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Season 3, Episode 20: The ‘New Normal’ of Blue-Collar Labor Shortages

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With Gad Levanon, head of Labor Market Institute at The Conference Board

Gad Levanon, head of Labor Market Institute at The Conference Board, joins the podcast to discuss his views of employment trends.

Levanon’s analysis differs from the consensus view of labor markets. In his view, unusual demographic and educational trends are causing a ‘new normal’ of shortages among blue-collar workers. These jobs can be expected to see fast wage growth, bringing a host of restraints on the next stage of economic expansion.

Content Highlights:

Background on the Guest:

Transcript

Nathaniel E. Baker 0:35

I am here with Gad Levanon. He is the head of the labor market Institute at the Conference Board in Princeton, New Jersey. Very excited to have him on. We are going to talk about wage growth, employment, the economy, and what this means potentially for the economic cycle and for Fed interest rate policies. And Gad here has some pretty contrarian views. Where wages are concerned, specifically, that wage pressure due to low unemployment rates are likely to begin earlier this cycle than in other expansions. And take hold much more quickly. As we record this, the unemployment rate is around 5.5% in the US. So we’re not all that far from what is considered full employment. But let me kick it over to Gad and tell us his views on this. And to get us up to date on it.

Gad Levanon 1:37

I think the main point where I probably differ from a lot of forecasters is the concern about long term labor shortages. So we are now in a period where we have the most severe labor shortages in recent memory. But those are probably partly temporary, we have kind of a lot of a lot of factors that are disrupting the supply of labor, like high unemployment benefits and the fear of getting infected and childcare issues. But hopefully, those obstacles are going to go away in a few months. And then we’ll probably see less of your labor shortages. But I think the main point is that because of unusual demographic and educational trends, I’m expecting labor shortages, especially in blue collar and manual services, jobs to be the kind of the new normal until the next recession. And that would mean that those types of jobs will see fast wage growth for the foreseeable future. Maybe let me talk a little bit about why I think this is so. I think it’s well known that the working age population in the US is barely growing, in fact, in 2022, declined for the first time in in US history. And it’s expected to barely grow for the rest of the decade. So I think a lot of people know that. But what is less known is that this overall story masks two opposite trends by education. So if you look at the number of people in the working age with a VA, that number is growing continuously at about 2% a year or even more. And this is what we expect to see in the coming decade as well. But the number of people in the working age population without a BA, that number is shrinking. Already in the past five years or so it’s been shrinking, and it will continue to shrink. And the reason is that over time, more and more people are graduating from college. And the new people entering the labor force are much more educated than the people who are exiting the labor force because of fair retirement. So for the number of people with a BA is continuing to grow and the number of people without a BA is shrinking. Now, why is it important for the labor market is that people with a BA are rarely going to work in blue collar and manual services jobs. You rarely see a truck driver who has a BA or a plumber or a cook so those jobs you

Nathaniel E. Baker 4:45

You do see waiters!

Gad Levanon 4:47

yeah, you do see some. it’s not zero, but but you see a for the most part, people with a BA aspire to different types of careers. That means that the people who are willing to work in those blue collar and manual services, jobs, and the number is shrinking. And, and that if, if this number is shrinking faster than the number of jobs needed in those categories, then that will create a continuous shortage, which was already the case before the pandemic. In 2018 2019, we had the blue collar labor shortages and much faster wage growth in those types of jobs than kind of in the professional managerial class. So, so I think that is likely to continue to be the case for the rest of the decade.

Nathaniel E. Baker 5:41

Yeah, that’s on the one hand, kind of disconcerting, because it is going to, of course, drive up the cost of these these services, like plumbing and electrical work and anything else — construction, right?

Gad Levanon 5:54

Yeah.

Nathaniel E. Baker 5:55

So that’s gonna make which is gonna make things more difficult, one would think, for economic expansion, in certain ways. The good news is that you don’t have to go to college, then to earn a living wage, you can learn a trade. Of course, this may not be good news for upwardly mobile families. But that that is the reality. But anyway, that that aside, talk to me a little bit about yet some of the some of the other effects of this, that you’re anticipating this labor shortage.

Gad Levanon 6:29

So I think, kind of in in the context of wages, what we’ve seen already in recent years, and we still continue to see is let me back up a little throughout most of the recent decades, wages of highly educated people grow faster, sometimes much faster than for people without a BA. But that changed around 2015, 2016. And since then you see the opposite trend. People without a BA in types of jobs, blue collar manual services, earning, it seemed faster wage growth than the more educated professional type. So I think that will continue. I think, overall, wages will rise faster. And I think that that has several implications, one for corporate profits. No other thing frequently, when labor cost goes up, profits go down, unless they pass the cost to the consumer, which is another option that this will end up in higher inflation. I think because of what I said earlier that the impact of this we vary by industry. So industries that have a lot of blue collar and menu services or workers, we see a bigger impact than industries that mostly hire white collar. consulting, finance, tech, although tech is a separate thing, because tech a, because of the huge growth in the tech sector there are they have their own recruiting problems there. Yes. So I think that those companies, those industries are going to see how you’re anything a bigger squeeze on corporate profits, and perhaps a bigger increase in consumer prices.

Nathaniel E. Baker 8:32

That thing brings to mind places like Amazon, if you think about it, but anyway, not to mention any specific companies. But okay, now, there is some a lot of maybe one trend that could help this is automation. And, you know, a lot of machines taking over a lot of the more manual tasks me we mentioned truck driving, self driving cars are still a ways away. But eventually, when we were talking 10 years, that could happen. But then other other advances in technology could make some of these more labor intensive jobs obsolete, right?

Gad Levanon 9:03

So that’s definitely an option that could happen. I would say, We are the decade before the pandemic was very disappointing. In this regard. We had in the 10 years before the pandemic, we had the slowest labor productivity growth, which is related to automation. We had the lowest labor productivity growth in the province in US history. A lot of the low hanging fruit of replacing workers with technology apparently took place before that. So for example, in manufacturing, in the past decade, there was almost no growth in labor productivity in manufacturing. Now, first of all, I think like one has to be skeptical about the ability to have massive amounts of automation, but I think there is The chance that it would happen. I think that the fact that we have such a severe labor shortage now is incentivizing employers to look for other ways to produce with fewer workers. I think also, perhaps the the shift to online activity in in many sectors and including war, could also eliminate some jobs that are no longer needed. So I think, you know, productivity and automation is a wild card, if it if there is a major improvement there, then I think that the problem of labor shortages will be smaller. But if we kind of continue as we did in the past decade, then I think it’s going to be a very severe problem. I would say that there are other US companies are very, very resourceful. One thing that they did before the pandemic that we probably see, again, is that they tapped populations that before were more or less connected to the labor market. So in the two, three years before the pandemic, we saw a large increase in that participation rate, the labor force participation rates of, for example, Hispanic women, they probably the group that is, has the least the smallest participation rate, and they seen a very big jump in that before the pandemic, also in a black population became more connected to the labor market. So that’s, that’s one thing that could help. And another is immigration. And I mean, I, it’s a very complex topic. But one could have opinions, pro and con. But from the perspective of labor shortages, I think it’s obviously more immigrants is a is going to reduce the problem.

Nathaniel E. Baker 12:00

Very interesting. And last word on automation, anybody who’s ever earned owned a Roomba device, will know that there’s not really very much to be afraid of there, because those things really don’t work very well. And they suppose we have all this AI built in and they just kind of drive around on the floor and kick up dust and don’t do anything. So we have that kind of going for blue collar workers, I guess, cleaning houses, by the way, cleaning is one of those things that I don’t see how you’ll ever be able to replace it. But anyway, yeah, I’m moving on here. How close are we to reaching full employment? Like I mentioned at the outset, we’re 5.5%. Now things are clearly trending in the right direction. They were pre COVID as well. And you think we’ll get there sooner than than most?

Gad Levanon 12:43

Yeah. I mean, I think when, in late 2020, when the vaccines are discovered, they’re discovered quicker than expected. And they were much more effective than anyone anticipated. Excellent. So that changed the outlook significantly. Yeah, in previous a, after previous recessions, it took probably four to seven years, from the beginning of the recession, until we got back to what’s called the natural rate of unemployment, which is now estimated at around four and a half percent, I think we are probably going to be in this territory, probably less than a year from now we have a very strong growth, we are already at 5.4%. So I think we’ll get there right around the middle of, of 2022, which is about two years after the beginning of the recession. And so a we will get much faster than usual. If history is any guide, like once the unemployment rate starts declining, it usually keeps declining until the next recession, moderately, like it’s not taking decline faster than the beginning. But it continues like you look at every economic expansion, the unemployment rate is almost continuously declining. So we probably and the next recession could be 510 years from now. The expansions are getting longer. We know how to manage business cycle better. We’re still not perfect, but central banks are getting better at this. So we could be you know, have 510 years ahead of us we say declining unemployment rates, which when they’re gradually continue to tighten in the labor market, further and further.

Nathaniel E. Baker 14:40

Hmm, very interesting. And a lot of these trends and these things that you speak of, are not solved with monetary devices, right, like the Fed can raise rates or lower rates as much as they want. If there’s no workers if there’s supply and demand imbalance with workers as such, you’re still gonna be paying a lot right you know, so what is I’d say for the next stage, once they do start typing,

Gad Levanon 15:03

well, you know, the Fed they have their own tool of interest rates and the way they can, the way they will fight it is essentially to slow the economy through through the interest of the, you know, housing sector first and auto interest rate sensitive industries will suffer a lot in debt, with gradually slow down the economy. But I think what that means is that kind of this labor shortage because of the Fed commitment to prevent inflation, the labor shortages will determine of the growth in the labor force, is the thing that is going to determine their pace of economic growth in the next decade. Could be a real constraint.

Nathaniel E. Baker 15:54

Yeah. Yeah. Interesting. And again, that’s not anything that they’ll be able to do around monetary policy with that

Gad Levanon 16:02

That will not solve the problem, the specific problem, they’ll just kind of use their big hammer to simply slow down the economy. If they can’t do anything, I think to specifically solve the problem of lack of shortages. That’s I think more the government’s can do. by for example, embracing immigration.

Nathaniel E. Baker 16:26

Yeah. Very good. All right, Gad Levanon, I want to take a short break here our sponsors a chance to make themselves heard. And come back and ask more questions. If you are a premium subscriber, don’t touch the dial, you will not get the break.

Welcome back, everybody, Gad Levanon here. He is head of labor markets, the labor markets Institute at the Conference Board. Gad, this is the section of the podcast of the episode where we talk to our guests a little more about their background, their professional background, how they came to their station in life. So curious about what, what your what path you took?

Gad Levanon 17:17

Well, as you can tell by my accent, I wasn’t born in the US. I am an Israeli I was born and raised in Israel. And I did my undergrad and Master’s in Tel Aviv University in Israel. And I also worked in the Israeli central bank for a couple of years. Then everyone told me, if I want to do a PhD, I should come to the US. So I came and did my PhD in economics here, I met my wife. So I decided to stay in the US. And actually, my first and only job since then, has been at the Conference Board. Maybe I should tell the listeners a little bit about the conference. The Conference Board is a member, a membership, organization, a think tank. So we are members are many of the largest companies in the world. And we provide research for them insights for what’s ahead, and also convene them in various ways. So yeah, so I’ve been doing the economics department. And you know, over time, we realize that the topic of labor markets is very important, because the two largest research areas at the conference, both are economics and human capital, and labor markets. It’s right in between. So there is a lot of interest from many businesses, but many business professionals, but let’s say, especially from the HR community, that are, of course, interested in everything related to work for us and in labor, so. So yeah, for that sort of been doing, and I’m now the head of their labor market Institute at the Conference Board.

Nathaniel E. Baker 19:19

Very interesting. You know, this all begs the question with all this human capital and labor costs and stuff, what do you what do you make of the whole remote work trend? And what are you seeing there? And how do you think that could impact things?

Gad Levanon 19:30

Yeah, I think this is the biggest legacy of COVID-19 saying in the context of the economy in the labor markets, is a huge shift. So if let’s say before the pandemic, maybe 7% of office related jobs were done remotely, the same, the post pandemic could easily be 70%, or even more and 70% or more primarily working from home, so this is a dramatic shift in a very short time, you know, usually, such trends take decades to happen. And this is happening in two years. So, and this will have a major impact, you know, you can now hire anywhere, are many companies are willing to hire anywhere. And we’re already seeing this trend. And we are tracking online job ads across the country. And we already see that, for example, tech companies in Silicon Valley, are shifting a lot of the job ads towards locations outside of Silicon Valley. So this will create a lot of those trends async. Another important trend is what’s called the doughnut effect. So businesses that operated in city centers, but next to the big office buildings are suffering much more because fewer people are coming to the office. And also, some people are moving away from city centers because they can get a cheaper housing. So they’re awake places. So this kind of the emptying of the middle, and the shift to the outskirts of the metro area or even beyond. So that is another big trend. So it will have a lot of implications beyond how we work. Also, like larger economic effects beyond that.

Nathaniel E. Baker 21:34

Yeah, that’s that’s a big one. I wonder you’re based in Princeton, New Jersey. Right.

Gad Levanon 21:38

But actually, I’m in New York City.

Nathaniel E. Baker 21:41

Okay. Well, then that’s — How you seen things progress in New York? I mean, you are, have a lot of people left? Are there a lot of companies that have relocated?

Gad Levanon 21:52

Well, some people left, but I think the biggest impact is all those people who used to come in for a day to downtown and Midtown Manhattan for work. Now, not coming, I have a story of debt collector was the hot dog truck that used to sell 450 hotdogs before the pandemic every day. And at some point during the pandemic, he was selling 10. So and this is a very decent been catastrophe for businesses, especially food services around the kind of the city center in New York.

Nathaniel E. Baker 22:32

Do you see people or companies coming back? Have a lot of your clients there talked about that much at all? Or is it really just going one direction?

Gad Levanon 22:41

Well, I think the initial trend is to have more flow of people than companies is to move out, but you know, those buildings out there, they’re not going to disappear. So I think what’s happening is that as companies are getting out of their research, they would rent a smaller space, because they don’t need as much space and that would lower eventually already starting to win and will continue to lower office rent office prices. And and of course, in retail there is also a similar trend. So what could happen is that the prices of real estate of commercial real estate and city centers will drop. And that will actually incentivize companies that couldn’t afford the price and return Manhattan before to move in. So you know, I think the those buildings are here to stay, they may definitely gonna build fewer in the future. But the amount of office space in New York is going it’s pretty inelastic. And someone will eventually come in, though, so. So but I think that the impact would be in the prices of real estate.

Nathaniel E. Baker 23:58

Yeah, yeah. Interesting. And as far as other impacts are there, what kind of other trends are you picking up? I imagine that’s the big one. Yeah. Is there anything else?

Gad Levanon 24:09

I mean, one very interesting trend that is also related to kind of social issues is, for example, the racial wage gaps before the pandemic kept on increasing, even though many companies are trying to improve the situation. It’s just kept increasing there, partly because the rise of tech in the western part of the country will do fewer black people there. And so they were not part of the kind of big increase in that industry. So, you know, we were we I hope that the events of 2020 are going to reverse this trend. In the we will see a ratio wage gap say shrinking and I know that this is one of the main trends in companies is to try to increase the book dissipation of people of color in high paying jobs. So that I don’t know the answer to that. But this is something we’re planning to work on and see if indeed, that was a turning point around 2020. In that context,

Nathaniel E. Baker 25:15

I wonder also, if companies that are hiring now, nationally, so there’s probably still issues hurdles to hiring internationally. But if you hire nationally, if you’re located in Silicon Valley, or in New York City, and you’re paying a certain amount for a job, and now you’re going to hire somebody in Duluth, or in wherever you can get away with paying a lot less Are you seeing trends are going in that direction.

Gad Levanon 25:39

So we, we do see, as I said, before, a Silicon Valley companies are hiring more outside. And I suspect that lowering labor cost is partly the motivation for that it could be that also their motivation is to increase diversity in their companies, because you can find there are many black software developers in San Jose, but there are many in Washington, DC and Atlanta and Charlotte, so. So that may be another motivation.

Nathaniel E. Baker 26:14

Very interesting. And as far as any other effects of having people living more rurally, potentially more suburban? Have you thought about that, at all the effects of that?

Gad Levanon 26:26

The prices around around New York City in the suburbs, and even areas like one two hours away from the CTO and having the time of their life. So a sinking and in you know, it may create like a virtuous cycle that you know, and professionals from New York City, we’ll move to some of the rural areas and make them more attractive to other professionals. And we will see like a really big transformation of some of those rural communities. That could be happen, as well.

Nathaniel E. Baker 27:07

Any any particular rural, or communities he might have seen? benefit yet other than Miami, Florida, which we all know?

Gad Levanon 27:14

Well, I know that the Hudson Valley is seeing a lot and in some parts in Connecticut to talk to your but even two hours away from New York City on the Hudson valley, they’ll be seeing some benefits.

Nathaniel E. Baker 27:32

Yeah. Yeah. I mean, I’m in Connecticut, and I left New York City last year during COVID. And with the intent of buying a place up here, and I’m up in New Haven in about two hours, yeah, about two hours north and the price has caught up and the supply of houses has gone down. And it’s been a very tough market. So I have bought, but so yeah, so I can absolutely speak to that. Yeah. I like to ask people, especially economist is what is it that you’re most concerned about, then as you kind of up at night? And if anything?

Gad Levanon 28:05

Well, I am a felt like everyone is concerned about the polarization in the US. And I think, as an economist, me as a labor economist, I think a lot of it is driven by growing regional inequality, that I think a lot of the a lot of the benefits of the last decade or two, especially from the boom in tech is concentrated in a few locations, and the rest of the country is left behind the sink. I don’t know how this trend would stop, because it’s not I mean, that those kind of areas are becoming more and more attractive, and the places that are left behind are becoming less attractive for young educated people. So it’s kind of a trend that I’m not sure could easily be stopped. And I think that’s a big contributor to the, to the polarization that we see in the country overall. So that’s okay. For example, the Midwest. You know, if you look at the states that are like next to the Great Lakes 5070 years ago, they were among the richest in the country. And now they are on average among the poorest not depressed, but getting there. So So those those trends are concerning me because partly because I don’t know what could stop them.

Nathaniel E. Baker 29:44

Remote work, right? I mean, wouldn’t that be one thing like if I live cheaply in Detroit or wherever and

Gad Levanon 29:50

so if, if that happens, I that could help but the question are people who can choose to live anywhere, wouldn’t they choose somewhere? A vacation destination in an attractive area or like maybe college town, but there’s a lot of like activity, social and cultural. I don’t know. How many would choose to go to like old manufacturing towns that tell him to decline. But yeah, I think remote work may move the needle a little.

Nathaniel E. Baker 30:25

wonderful. Well, thank you so much for joining the Contrarian Investor Podcast maybe in closing can tell our listeners how they can find out more about you and your research. And I’ll put that in the show notes as well if there’s any URLs or anything like that.

Gad Levanon 30:38

I don’t remember the URL, but they can Google by name. And there are there is a bio page I’m also an op ed contributor in Forbes so they can find right to make pieces.

Nathaniel E. Baker 30:51

I’ll put those links up. Wonderful. Gad Levanon, thank you so much for joining the Contrarian Investor Podcast today. Thank you all for being with us for listening. And we look forward to speaking to you again next time.

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