HAMISH MCRAE: Labor shortages in many countries will drive up wages – so wait for some welcome pay rises
We have to pay people more. Of course we have to pay truck drivers more. Empty supermarket shelves are proof of that.
But this isn’t just about a particular activity with a staff shortage. There are many other areas where employers find it difficult to fill vacancies.
The hospitality industry has a hard time manning restaurants and hotels. The CBI reported that builders, masons and welders are scarce. And when law firms in the city have to pay £100,000 a year to hire a newly qualified lawyer, you can see something big happening.
Filling the void: for years the power lies with the employer – now the boot is on the other side
Power has been with the employer for years. Now the boot is on the other foot.
The truck driver shortage shows what happens when companies push wages down too far. People will not train to do that job.
There is a national shortage of 90,000 drivers, of which only 25,000 can be covered by Europeans returning to the mainland.
Covid is responsible for some of the daily deficit, but the real problem goes back a decade or more. The average age of a driver is apparently in the mid-1950s, and given that wages have risen more slowly than other comparable activities, it is not surprising that not enough young people are willing to apply.
It will take some time for the labor market to calm down. Brexit, the pandemic and the other structural changes taking place in the economy have distorted the picture.
So it is difficult to know what are temporary shortages and what are underlying shortages. But if we go back to some sort of normalcy, I think we’ll find that three things happened.
One is that employers will have to work much harder to entice people to join them.
That means higher pay where certain skills are needed. But it will also mean better training people – increasing their human capital – treating them decently, building loyalty, being flexible in terms of employment, and so on.
A few years ago, I spoke to an American consulting firm that spent huge amounts of money on training. “Aren’t you concerned,” I asked, “that people will leave and look elsewhere for their newfound skills?” The answer came, ‘No, Hamish, you don’t understand. Because we increase their human capital, they stay. The moment we stop investing in them, they will find someone else who can teach them more.’
Over the past 18 months, we’ve seen a massive shakeout. The ill-run companies have gone to the wall, while the adepts and flexible companies have come through, often in much better shape.
In the next phase of the shake-out, the companies that train their employees will flourish. Those who don’t will struggle. The auto industry needs to make the massive switch to electric cars, as Lord Grimstone charts. That means building a whole new set of skills. It can and should be done.
The second thing that will happen is a boom in productivity. When people are better educated, they are more productive. As people start to get paid more, employers will find ways to deploy them better, for example by streamlining tasks so that they take less time. The easy option to hire more people will not be there.
So I think we’re going to see an economy that doesn’t create new jobs at the rate of recent years, but instead learns to use labor more efficiently.
Real wages will rise, especially at the lower end of the pay scale, and they should very well.
That leads to the last thing to expect: higher inflation.
We cannot escape the harsh truth that inflation will rise. There has long been debate about the extent to which inflation is driven by higher costs or by central banks creating too much money.
The surge we see in stock prices and real estate values all over the developed world must be due in large part to central bank policies.
There will be some sort of reckoning there – as discussed by Raghuram Rajan on the next page.
But costs also matter, and labor shortages occurring in many countries will drive up wages, which in turn will drive up prices in general.
So be prepared for some welcome pay increases in the fall and beyond.
But also be prepared for sharper price increases.