This article was originally published on ETFTrends.com.
I try not to blame economists for being wrong. I think most try to interpret the data fairly. It’s easy to miss (or misunderstand) important information.
So I’m surprised how so many otherwise thoughtful, data-driven analysts repeat the “unemployment benefits deter people from working” narrative while citing no data at all.
Surely if they had any supporting data, they would mention it… but no. They simply assert millions of people don’t want to work because the government pays so much.
Is that happening sometimes? Probably, but these analysts say it’s normal. They also don’t mention evidence to the contrary—for instance, the data showing online job searches haven’t increased in states where the governors are cutting off benefits.
Or the fact that some nine million American workers were denied unemployment benefits in the pandemic, often due to bureaucratic snafus. None of them are being paid not to work.
In reality, this labor shortage predated the pandemic and will probably outlast it, too. Bigger things are happening… and they may signal the kind of changes that only happen every few decades.
Or every few centuries.
Source: Wikimedia Commons
Furious Growth
For an economy to grow, it has to produce more goods and services. We have an equation for that. It comes from the factors of production.
All goods and services emerge from some combination of:
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Land and natural resources
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Labor
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Capital
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Entrepreneurship.
Since you need all four factors in order to produce anything, changes in their supply are important.
Labor was abundant for most of human history. Birth rates were high, and most work didn’t require a lot of education. This changed as the Industrial Revolution made jobs more technical and artificial birth control reduced family sizes.
But countering that, we had a postwar Baby Boom. More women entered the labor force, and globalization let large countries like China and India deploy their vast labor supply more efficiently.
Capital was historically more scarce. But recently, its supply grew as modern financial markets let it flow more freely. That combination—abundant labor and abundant capital—explains much of the furious growth seen in the last few decades.
Both are necessary… which is why a labor shortage is a big problem.
Source: Kevin McGuire/Flickr
Missing Labor
Now we have a different combination. The economy has more capital than ever, thanks to the Federal Reserve and other central banks. Money, and the things it can buy, are everywhere.
What’s not everywhere is labor, or at least skilled labor, as Baby Boomers retire or die and younger generations have fewer children. The other labor growth factors—women working outside the home, China’s emergence, etc.—were one-time events. Nothing else like them is on the horizon.