Labour shortages

Labour shortages occur when employers struggle to fill labour vacancies because of insufficient labour applying for the jobs.

Labour shortages can occur in geographical regions or in occupations with special requirements in terms of skill or function. Labour shortages can also be seasonal in industries like retail (Christmas) and agriculture (harvest time)

Reasons for labour shortages

  1. Geographical shortages. An area with a booming economy, but poor housing can experience labour shortages quicker than the rest of the economy. In the UK, London has strong employment demand but suffers from high rent costs which make London relatively unattractive to workers, causing labour shortages.
  2. High skilled jobs. Occupations which require particular skills/qualifications have only a limited pool of workers who can apply. For example, an occupation like doctors/nursing requires a lengthy training period. If there is a shortage, there will be a considerable time lag in training new workers.
  3. Unattractive jobs. In the service sector or agriculture, there are some jobs which are hard to fill because of non-monetary costs and negative social perceptions about the job. For example, fruit picking – is long hours, repetitive work and exposed to the elements. In a developed economy with high expectations, farmers can struggle to fill these low-paid jobs, which are seen as undesirable.
  4. Social prestige. Job professions are not just about wages, but the prestige attached. In the UK, there has been a push to increase rates of students studying at university. For many schools and parents, vocational jobs, such as plumbing, electrician and technician are seen as relatively unattractive. The retail sector has a perception it is just a ‘temporary’ job and many want to avoid a career in this sector.
  5. Fixed pay. Public sector jobs have pay determined by the government and not market forces. For political reasons, the government may implement a prolonged pay freeze – even in public sector occupations where shortages are beginning to show. This is often a problem for an occupation like teaching, which is high-skilled but relatively low paid compared to private sector alternatives.
  6. Economy at full employment. Labour shortages will be more likely in vulnerable sectors when the macroeconomy is close to full employment.

Impact of labour shortages

labour-shortages
Diagram showing labour shortages

The basic economic response to a labour shortage is for firms to increase pay to attract more workers. If you ever wondered why it cost £60-£100 an hour to hire a plumber, it is partly due to the relative shortage of labour. In a free market, we will see higher wages in professions, such as lawyers, where there is a limited supply.

However, we also see jobs, which routinely experience labour shortages but wages remain close to the national minimum wage

Raising pay is only one possible response to labour shortages.

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Source: CIPD Labour Market outlook 2017

This shows different responses employers say they will pursue in response to labour shortages

  •  Leave positions unfilled
  •  Invest in more training and up-skilling staff

It suggests ‘increasing pay to attract more UK-born nationals’ is quite low down on the list (7%) of possible responses.

Evaluation

  • It depends on the industry:
    Farming – very tight margins, with monopsony buyers (Supermarkets putting pressure on farmers to keep prices low). Supermarkets also have the option of importing food if UK wages do rise.
  • In the service sector, some jobs hard to replace with technology, e.g. hairdressing, baristas. Some jobs in manufacturing are easier to replace with increased automation.
  • The difference between short-term and long-term. In the short-term, employers may leave positions unfilled, but in the long-term, this may be increasingly untenable.

Labour shortages and migration

Labour shortages can increase the tendency for firms to look abroad for willing/skilled workers. If you have a shortage in nursing, it is very difficult to increase UK supply. Even higher wages would have little impact in the short-term. Encouraging migration from other countries is the easiest way to attract nurses to fill immediate shortages.

Employers have often sought migrants for vacancies which are hard to fill – especially those with seasonal patterns. If fruit picking is six months, it can be hard to get a native UK resident to commit to a low-paid job for six months. However, it may suit a migrant from Eastern Europe, who can commit to working in the UK for relatively higher wages for six months and then returning.

Labour shortages – short-term and long-term

Some may argue that migration is a short-term fix to labour shortages. If migration is stopped, it will force an economy to deal with labour shortages by training relevant workers.

However, limiting migration may not be enough. Lower levels of migrants don’t necessarily lead to increase in the number of trained nurses, builders and plumbers. There are also structural factors behind why people choose or don’t chose training qualifications. There could also be a period of shortages because it would take time for the labour market and educational institutions to respond to the labour shortages.

Labour shortages and inflation

Prolonged labour shortages will have an upward effect on wages. Higher wages will start to feed into higher inflation (both cost-push and demand-pull pressures) The impact on inflation depends on:

  1. How much employers respond to shortages with putting up wages
  2. The number of occupations affected by labour shortages and whether there is a knock on effect to other wages in the economy.
  3. Other inflationary pressures in the economy.

Brexit and migration

At the start of 2017, a National Farmers Unions survey of labour providers, found by Aug and Sep 2016, 60% of farmers were unable to meet recruitment targets for workers. This is up from 0% at the start of 2016 and 13% in Q2 2016.

There has been no change in labour law, but the UK has changed perceptions as a place to work. The depreciation in the value of the Pound has also made the UK relatively less attractive to foreign workers.

It is only one tentative survey, but traditional migration has helped UK labour market to be more flexible. If migrants were put off working in the UK through changing attitudes / legal limits, it could exacerbate labour shortages in certain occupations.

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