Job openings continue to rise–labor scarcity will drive innovation
By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast
Last Friday’s national employment report showed very favorable job gains. The Bureau of Labor Statistics reported that the economy grew by 943,000 jobs during July. This was higher than most estimates and was the highest since August 2020. The first half of the year was marked by several payroll misses with monthly numbers coming in much lower than expected. One of the reasons was due to supply-side issues, specifically the availability of labor. Last week’s report showed the growth in employment increased at a much higher level than the labor force. Consequently, the nation’s unemployment rate dropped by ½ of a percent to 5.4%.
The largest gain occurred in the leisure and hospitality sector, adding 380,000 jobs. In the past three months, leisure and hospitality has been the largest contributor of job growth. More than 1 million jobs have been added in leisure and hospitality, more than double the jobs added in the second highest producing government sector. The strong growth in leisure and hospitality is to be expected. Last year, and early this year, consumers spent heavily on goods, driven by government stimulus and the difficulty in pursuing services, particularly leisure and hospitality. The growth in leisure and hospitality simply reflects re-openings and pent-up demand for experiences.
At a national average hourly rate of $18.55 an hour, leisure and hospitality is the lowest paid sector. Despite being the leading driver of job growth last month, average hourly earnings increased by 11 cents an hour to $30.54. This is no small increase! Since February 2020, average hourly earnings have increased by about $2 an hour. As a comparison, the average hourly rate increased by about 41 cents a year after the Great Recession. For my data source, FactSet, average hourly earnings data only go back to 2006, but the recent changes in hourly earnings far exceed anything since that time. In a recent One Weekly column, we also wrote about the record-breaking increases in average weekly wages for Southern Indiana.
What are the implications for these significant changes in average hourly wages? Does it mean that these costs will be passed along to business and consumers, and inflation will be the result? Or as some Federal Reserve officials and others believe that current inflation is only transitory, once we get through some of these supply chain issues, including labor availability. Here is my view. The combination of higher wages and a scarce labor pool will motivate a more rapid transition to automation. In a quest to meet demand, companies have no choice but to figure innovative changes to production, which could include the adoption of more efficient processes, either through automation or just pure creativity. This applies to both goods and services. Higher wages will be justified due to gains in productivity because of the adoption of innovative business and production processes. Productivity gains will serve as a headwind to sustained inflation.
Let’s look at the data on job changes and GDP. Back in the 1970s and 80s, an increase in GDP, that occurs when the economy is exiting the recession, was accompanied by an increase in payrolls. That is, an increase in GDP also occurred with an increase in jobs. Since 1990 and for every recession since, a positive increase in GDP occurred without the nation fully recovering jobs lost. That means that the economy was able to produce more, but with fewer workers. In the most recent recession, the economy is now at a market level of goods and services that exceeds the level that existed in February 2020 but is still down close to 6 million payrolls. We are observing a more productive economy in action. The nation is producing a significantly higher GDP than February 2020, but with less labor.
One year after the Great Recession, GDP was about 2% higher than the start of the recession. This 2% gain to GDP was accomplished with payrolls being down 5% from the start of the recession. With the most recent Covid recession, GDP is now 6% higher than the recession beginning date and payrolls are down about 4%. Compared to the Great Recession, the percentage change to GDP is about 3 times higher with the Covid recession, but the percentage drop in payrolls is only 1 percentage point higher.
The most recent Job Openings and Labor Turnover report shows that labor scarcity is not improving. On Monday, the U.S. Department of Labor reported that job openings increased again in June, rising to above 10 million. This is the highest on record. As a comparison, the number of job openings a year after the Great Recession stood at about 3 million. If employers can’t rely on labor, some will have no choice but to invest in a machine.
Data sources: BLS Job Openings and Labor Turnover Survey, FactSet, BLS Employment Situation.