Note: Because Bob Johnson was traveling this week, we are running this recently filmed video report in place of his regular weekly column.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Our director of economic analysis, Bob Johnson, thinks that labor scarcity will be one of the big themes in the years to come. He is here today to walk us through some of the data underlying that idea.
Bob, thanks for joining me.
Bob Johnson: It's great to be here today.
Glaser: Let's start with why you think this labor scarcity is coming. It seems like we are still talking about recovering from the huge amount of unemployment we had during the recession. Why is it time to start talking about a shortage here?
Johnson: Well, I think the time is now, and I think that 2015 will be the first year that we really see some of the major signs of the data. We have already begun to see some early signs, which is why I'm thinking this theory is coming true. We have seen initial unemployment claims come down. And as a percentage of the population, we are actually at the lowest level in history--right here, right now. That's a very forward-looking metric.
The current unemployment level is also a decent metric to use to gauge the scarcity. The natural unemployment rate, to pick a number--and you can ask different economists--it's 5% to 5.5%. We're at around 5.8% right now. We are almost back to what people consider the natural unemployment, and that's when you are going to start to see some of these scarcity issues creep in.
Certainly, the job-openings report, as Yellen has highlighted, has become much more important economic metric. And we have seen the number of job openings--that is, they call up a business say, "How many positions do you have open?"--increased over five million openings. That's a huge number compared with the two million or three million level we had in the middle of the recession. Even going back to 2000, the first year they started collecting this data, that five million is the highest number we have ever had. So, it's really become a big indicator of, I think, the coming scarcity. Certainly, small businesses--the National Federation, there, has said that the number of companies finding it hard to fill positions has gone up every month recently. So clearly, we are seeing the data there, too.Read Full Transcript
Glaser: How do demographics play into this? Maybe one of the knocks about the unemployment rate is that [the lower number is from] people leaving the workforce and who may come back if the market looks a little bit firmer.
Johnson: I think that we have gone through the short-term data a little bit [to answer the question, "Why now?"] But certainly, the longer-term demographics [show] that this will be the first year--2015--where the number of people between the ages of 22 and 62 born in the U.S. actually begins to decline. Now, in the beginning of the century, we had as much as over one million people entering that age group every year, and now we are going to move into a position where that's actually declining. So, I think that's going to have a big effect on the market, and that's the biggest reason I felt that we had a scarcity coming and why I've been talking about it. You could obviously see it on a chart for years, but we started talking about it a lot last year. Now, we are seeing some of the data that I talked about earlier, which is saying that now is the time.
Glaser: Would you expect the scarcity to be evenly distributed across sectors and types of jobs or are there areas that are likely to benefit more?
Johnson: I think anything with a skill will benefit. I don't think it's necessarily the high-end worker or the Ph.D. candidate; I'm talking skilled--whether it would be an air-conditioning person, maybe even a truck driver is a semi-skilled position. I think that it's those kinds of semi-skilled to skilled positions that are really going to [see a shortage]. And maybe some of the health-care positions--not necessarily the doctors, but the aids and so forth--those will be the markets where you're really going to see a shortage and where you may see some potential wage pressure. But it won't be across the board. The people with no skills, I doubt they are going to be much better off 10 years from now. And unfortunately, I think at the high end of the market for the college educated, that may not be as lucrative as it used to be.
Glaser: What could go wrong here? When you look back on this a few years from now, if it doesn't come to pass, what do you think would be the driver of that?
Johnson: Well, the other side of the demographic is that, as people get older, they spend less. So, we may have less consumption growth and a slower-growth economy, and that may hold things back in terms of wanting to hire more people. Just a slower overall growth rate will certainly be one of the things. Surprisingly, as I present this to clients, a lot of the pushback I get is, "Well, we've had many productivity gains. It looks like maybe the electric car or electric truck is just around the corner, and if we need fewer drivers for that and fewer insurance agents for fewer accidents, that's going to cause a big slowdown." I don't know. It just seems a little too far out for me to put it in my numbers yet, and it certainly seems to be at the very far end of the curve. But I do have people who are worried about that as well.
Glaser: Looking at wage growth, then: If we are going to see some scarcity or if we are beginning to see some scarcity, shouldn't we also be seeing wages go up? Have you been seeing any signs of that in the data?
Johnson: The government data has not shown an acceleration in wage growth. When you look at it year over year, it's not the horrific number that everybody makes it out to be; but it's still only about 1% when you adjust for inflation. So, it hasn't been a lot. I think that number will pick up over the next year. Right now, what's held it back a little bit is that we have gone through a period where we've had a tailwind to the wage numbers. So, they haven't looked necessarily stellar, but they have been OK. The reason they have been helped along is that as the workforce has gotten older, [workers have made more money]. Typically, the older you get, the more money you make--and there is a pretty strong relationship there. So, we have had a little help from that aging. Now, we're actually starting to go down the curve again. The workforce is getting younger again, and I think that's held back the number. And I think there are different mix issues that have probably held back the data a little bit, too. I think we have had less job growth on the really high end of the market and a little bit more at the low end of the market where the wages are a little less.
Glaser: Outside of the government data, are you seeing any signs that wages might be coming up? I know Wal-Mart (WMT) recently announced they are giving raises and some other companies as well. Is that part of the story?
Johnson: The Wal-Mart [news] came as a little bit of a surprise. I think it might be a business issue with their revenues and so forth and trying to find ways [to increase productivity]--they're thinking, "Maybe if we paid our workers more, maybe we could get more out of them." But certainly, Wal-Mart moving wages up is a positive sign for the wage-growth story, and I think that's certainly something we may see in other businesses. One of the other indicators that we have had on that is the same small business survey that indicated about hard-to-fill positions also asks the question, "Do you plan to give your employees a raise in the year ahead?" And that number has been moving up nicely as well. So, I think it's just a matter of time until the numbers kind of filter through. Unfortunately, with the way they amalgamate the numbers, I think we have to be a little careful that it's not the only metric we look at.
Glaser: If this does come to pass, if we do have this labor scarcity, what are the ramifications for the market?
Johnson: There's not an easy answer to that. Certainly, companies that serve the consumer and serve the middle market are going to do better. Companies that employ a lot of labor, especially skilled to semi-skilled labor, are going to face wage pressures, and so that's probably bad news. It will offset some of the consumer good news. Whenever we have had periods of sharply rising wages, it's been very, very bad news for corporate profits. So, I think we have to be a little bit careful about what we wish for in terms of stronger wage growth. And the Fed looks at wage growth, and when that starts to really accelerate, that's when they are really going to begin to tighten.
Glaser: Bob, I certainly appreciate you walking us through this today.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
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