Morgan Stanley
  • Wealth Management
  • Jun 15, 2021

How Tight Is the U.S. Labor Market?

Why the disconnect between robust hiring demand and still elevated joblessness may persist, and how investors can prepare.

Lately, signs of a disconnect in the U.S. labor market have been mounting: As the economy recovers and businesses reopen, many employers are eager to hire, yet they often can’t find workers to fill the roles. 

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Explanations abound. Some believe that pandemic-related federal aid may dissuade a population of the unemployed from returning to work. Others cite a host of factors, such as public-health concerns, availability of childcare, the seasonality of school reopenings—even excess personal savings.

Other factors have created unusual market dynamics. Some manufacturers, for example, have had to cut shifts for a lack of key production materials. This is also an issue for homebuilders, who face a catch-22: They lack enough workers to start jobs, but delaying those starts has contributed to job losses in construction. All of these conditions may be impeding a more robust U.S. labor market recovery.

Many of these factors are short term, but we believe that structural economic changes are also influencing today’s labor-market dynamics and could have longer-lasting implications for investors. These include:

  • Accelerated retirements: According to Morgan Stanley & Co. Chief U.S. Economist Ellen Zentner, in the 12 months to February 2021, the U.S. retiree population rose from 18.5% to 19.3%, or some two million more people. This higher-than-pre-pandemic trend cannot be explained by aging alone.
  • A widening skills gap: According to the Labor Department, a record 9.3 million jobs were available in April. One explanation may be the growing gap between the skills companies need and the ones workers possess. It also suggests that the labor market is tighter than headline unemployment data would indicate, as companies compete for qualified workers.  
  • Geographic imbalances in the labor pool: Some towns, cities and states have experienced acute labor shortages, as pandemic-related relocations have become permanent for many people. 

These factors mean that, in the near term, labor market slack may not be what it seems. Indeed, the Employment Cost Index showed that wages and salaries grew at a 4.1% annualized rate in the first quarter of 2021, much higher than expected, given the headline rates of unemployment. This, in turn, means that inflation could prove more durable. Higher prices—already a reality, with the core consumer price index at 3.8%—could help redirect excess personal savings from consumption toward retirement savings.

Against this backdrop, we encourage investors to watch average hourly earnings, total real income and the Employment Cost Index for evidence that “sticky inflation” is emerging. Investors should also emphasize security selection, with a focus on companies that have pricing power and levers to sustain profit margins in the face of growing headwinds.

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from June 14, 2021, “Slack or No Slack.” Ask your Financial Advisor for a copy or find an advisor. Listen to the audiocast based on this report.

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