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Labor shortages growing acute

March 10, 2021

Graph depicting the national federation of independent business' unfilled job openings index

Source: National Federation of Independent Business

Small business optimism rose for the first time in five months in February, moving up to 95.8 from a prior 95.0. Economic expectations, capex plans, hiring plans, and compensation plans all improved on the month while the uncertainty index equaled its lowest mark since late 2019. There were also further hints of incipient inflation pressure, as a net 25 percent of respondents reported higher selling prices, the largest share in more than a dozen years.

The big story, though, was the unfilled openings index hitting a new record high of 40.0 in another sign of an increasingly acute shortage of labor. Some of this represents the COVID and recession-driven drop in labor force engagement that will be alleviated as the pandemic fades, but it is likely much more a function of a growing skills mismatch and a longstanding structural decline in the participation rate. Labor force participation peaked in early 2000 and, apart from modest countertrends in the middle-to-latter stages of the last two expansions, has been in a steady decline since. There will be some steadying effect in participation as this cycle matures, but it is a good bet to be overwhelmed by the more pronounced cyclical trend in job openings. Unfilled openings generally maintain a steady climb through expansions and don’t peak on average until less than a year before the onset of recessions. With this cycle still less than a year old, the labor market is shaping up to become extremely imbalanced before the next downturn takes hold.

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