A Tight Labor Market Is Good for Workers

By Kevin D. Williamson

Thursday, July 29, 2021

 

A fast-food CEO calls it a “total nightmare.” Some economists are calling it The Great Resignation. Best just to call it what it is: a tight labor market — and three cheers for it.

 

In late July, the United States had about 9.5 million unemployed people and about the same number of unfilled jobs. The unemployment rate was under 6 percent in the most recent survey, so one way of thinking about those 9.5 million unemployed workers and 9.5 million unemployed jobs is as churn at the margins.

 

That churn has been intensified by a tight little knot of interrelated factors.

 

The first of these is the partial liberation of workers who had been hunkered down during the COVID-19 crisis. Unemployment had hit almost 15 percent in the depths of the lockdowns, which made that a rotten time to be looking for a new job. On top of that, half of all Americans are in employer-based health-insurance programs — unemployment means losing not only income but also, in many cases, health insurance, with many unemployed workers lacking the means to pay for COBRA coverage. The fearsome prospect of losing both income and health insurance during an epidemic was enough to keep many dissatisfied workers in place rather than on the hunt for a new job — but that is no longer the case. Before the epidemic, the unemployment rate had been as low as 3.5 percent, and even if the labor market does not return to its pre-COVID situation, it has moved substantially in that direction, meaning that it is, for many workers, a seller’s market. There has been a great deal of disruption, which creates, in turn, a great deal of opportunity for in-demand workers. No one should expect them to sit still.

 

A second and related factor is the partial reversal of work-from-home arrangements in many sectors. Some businesses are better suited than others to having a workforce that does not report to an office every day, and many are eager to get their workers back at their desks. But the workers themselves are in many cases less eager. Many workers felt like working from home had given them, in effect, a raise: A worker with an hour-long commute has to invest ten hours in an eight-hour workday, whereas the same worker doing his job remotely can commit less time to the job even if he is doing more hours of actual work every week. The flexibility of being at home can provide enormous economic benefits, too, offering potential savings on everything from meals to child care. Some of these workers are demonstrating the limit of the theory of “sticky” nominal wages: A higher number on the paycheck does not necessarily translate into higher real wages once commuting and the expenses of being away from home all day are taken into account. A $20-an-hour job is not an improvement on a $17-an-hour job if, in order to take it, you have to pony up $10 an hour for child care — which, if we credit industry estimates, would be a bargain rate.

 

A third factor is that the very tight labor market leading up to the COVID-19 crisis already had some workers ready to demand more out of their employers, and those same workers surely are informed at least in part by the situation of workers in firms that thrived during the emergency. At the end of 2020, Amazon was hiring almost 3,000 workers a day. Right now, Amazon is advertising $20-an-hour jobs on these terms: “Benefits start when you do. No experience required. No résumé.” UPS has drivers earning more than $90,000 a year. Not everybody is in a position to take one of those jobs, but such positions are part of the scene, helping to give at least some workers — including those without much in the way of skill or education — the confidence not to take the first paying post that comes along.

 

So, yeah, Johnny Rockets is having a hard time of it.

 

Andy Wiederhorn, CEO of FAT Brands (corporate parent of Johnny Rockets and Fatburger), went on Fox Business in late July and described the labor situation facing his growing restaurant chain as a “total nightmare.” The existing restaurants are reasonably well staffed up, he says, but new locations are having a hard time getting help.

 

If only there were some time-tested strategy for attracting new workers, one that is supported by standard economic theory and that has proven itself effective in many different industries over centuries! President Joe Biden, asked about the shortage of service-sector workers, stage-whispered, “pay them more.” And though it is a little more complicated than that, the president is basically right: If your burger joint’s business model doesn’t work at prevailing labor costs, then your burger joint’s business model doesn’t work.

 

Wiederhorn is Exhibit A for the proverb that the problem with capitalism is capitalists: He once got paid $4.6 million over the course of 16 months he spent doing time in federal lockup for his role in what Forbes describes as “one of the worst pension frauds ever committed by an investment adviser.” His personal fortune is well north of $100 million, and he’s the kind of epic dingleberry who names his mansions (“The Ivy”) and boasted about spending $15,000 on a mirror in which to admire himself.

This is the doofus who is complaining that it is hard to find a reliable fry-guy — you want to know why your kids love Bernie Sanders? This is why your kids love Bernie Sanders.

 

Other executives seem to have received the message the market is sending. Beyond the obvious COVID winners (Amazon, FedEx, UPS, etc.), other companies representing several dissimilar sectors have raised their wages in the past year or so: Under Armour, Walmart, banks including Wells Fargo and Bank of America, fast-food chains including Chipotle and McDonald’s, Costco, Ikea.

 

Conservatives used to say that a job is the best social-welfare program. And it is. And there is nothing quite like a tight labor market for increasing labor’s share of income.

 

What should concern policy-makers is the considerable share of unemployment that is long-term and results from persistent mismatches between the skills of workers on the supply side of the labor market and the requirements of the demand side. The hardest jobs to fill in our economy are not positions for AI researchers or mechanical engineers and intellectual-property lawyers, but jobs for home health workers, truck drivers, warehouse workers, and management positions in food and hospitality. Another way of saying that is: Many of the people you’d want to hire as store managers for Fatburger have better options than being a store manager at Fatburger. As anyone who has worked in fast food knows, this is a longstanding challenge. But there is a considerable population of unemployed people out there who could, with the right incentives and preparation, fill some of those open roles. Many of these jobs fall into the gap between the positions that require a college degree and professional preparation and those that are truly entry level. You don’t necessarily need a degree or a certification to be a warehouse manager, but it isn’t a job you can just walk into, either. The same thing is true of retail and hospitality managers.

 

Another factor that should always be on our labor radar is that higher wages create incentives for firms to invest in automation and other labor substitutes. That isn’t necessarily something to worry about, but it is a reality to be taken into account. The good news for workers on that front is that the COVID-19 lockdowns illustrated in one of the most dramatic ways possible that dining and shopping are intensely social activities for which highly automated and technologically mediated experiences are a poor substitute. No doubt Jeff Bezos et al. will figure out a way to have the full menu of the Ritz Paris on all of our doorsteps with ten minutes’ notice, but many of us will still prefer going out for burgers with friends. For the past 15 years or so, the jobs that were considered the most secure for workers were those that were not readily subject to automation or offshoring: education, health care, government work, etc. We have seen some automation in fast-food restaurants, with customers ordering electronically at a kiosk at McDonald’s or placing their orders in advance via app at Starbucks, but it seems likely that this sort of thing will have only a limited appeal for customers who expect service with a human face.

 

What can we do for workers right now? The best thing we can do is to let markets work in their favor, which they are doing: The first quarter of 2021 saw the strongest wage growth in 20 years. And the market remains tight even with the winding down of COVID-era extended unemployment benefits. Beyond doing no harm, we have long-term policy failures to deal with, beginning with our dysfunctional K–12 education system and a federal government that somehow cannot manage to keep illegal immigrants out of the labor market. The wage effects of illegal-immigrant workers are felt most strongly at the low-paid end of the market, especially among workers who are recent legal immigrants.

 

And if this means that it is a more competitive world out there for restaurant owners looking to hire fry cooks, there’s a cure for that: Try money. It’s a simple enough solution that even Joe Biden has figured it out.