competition places downward pressure on US workers than if a domestic labor shortage puts them in the catbird seat in the economy and places business under pressure to recruit more workers.

Finally, if my analysis is wrong and the US develops a great labor shortage in the future, I do not see how the country can go wrong allowing market forces to raise the price of labor. There is nothing in economics that predicts “slower growth in the standard of living, change in the balance of payments, inequality, persistent structural unemployment,” or any other economic disasters from the normal functioning of competitive markets in the face of a shift in the supply-demand balance. If there is going to be a great labor shortage that raises wages and benefits for American workers, maybe we ought to cheer the workings of the Invisible Hand rather than seeing this as a disaster that policy should seek to avoid.

The last paragraph is worth emphasizing. David Wessel of the WSJ and Andrew Samwick have a previous discussion of these results.