Companies are facing two major shortages at the moment, scarcity of materials and scarcity of labor. While the cost and availability of input materials continues to be a major problem, it is also one that is becoming slightly less acute. Companies are increasingly finding substitute materials, tweaking or dropping less profitable product lines, or changing providers and/or trade routes—e.g., from China to other parts of Southeast Asia or even South America. The shortage of labor, however, is a second hurdle that companies are finding much harder to bypass, and many believe this is more than just a temporary phenomenon. It is feared that this shortage will result in rising wages, leading to soaring inflation. With the release of today’s employment report (and indeed subsequent ones over the next few months) we should get a better grip on just how temporary or structural these labor shortages are.
In this Economics Weekly, we review the current employment situation, with the view that the jobs market is indeed very tight at the moment; however, the pool of available labor is still deep, and as the recovery continues, we should expect these workers to return to the labor force, easing wage and inflationary pressures.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.