Labor Market Tightness in Advanced Economies

Romain A Duval; Yi Ji; Longji Li; Myrto Oikonomou; Carlo Pizzinelli; Ippei Shibata; Alessandra Sozzi; Marina M. Tavares

doi:10.5089/9798400204340.006.A001

Author: Mr. Romain A Duval https://orcid.org/0000-0002-2775-7172, Yi Ji¹, Longji Li, Myrto Oikonomou, Carlo Pizzinelli², Mr. Ippei Shibata³, Alessandra Sozzi, and Marina M. Tavares

¹ 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
| ² 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
| ³ 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Publication Date:: 31 Mar 2022

eISBN:: 9798400204340

Language:: English

Keywords:: Phillips curve; wage inequality; wage distribution; labor turnover; inflation pressure

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Two years after the onset of the COVID-19 pandemic, a puzzle has emerged in several advanced economies: unfilled job vacancies have increased sharply even though employment has yet to fully recover. This note sheds light on three contributing factors, namely barriers to returning to work, changing worker preferences away from certain types of jobs, and sectoral and occupational job mismatch. The note also assesses the impact of labor market tightness on wage growth, showing that it has been large for low-pay jobs but milder overall. Bringing disadvantaged groups of workers into the labor force, including by controlling the pandemic itself, would ease labor market pressures while amplifying the recovery and making it more inclusive.

Abstract

Executive Summary

Two years after the onset of the COVID-19 pandemic, employment and other measures of labor market slack have yet to fully recover, yet labor markets are tight in some advanced economies. If this a puzzle—what is driving it? And what are its consequences, including for labor market inequality, wage pressures, and public policies? This Staff Discussion Note sheds light on these questions, focusing on a selected group of countries.

Most labor markets in advanced economies are tighter than they were prior to COVID-19, particularly in English-speaking countries (Australia, Canada, United Kingdom, United States). Tightness can be seen in a sharp rise in vacancies and vacancies-to-unemployment ratios. Vacancies have risen across all sectors, including those with more contact-intensive, less-teleworkable, and lower-skilled jobs that were hit hard by the pandemic. Fears that COVID-19 might permanently destroy these jobs, including via automation, have not yet materialized.

Tight labor markets partly reflect reduced labor force participation, which has shrunk the pool of available job seekers and made it harder to fill vacancies. Disadvantaged groups—including the low-skilled, older workers, and women with young children, depending on the countries—have yet to fully return to the labor market. Looking through cross-country heterogeneity, in the median country, low-skilled workers accounted for more than two-thirds of the aggregate employment gap vis-à-vis its pre-COVID-19 trend by late 2021, while older workers—including low-skilled ones—contributed about one-third.

The pandemic itself partly explains why some workers have not fully come back. It has persistently pushed low-skilled and older workers out of employment in some countries, while in the United States, the adverse impact of the pandemic on school closures and childcare availability has kept women with young children home. In some cases, lower immigration also seems to have amplified labor shortages among low-pay jobs.

There are also signs that COVID-19 may have changed worker preferences, most clearly away from some low-pay jobs—a phenomenon sometimes labeled the “Great Resignation.” A growing share of workers with contact-intensive jobs have been moving into other jobs or left the labor force altogether, despite the concomitant rise in contact-intensive job vacancies. Likewise, voluntary quits have risen most in industries with larger shares of contact-intensive, physically strenuous or less flexible jobs, resulting in pockets of labor shortages.

Sectoral job mismatch also played a role, but it rose less, and less durably, than it did after the 2008–09 global financial crisis (GFC). By late 2021, the rise in mismatch accounted for less than one-tenth of the employment rate gap vis-à-vis pre-COVID-19 levels in the median country. This suggests that, at least so far, the pandemic has transformed labor markets less than was generally envisaged after the first wave.

Tightness has pushed up wage growth, especially among low-pay jobs, helping reduce wage inequality in some countries such as the United Kingdom or the United States. In low-pay industries, wages are more responsive to tightness, and tightness has increased more than in other industries. The impact on economy-wide wage pressures—at least 1.5 percentage points on annual wage growth as vacancies recovered—has been muted by the small overall share of low-pay jobs in firms’ total labor costs. In comparison, demands for compensation for recent price hikes and/or sustained higher inflation expectations among workers would entail larger inflationary risks.

To ease labor market pressures while making the recovery more inclusive, further wage increases will help by attracting more disadvantaged workers back into the labor force, but policies need to amplify market forces. Controlling the pandemic itself is paramount—it would enable seniors, workers in contact-intensive industries and women with young children (in the United States) to fully join back the labor force. Active labor market policies—including short-term training programs targeted at some of the professions that concentrate shortages—could also help. So could labor laws and regulations that facilitate telework, and a resumption of immigration.

I. Introduction

Two years after the start of the COVID-19 pandemic, labor markets in a number of advanced economies are showing signs of tightness even though employment and average hours worked have yet to fully recover (Figure 1). Under the latest IMF World Economic Outlook projections, while the ongoing labor market recovery should remain solid, employment would remain below pre-COVID levels by the end of 2022 in about one-third of advanced economies. Yet, even in some of these, labor markets have become tight, as indicated by a sharp rise in unfilled job vacancies and vacancy-to-unemployment ratios, alongside a pick-up in wage growth lately. This surprising coexistence of plentiful vacancies with incomplete labor market recoveries can be found in countries, such as the United States and the United Kingdom, whose government policies and employment trajectories varied widely during the pandemic. This suggests that, beyond the role of policies, other factors have likely been at play.

This note sheds light on this puzzle and explores some of its consequences, including for labor market inequality, wage pressures and public policies. Specifically, the note

(1) reviews the current state of labor markets in advanced economies, documenting both tightness and remaining employment shortfalls vis-à-vis pre-COVID levels, as well as how these varies across types of industries, workers and jobs; (2) provides fresh evidence on factors that may account for the coexistence of plentiful jobs and scarce workers, including sectoral and occupational mismatch (between characteristics of job seekers and open vacancies), barriers to returning to work for certain demographic groups (such as the elderly or women with young children) amid a persistent pandemic, a decline in immigration, and changing job preferences among some workers generating a new type of mismatch between their aspirations and available jobs; (3) investigates the impact of current labor market tightness on wage growth, both in general and across different types of jobs—low-pay versus others; (4) draws implications regarding which policies in advanced economies could, at the same time, ease labor market tensions, amplify the labor market recovery, and sustain a much-needed reduction in wage and broader income inequality.

Some of the key questions considered in this note are the following:

How tight are labor markets across advanced economies? Have unfilled vacancies shot up across the board, or do tensions vary depend on jobs’ contact intensity, teleworkability, and required skill levels? To what extent are employment and labor force participation back to pre-COVID levels, and how does this vary across countries, sectors, and demographic groups?
Why are jobs plentiful while workers are still comparatively scarce? To what extent has the pandemic increased (sectoral and occupational) mismatch between available jobs and (the backgrounds of actual and potential) job seekers, making it harder to fill out vacancies? Have the pandemic and policy responses (or lack thereof) persistently pushed certain groups of workers out of the labor force, and how likely are they to fully return soon? Has the fall in immigration during the pandemic amplified the decline of available workers? Are there signs, such as rising voluntary quits, that workers might have become more reluctant to take up certain jobs? Are workers who previously held more contact-intensive or less flexible jobs more likely to remain out of the labor force and be looking for different kinds of jobs?
What is the impact of increased labor market tightness on wages? Is it larger for low-wage workers and industries? If so, could this help reduce wage inequality? How much has greater competition for fewer workers among firms contributed to a pick-up in overall wage inflation pressures, and will these last?
Which policies could help ensure that tightness remains a blessing, not a curse? How can policymakers ease ongoing tensions, while at the same time amplifying income gains at the lower end of the pay scale and sustain an inclusive labor market recovery? How can they bring more people into the labor force?

The main findings can be summarized as follows:

Most labor markets are tighter that they were prior to COVID-19. These include English-speaking (Australia, Canada, United Kingdom, United States) and several northern and western continental European economies, while Germany and Japan still show lower vacancy-to-unemployment ratios than in 2019. Vacancies have risen steadily across all sectors, including those with more contact-intensive, less-teleworkable, and/or lower-skilled jobs that were hit hard by the pandemic. Fears that COVID-19 might permanently destroy these jobs, including through automation, have not materialized so far.
Tight labor markets partly reflect reduced labor force participation, which has shrunk the pool of available job seekers. The main reason why employment remains subdued, particularly compared to pre-crisis trends, is that disadvantaged groups—including, depending on countries, the low-skilled, older workers, or women with young children—have yet to fully return to the labor market. Looking through cross-country heterogeneity, in the median country, low-skilled workers—about one-fourth of whom are older workers— account for more than two-thirds of the aggregate employment gap vis-à-vis its pre-COVID-19 trend, while older workers as group contribute about one-third of the gap. In some cases, the decline in immigration also seems to have amplified labor shortages among low-skilled jobs.
The pandemic itself partly explains why some workers have remained out of the labor market. Health concerns—and, in some cases, pension plan valuation gains amid booming financial markets until late 2021—contributed to older workers’ labor force withdrawal, which accounted for one-third of the overall employment gap vis-à-vis pre-COVID levels in the United Kingdom and the United States by late 2021. Likewise, prolonged school closures and scarce childcare opportunities have kept women with young children home, explaining some 15 percent of the overall US employment shortfall by the fall of 2021.
There are also signs that COVID-19 may have changed worker preferences, most clearly away from some low-pay jobs. A growing share of workers with contact-intensive jobs has been moving into other jobs or left the labor force altogether, despite the concomitant rise in contact-intensive job vacancies. Likewise, voluntary quits have risen most in industries with larger shares of contact-intensive, physically strenuous, or less flexible jobs, resulting in pockets of labor shortages.
Sectoral and occupational mismatch also some played a role, but it rose less, and less durably, than it did after the 2008–09 global financial crisis. In most countries, mismatch spiked at the onset of the crisis, but then receded gradually as hard-hit industries recovered from the COVID-19 shock and hired back previously laid-off workers. By late 2021, the employment rate loss due to mismatch was less than 1 percentage point higher than it was prior to the crisis, with Spain being the exception among the countries covered. Overall, by late 2021, higher mismatch accounted for just one-tenth of the overall employment rate gap vis-à-vis pre-COVID-19 levels in the median advanced economy for which data are available.
Tightness has pushed up wage growth among low-pay jobs, helping reduce wage inequality in some countries. In the United Kingdom and the United States, for example, wages are more than twice as responsive to tightness in low-pay industries, which have also seen larger increases in tightness, than other industries. For both reasons, the tighter labor market is estimated have raised the annual growth rate of nominal wages in low-pay industries by 4 to 6 percentage points between mid-2020 and late 2021.
The overall impact of increased tightness on wage inflation has been more muted so far. The analysis in this note puts it at least at 1.5 percentage points in the United Kingdom and the United States between mid-2020 and late 2021, partly because of the small overall share of low-pay industries (and jobs) in total labor costs. Nonetheless, given persistent labor market tightness, overall nominal wage growth should remain solid going forward. Worker demands for compensation for recent price hikes and/or sustained higher inflation expectations would entail larger inflationary risks than tight labor markets perse.
To ease labor market pressures while making the recovery more inclusive, further wage increases will help by attracting more disadvantaged workers back into the labor force, but policies need to amplify market forces. Measures to bring disadvantaged workers into the labor force are key. Controlling the pandemic through vaccines, tests and treatments will enable seniors, low-skilled workers in contact-intensive industries and—by enabling schools and daycare to stay open—women with young children (in the United States) to fully join back the labor force. Well-designed active labor market policies could speed up job matching, including through short-term training programs that help detached (and employed) lower-skilled workers build the skills required for new fast-growing occupations or more traditional jobs that have experienced acute shortages. To accommodate shifting worker preferences, labor laws and regulations also need to facilitate telework. Immigration, whose sharp reduction slightly amplified labor shortages in some cases, could also help “grease the wheels” of the labor market.
In the more distant future, mainstreaming the use of job retention schemes could help keep disadvantaged workers attached to the labor force after major temporary shocks. Job retention schemes dampened initial job losses, labor force withdrawals, and subsequent increases in tightness in most European economies. It is important, however, that job retention support be temporary so as not to impede the eventual reallocation of workers after persistent shocks—such as the lingering pandemic.

Because of data limitations, these findings should be interpreted with caution. Many of the key issues analyzed in this note require granular data that could be accessed and used for just a few advanced economies. Further, the impact of labor market tightness on wage growth is explored for the United Kingdom and the United States; it might be different—possibly weaker—in those other advanced economies, such as in continental Europe, with more stringent labor regulations—tighter job protection legislation, higher minimum wages—and more centralized collective bargaining arrangements.

II. The Current State of Labor Markets in Advanced Economies

II.1. Rising Vacancies

Labor markets are tighter than they were prior to the pandemic, as reflected in ratios of open vacancies to the number of unemployed that are at or above pre-pandemic levels in most advanced economies—most strikingly in Australia, Canada, Luxemburg, Norway, the United Kingdom, and the United States, with Japan, Germany, and Sweden being the main exceptions (Figure 2, panels 1 and 3).¹ Tightness has increased sharply in countries that protected existing jobs through extensive job retention schemes throughout the pandemic— such as the United Kingdom, where the Coronavirus Job Retention Scheme covered almost a third of employment at its peak—and others that relied more on protecting workers through extended unemployment benefits—such as the United States, although the Paycheck Protection Program also saved jobs there. Across countries, the sharp rise in tightness also correlates positively with the magnitude of fiscal support given to households during the pandemic (Figure 2, panel 4). Within countries, it has been widely shared across sectors, although it has been slightly stronger in those with more contact-intensive and less-teleworkable jobs, which the pandemic hit harder (Figure 2, panel 2). It has also been particularly large for some low-pay jobs (Box 1).

II.2 Incomplete Employment Recovery

Despite plentiful job opportunities, the employment recovery remains incomplete, albeit with wide cross-country variation. Employment across all sectors is still in the process of recovering to pre-pandemic levels. Hard-hit sectors with more contact-intensive and less teleworkable jobs are still lagging behind, although they have been catching up since the spring 2020 trough (Figure 3, panel 1). There are also significant differences across countries, with still significant employment shortfalls in Canada, the United Kingdom, or the United States, while employment is already above pre-pandemic trends in several European countries (Figure 3, panel 2). More broadly, employment fell less in Europe than in some other regions in the early phase of the crisis, owing in part to extensive reliance on job retention schemes (Ando and others, forthcoming; IMF 2021); even so, the employment rate remains slightly below its pre-pandemic trend, with some countries (such as Portugal and Sweden) falling significantly behind. In many countries, this employment gap is accompanied by a substantial labor force participation shortfall, as workers who left the labor market during the pandemic have not fully returned, such as in the United Kingdom and the United States, although tight labor markets are bringing workers back in some other countries, such as Norway and The Netherlands (Figure 3, panel 2). Overall, in the median country in the sample, the labor force participation rate gap accounts for half of the remaining employment gap vis-à-vis its pre-COVID-19 trend.

Disadvantaged labor market groups are still facing employment scarring, shrinking the pool of available job seekers and contributing to labor market tightness. Across demographic groups, low-skilled and older workers experienced the sharpest employment rate drops during the crisis, and they are still showing sizeable gaps vis-à-vis pre-pandemic levels (Figure 2, panel 3). Employment has not fully recovered for women either in the United States, and in fact in most other advanced economies as well once factoring in that female participation and employment rates would have likely increased in the absence of COVID-19; by late 2021, female participation was still generally below a linear projection based on the 2015–19 period, with notable exceptions such as The Netherlands and Norway that lifted the European average.

III. Why Are Jobs Plentiful While Workers Are Still Scarce?

There are three broad types of explanations for the seemingly puzzling coexistence of tight labor markets and employment slack—job mismatch, barriers to returning to work, and changing job preferences among workers. This section provides evidence that all three have been at play, albeit to varying degrees and differing across countries. A fourth potential factor put forward in recent policy discussions is the adverse effect of generous public income support and excess savings during the pandemic on non-employed workers’ willingness to seek and take up jobs. However, preliminary evidence, including from the phasing out of the US federal unemployment insurance supplement in the second half of 2021, suggests the early removal of COVID-related unemployment benefits only had a modest effect on getting people back to work (Coombs and others 2021). Likewise, while households accumulated excess savings in advanced economies because of consumption restrictions and government support schemes, these were temporary, and tended to be concentrated among higher-income households (Bilbiie and others 2021; Armantier and others 2021; Attinasi, Bobasu, and Manu 2021). As such, while excess savings may have enabled some workers to take time off their job search to find better opportunities, they seem unlikely to durably suppress labor supply, particularly among low-income workers.

III.1 Sectoral and Occupational Mismatch

COVID-19 could create labor market mismatch and increase tightness. COVID-19 may have triggered a wave of structural transformation, as some industries and firms shrink due to limited demand for their products or because they cannot fully operate during the pandemic, while others benefit from increased demand and their ability to telework. This could result in misalignment between the sectors and firms in which vacancies abound and those where most job seekers, displaced from their previous positions, either are looking for new employment or are qualified to get jobs. In turn, such sectoral and occupational mismatch could constrain job creation and increase labor market tightness, all else equal, as workers often take longer to find employment in new sectors and firms. Increased sectoral mismatch significantly slowed employment recoveries during past economic downturns, including after the GFC, when it may have accounted for up to one-third of the rise in US unemployment (Sahin and others 2014).

Sectoral mismatch rose during the COVID-19 crisis, but generally receded as labor markets recovered (Figure 4, panel 1).² At a basic level, the combination of rising vacancies and falling—rather than rising unemployment since the trough of the crisis suggests that mismatch is unlikely to have increased dramatically.³ Detailed mismatch is computed following the methodology proposed by Sahin and others (2014), using granular vacancies and employment data at the sector and/or occupational level. In Australia, Spain, the United Kingdom, and the United States, mismatch rose markedly throughout 2020, which is consistent with heterogenous sectoral impacts of the COVID-19 shock. Jobs requiring in-person interactions, such as in restaurants, hotels, and entertainment, were hit hard while “teleworkable” jobs fared substantially better and yet others, such as delivery services, boomed. However, as hard-hit industries recovered and laid-off workers managed to transition to new jobs, mismatch generally receded. In the case of Australia, one of the hottest labor markets among advanced economies, estimated sectoral mismatch even fell below its late 2019 level by the end of 2021. In Canada, however, mismatch has been rising gradually since late 2020, standing 50 percent above its late 2019 level by mid-2021. While all countries covered here experienced at least some rise in mismatch, this was not the case in Japan, where it remained essentially flat.

Due to its temporary nature, the rise in sectoral mismatch generally accounts for a small fraction of the remaining employment shortfall at this point in the labor market recovery, consistent with a less transformative labor market impact of COVID-19 than envisaged earlier in the pandemic. With the exception of Spain, in all countries mismatch accounted for no more than a fifth of the total employment rate contraction at its peak, and for a smaller fraction of remaining employment shortfalls vis-à-vis pre-crisis levels by late 2021—about 10 percent in the United Kingdom and the United States, and even less in the median country (Figure 4, panel 2). Overall, although most countries saw a rise in mismatch in the past two years, little evidence has surfaced of a persistent increase driven by major structural transformation. In fact, the estimated rise in mismatch has been smaller during the COVID-19 crisis than during the GFC. The GFC triggered a long-lasting contraction in, and job reallocation away from, industries such as construction and manufacturing. By contrast, during the pandemic, hard-hit industries recovered sharply from their initial drop, recruiting many of the workers who had lost their jobs in those same industries during the spring of 2020. Further, the use of job retention schemes on an unprecedented scale contained the total number of displaced workers who had to search for new jobs, thus limiting the scope for mismatch to affect a large fraction of the labor force.

III.2 Barriers to Returning to Work

Barriers to returning to the labor force

Several demographic groups, particularly low-skilled workers, were hit harder at the onset of the pandemic and are still lagging behind for the recovery. Low-skilled workers were hit particularly hard at the onset of the COVID-19 pandemic (Figure 5, panel 2), amplified in some countries by their over-representation in the most-affected contact-intensive sectors (right-hand set of bars in Figure 5, panel 2). Although their employment rates have risen steadily since then, they remain below pre-COVID-19 levels, despite the fact that there is no longer any additional employment stigma from being previously employed in contact-intensive sectors, partly because these have been recovering (Figure 5, panel 3). Looking through cross-country heterogeneity, in the median country, low-skilled workers accounted for more than two-thirds of the aggregate employment gap vis-à-vis its pre-COVID-19 trend by late 2021, of which almost one-fourth reflect underemployment of older low-skilled workers (Figure 5, panel 1).⁴

The COVID-19 pandemic also durably pushed older workers into inactivity in a number of countries, with available evidence suggesting that health concerns played a bigger role than any wealth gains (Figure 5, Panel 1). Labor force withdrawal has disproportionately affected low-skilled workers and renters, who are also less likely than high-skilled homeowners to hold retirement savings plans—and therefore to have benefited from booming financial markets until late 2021, particularly in countries with sizeable defined-contribution pension schemes. Overall, older workers’ labor force withdrawal accounted for one-third of the overall employment gap vis-à-vis pre-COVID levels in the United Kingdom and the United States by late 2021 (Pizzinelli and Shibata 2022). This pattern also held true for the median advanced economy, albeit with wide cross-country heterogeneity.⁵ Insofar as some of the rising inactivity among the elderly reflected early retirement, it could be largely irreversible and remain a drag on the labor market recovery for a while.

While mothers with young children struggled at the onset of the COVID-19 in many countries, their under-employment remains an issue mainly in the United States. School and daycare closures may have pushed many mothers with young children out of the labor force at the onset of the COVID-19 recession (such as in Canada, Spain, and the United States), a so-called “She-cession” (Alon and others 2021, Bluedorn and others 2021, Fabrizio and others 2021) (Figure 5, panel 4). By the fall of 2021, their inactivity rate remained above the pre-COVID trend only in the United States—accounting for some 15 percent of the overall US employment gap vis-à-vis pre-COVID levels—while the “she-cession” had dissipated in other countries (Bluedorn and others 2021). However, a resurgence in COVID-19 cases, such as that seen in late 2021 due to the Omicron variant, could push mothers with young children out of the labor force again.

The sharp reduction in immigration seems to have amplified low-pay job shortages in some cases. Unfilled vacancies have increased more in those low-pay sectors where the share of foreign workers has fallen more (Box 2). In the United Kingdom, for example, the pandemic may have accelerated a process already set in motion by “Brexit,” speeding up the decline in the employment of foreigners and contributing to pockets of labor shortages in low-skilled professions, such as construction laborers, truck drivers, and workers in the hospitality and care sectors, as the economy recovered but immigrants did not fully return. In the United States, labor supply growth has been slightly reduced by lower immigration inflows—a trend that pre-dates, but was exacerbated by, the COVID-19 crisis. In Canada, after the pandemic forced immigration operations to shut down in 2020, the number of admitted immigrants fell well below the authorities’ target—although this decline was followed by a very sharp rebound in 2021 to an immigration pace (of about 1 percent of the population) that is expected to last in the coming years and should help “grease the wheels” of the labor market.

III.3 Shifting Worker Preferences

COVID-19 may have changed workers’ job preferences. The crisis hit particularly hard contact-intensive jobs, such as in hotels, restaurants, and entertainment (Dingel and Nieman 2020, Kaplan and others 2020). While these sectors have been recovering, health concerns may be discouraging workers from keeping such jobs and job seekers from taking them up, leaving many vacancies unfilled. For vast categories of jobs, the crisis also expanded telework opportunities and made work schedules more flexible, offering the prospect of improved work-life balance; this may have led workers to prioritize such jobs and discard others (Barrero, Bloom, and Davis 2021). To shed light on this issue, this section exploits recent data on job switches and separations (quits) and how they differ across industries and occupations depending on characteristics such as contact intensity. Further, Google trend series on internet search frequency of key words related to job characteristics are used to detect changing job search patterns.

A growing share of workers with contact-intensive jobs have been moving into other jobs or left the labor force altogether, despite the concomitant rise in contact-intensive job vacancies. The share of industry switches that are accounted for by workers who previously held contact-intensive jobs has increased significantly in 2021 compared to the 2015–19 period (Figure 6, panel 1), even though contact-industries had largely recovered, as reflected in buoyant vacancies (Figure 6, panel 3). Likewise, the fraction of workers who separated from contact-intensive sectors to leave the labor force was significantly above its 2015–19 average during 2020—as would be expected from the magnitude of the initial COVID-19 shock—but, more surprisingly, given these industries’ strong labor demand recovery, it also remained high in most countries during 2021 (Figure 6, panel 2). Taken together, these facts are consistent with workers being less willing to work in contact-intensive sectors today than was the case prior to the pandemic. So is the rise in voluntary quits in the United Kingdom and the United States—the so-called “Great Resignation”—discussed in Box 3.

Online job search data also point to growing interest in teleworkable jobs among job searchers. Based on the number of google searches for “jobs,” search intensity has declined relative to pre-COVID19 (January 2020) levels in most countries (Figure 7, panel 1). Yet search intensity for “telework” and “remote” has increased, remaining high in most cases even after its spring 2020 spike (Figure 7, panel 2). Taken together, these online job search patterns tentatively point to a preference shift toward teleworkable jobs.⁶

IV. Labor Market Tightness and Wage Growth

IV. 1 Wage Developments

Nominal wage growth is starting to pick up in many advanced economies. In Japan, the United Kingdom, and the United States nominal wages are already growing faster than before the pandemic although, with the exception of Japan, these wage gains have so far been largely or fully eroded by the concomitant increase in price inflation (Figure 8, Panel 1). Micro-data evidence from the United Kingdom, and the United States offer further evidence of building wage pressures. In particular, new hires have been enjoying faster wage gains than incumbent workers lately (Figure 8, panels 2 and 3). Further, in the United States—where data allow for more granular analysis of wage patterns among new hires—this gap is being driven by workers hired from non-employment, rather than by on-the-job switchers. This points to stronger bargaining power of entrant workers in tight labor markets.

IV.2 Labor Market Tightness and Wage Growth

Understanding the link between wage growth and tightness requires factoring in the wide heterogeneity in labor market developments across industries and groups of workers since the start of the pandemic. This link is often captured by so-called wage Phillips curves, which typically estimate the impact of low unemployment—and other factors, including inflation expectations—on wage growth. However, an aggregate wage Phillips curve fails to capture the sizeable existing heterogeneity across industries and groups of workers, in terms of both tightness dynamics and the responsiveness of wage growth to tightness. Such heterogeneity may be particularly relevant at the current juncture given prevailing asymmetries in the initial impact of, and subsequent recovery from, the COVID-19 shock, with potential implications for both wage inequality and overall wage inflation pressures.

Against this background, this section estimates empirically relationships between wage growth and tightness at the sector level for both the United Kingdom and the United States, also distinguishing between low- and high-pay sectors. Specifically, for each country separately, quarterly wage growth at the industry level is regressed on labor market tightness—measured as the ratio of vacancies to unemployment— and various controls, including sector fixed effects, economy-wide inflation expectations and past wage growth and labor productivity growth (see Annex 3 for details). This specification is then extended to assess whether tightness has different effects on wage growth in low-pay versus other sectors.⁷

Labor market tightness raises wage growth across the board, but more than twice as much in low-pay sectors than in others. In both the United Kingdom and the United States, the simple correlation between tightness and wage growth is strong, and stronger in low-pay sectors than in others (Figure 9, panels 1 and 2). In-depth regression analysis confirms both facts. The estimates imply that a given rise in tightness has over twice as large an impact on wage growth in low-pay sectors than in the average industry in the United States, with an even larger difference in the United Kingdom. While the analysis could not be performed for other advanced economies for lack of granular data, it is possible that this gap in responsiveness between low-pay and other industries might be smaller in many continental European economies, reflecting binding and stickier statutory and collectively bargained minimum wages.

Rising tightness since the summer of 2020 has fueled low-pay wage growth and contributed to the pick-up in aggregate wage growth in the United Kingdom and the United States. Based on the aforementioned model estimates, a back-of-the-envelope calculation indicates that the sharp observed increase in tightness between 2020Q2 and 2021Q4 increased overall wage inflation by at least 1.5 percentage points in the United States (Figure 10, panel 1) and the United Kingdom—implying a material contribution of tightness to wage growth (in the United States mean hourly wage inflation was 3.5 percent year-over-year in 2021Q4, up from 2 percent on average prior to the pandemic, while in the United Kingdom it was 4 percent year-over-year in 2021Q4, up from 2.3 percent).⁸ In the United States, higher tightness is also estimated to have increased wage growth among low-pay industries by at least 4 percentage points since 2020Q2, a finding that is consistent with the steeper recovery of hourly wage growth for individuals at the lower end of the wage distribution (Figure 10, panel 2). Likewise, the direct impact of tightness on wage growth was larger for low-pay industries in the United Kingdom—contributing at least 6 percentage points to higher low-pay-industry wage growth versus 1.3 percentage points for other industries.

Nonetheless, the overall impact on economy-wide wage pressures of rising tightness among low-pay industries has been dampened by the small overall share of such industries—and low-pay jobs more broadly—in total labor costs. When factoring in the larger increase in tightness, and the greater responsiveness of wage growth to a given rise in tightness among low-pay industries, the contribution of rising tightness to higher aggregate wage growth rises by just a few tenths of a percentage point, compared to an empirical framework that does not incorporate such cross-industry heterogeneity—as shown by the comparison of the “payroll-weighted average” and “average” bars in panel 1 of Figure 9.

Current tightness should keep wage growth elevated for a while, particularly at the lower end of the wage distribution. Barring a strong economic growth setback, ongoing labor market tightness is likely to persist and keep wage growth high in a number of advanced economies, such as the United Kingdom or the United States.⁹ The empirical analysis above also suggests that low-wage jobs should keep enjoying above-average wage growth for some time in these countries, helping reduce wage inequality. The impact of faster wage growth at the bottom of the pay scale on price inflation could be significant in some low-skilled-labor-intensive industries although, as the empirical analysis above shows, this dynamics should on its own weigh only to a limited extent on overall labor costs, and thereby on economy-wide price inflation. Comparatively more important for inflation dynamics going forward will be the extent to which recent inflation feeds into wage growth, and the extent to which higher wages are then passed onto prices. With price inflation largely or (more than) fully outpacing wage increases so far, including in those advanced economies where labor markets are tightest, this a material risk.

V. Policy Implications

Tighter labor markets should continue benefiting low-paid workers and reducing wage inequality, with a manageable direct impact on inflation. In those advanced economies wherein unfilled vacancies are plentiful and wage growth has picked up among low-skilled workers, further wage increases will help attract others back into the labor force. Such pressures should have a manageable impact on overall wage and price inflation, even in the United Kingdom and the United States, where wages have accelerated the most in the past year; demands for compensation for recent price hikes and/or sustained higher inflation expectations among workers would have a comparatively larger impact as they might trigger wage-price spirals. Nonetheless, there is high uncertainty around how this process will unfold, and wage growth and inflation could turn out higher than expected. Against this background, central banks should continue to signal their strong determination to alleviate second-round effects from recent high inflation.

However, active labor market policies can amplify the role of market forces, including to bring more people back into the labor force, fill out available vacancies and help workers get the kind of jobs they are looking for. Those population groups most detached from the labor force may be less sensitive to market conditions, and long non-participation spells would damage their future employment prospects and earnings. Further, they may lack the skills to fill out existing vacancies for either fast-growing digital-intensive occupations (technology and e-commerce, for example) or more traditional jobs—sometimes even rather low-skilled ones— that have experienced more acute shortages (truck drivers or care economy workers, for example). Active labor market policies can help detached (and employed) lower-skilled workers build the skills required to get such jobs. These include short-term training programs, financed or subsidized by public employment agencies, targeted at professions that concentrate shortages and for which the required skills can be realistically acquired over a short timeframe. Returns from such policies may also be larger if targeting low-skilled youth.

Labor laws and regulations also need to adapt to changing worker preferences by facilitating telework or remote work access. These new laws and regulations should aim to make telework attractive to both workers and employers. This requires striking the right balance between their sometimes conflicting objectives, such as regarding working hours flexibility, the definition of office hours and the cost of resources used to work from home. Whenever the nature of the job allows, enhancing telework access should particularly support lower-skilled workers who favor working from home due to preferences or health reasons, thereby enhancing their labor force participation. Indeed, while low-skilled workers have been enjoying above-average wage growth in some advanced economies, they have benefitted less than others from the novel flexibility brought about by the pandemic—a potentially significant non-wage benefit.

To bring other disadvantaged workers into the labor force—notably older workers and women with young children, fighting the pandemic remains paramount. Vaccines, tests, and treatments remain essential to curb individual (and societal) risks from the virus. This, in turn, will enable seniors and lower-skilled workers in contact-intensive industries, who dropped out more than other groups during the pandemic, to join back the labor force. Likewise, supporting schools and daycare to stay open can help mothers of young children take up jobs—particularly in the United States where this has been an issue and female labor force participation remains below pre-pandemic levels, unlike in most of Europe, for example. There is also a case for making these options affordable through greater public childcare spending and subsidies, and for paid family leave to help caregivers combine and work and family priorities—in general, but even more so importantly while the pandemic remains disruptive. These immediate actions could be envisaged as part of a broader, longer-term policy package to reduce gender-based tax and regulatory barriers to female labor force participation, which had already declined in the United States in the decade following the 2008–09 global financial crisis.

A resumption of immigration could also slightly ease labor shortages in some cases. This will vary across countries depending on the extent of the decline in immigration before and during the pandemic, the adequacy between unfilled jobs and potential immigrants’ profiles, and the nature of the immigration system. For example, countries with predominantly employment- and skill-based immigration systems may wish to tailor their entry criteria more specifically to existing labor shortages. For those immigrants who stayed in their host country, but became non- or under-employed during the pandemic, access to the types of training programs mentioned above can facilitate return to work—over and above the pulling effect from improving health conditions and sustained market wage growth.

In the more distant future, mainstreaming the use of job retention schemes could help keep disadvantaged workers attached to the labor force after major temporary shocks, thereby alleviating wide swings in labor market tightness. Job retention schemes dampened initial job losses, labor force withdrawals and subsequent increases in tightness in most European economies. Together with their beneficial role—on a smaller scale—during the 2008–09 global financial crisis, this suggests that such schemes can be used to mitigate the labor market scars from future transitory shocks. It is important, however, that job retention support be temporary so as not to impede the eventual reallocation of workers after shocks that eventually prove to be more persistent—a relevant consideration at the current juncture, two years into the pandemic, as countries need to transition away from such schemes and instead facilitate workers’ transitions away from struggling firms and industries toward expanding ones.

^{Box 1:}

A Closer Look at Vacancies in Low-Wage Jobs^¹

While the low-skilled remain less likely to be employed than they were prior to the crisis in many advanced economies, job vacancies in low-wage occupations have sharply recovered in several countries and were well above their pre-pandemic levels by end-2021.^² Connected to this, hiring difficulties have been widely reported in recent months for specific professions, such as construction workers, warehouse workers, truck drivers, or retail salespersons (for example, US Federal Reserve System 2021). Such labor shortages may reflect a strong demand amid persistent reluctance of workers to keep or take up such jobs at prevailing wage levels because of the contact intensity, lack of teleworkability, inflexibility in workings hours, and/or physical hardship involved. The purpose of this box is to document labor market tensions for these and other professions in the context of the broader rise of labor market tightness.

Vacancies data for detailed professions provided by Indeed, a large-scale job posting website, are used for Australia, Canada, the United Kingdom, and the United States. The Indeed database contains individual job postings, starting in January 2019, reporting the title of the advertised position and the day in which it was first posted. Between January 2019 and November 2021, the data set contains several millions of job posts in each country (approximately 100 million for the United States, for example). Using a series of advanced matching algorithms applied to the job titles, the postings are categorized according to the 4-digit level of the 2008 International Standard Classification of Occupations (ISCO-08). For each occupation, the average number of new job posts in the first four weeks of each month can then be computed.^³

In Figure 1.1, the grey areas report the 10^th-90^th percentile range of the distribution of vacancies by occupation. In the four countries, vacancies for almost all occupations fell sharply during the first wave of COVID-19 but began a steep recovering starting from mid-2020. This recovery was broad-based, with even the lower percentiles of the distribution eventually returning to pre-pandemic levels by 2021. Moreover, the various waves of the pandemic were associated with increasingly muted inflections in vacancies, as firms and workers learned how to cope with the virus and restrictions.

Figure 1.1. also confirms the growing labor shortages for specific, mostly low-paying professions, as well as falling opportunities for jobs that were durably hit by the pandemic. The dashed black line reports the 90^th percentile of the distribution for vacancies in low-wage occupations only. In all countries, this line lies above the grey areas in late 2021, indicating that a larger fraction of low-wage occupations has experienced a steep rise in vacancies in the post-COVID recovery compared to medium- and high-paying ones. This can be seen, for example, from the individual series for construction laborers, warehouse workers, and truck drivers, which are plotted separately against the rest of the distribution. In all countries, the first three occupations have experienced bouts of exceptional tensions, being often in the top 10 percent of occupations whose vacancies have risen the most vis-à-vis pre-pandemic levels. By contrast, vacancies for shop sales assistants are consistently in the bottom quarter of the distribution, indicating a sharp drop in vacancies compared to other occupations, in Canada, the United Kingdom, and the United States. Since the absolute value is still close to or above the 2019 average, this need not imply a permanent shrinking of the labor force employed in the shop sales sector, but rather a change in the nature of these jobs—reflecting lower consumer demand for in-person shopping and perhaps growing appetite for e-commerce.

^¹ Prepared by Carlo Pizzinelli and Alessandra Sozzi.^² For detailed analysis on the United States and the United Kingdom prepared for this note, see Pizzinelli and Shibata (2022).^³ Annex 2 describes in detail the matching methodology, the construction of the monthly series, and the definition of low-wage occupations.

^{Box 2:}

Receding Immigration and Rising Vacancies in Canada and the United Kingdom^¹

During the pandemic, governments imposed travel restrictions and applied changes to their immigration policies that limited workers’ mobility across national borders, while foreign workers faced new concerns that may have led them to relocate or return to their home countries. This Box provides evidence that, in the case of Canada and the United Kingdom, the resulting drop in immigration likely amplified the rise in labor market tightness among low-pay jobs.

Because foreign workers often specialize in specific types of jobs, a reduction of immigration should not affect the labor market homogenously but rather induce shortages in a narrow set of industries and occupations. In the United Kingdom, for example, foreign workers are concentrated in occupations with very high and very low shares of college workers (Figure 2.1, panel 2).^² Instead, in Canada, the relationship between skills and immigration is flat, as several low-skill occupations (in construction, agriculture, natural resources) are predominantly covered by domestic workers.

In both countries, the fall in immigration during the pandemic affected predominantly low-skill occupations. Occupations with fewer university graduates (blue dots in Figure 2.2) saw falling shares of foreign workers between 2019 and 2021, while most occupations with more university-educated workers (red diamonds) saw rising shares of immigrants. Furthermore, Figure 2.2 shows a negative correlation across low-skill occupations between the change in the foreign worker share and the growth of unfilled vacancies vis-à-vis pre-pandemic levels, while this relationship is positive for high-skill jobs. This suggests that the reduction in immigration was one factor contributing to low-pay job shortages.

^¹ Box prepared by Longji Li and Carlo Pizzinelli.^² Annex 5 provides details on the data sources, the occupational categories used, and the definition of low-skill occupations.

^{Box 3:}

The Great Resignation^¹

Joint with the sharp increase in labor market tightness since the spring of 2021, both the United Kingdom and the United States have recorded historically high rates of job quits, defined as shares of workers who voluntarily leave their positions (Figure 3.1).^² This phenomenon, sometimes labelled the “Great Resignation,” could reflect many potential factors that have yet to be elucidated. One could be growing job dissatisfaction among workers, who then separate from jobs they feel do not offer satisfactory working conditions (including not just remuneration but also flexibility, safety, or a sense of purpose). While this explanation has received growing attention lately, another one could be that workers, rather than being dissatisfied, are simply taking advantage of a hot labor market to seize new opportunities. In this sense, high quit rates could reflect a well-functioning labor market where workers are able to progress along the job ladder.

Under the latter explanation, quit rates are typically higher when the labor market is tighter, as workers more easily find better jobs and face lower risks of long non-employment spells. While this relationship between quits and overall labor market tightness has indeed held up well in the past, by late 2021 quit rates were well beyond what this historical relationship would suggest in the United States—albeit not in the United Kingdom (Figure 3.2). “Excess quits” tentatively suggest a strengthening of workers’ bargaining powers in their search for better working conditions, and an increase in their reservation wages—the wage levels below which they would not consider taking up jobs, particularly those that do not meet their expectations, such as regarding telework or working hours flexibility, for example.

More detailed analysis of quits by type of industry further suggests that concerns regarding health and working conditions are driving some of the Great Resignation. In the United States, the five industries with the largest increases in quits relative to 2019 are (1) retail trade, (2) accommodation and food services, (3) nondurable goods manufacturing, (4) durable goods manufacturing, and (5) wholesale trade (Figure 3.3, panel 2). In the United Kingdom, the top five industries are (1) accommodation and food services, (2) real estate, (3) transportation and storage, (4) wholesale and retail trade, and (5) construction (Figure 3.3, panel 2). In both countries, several of these sectors are contact-intensive and/or low-pay. Furthermore, quit rates have risen the least in industries that are less contact-intensive and/or high-pay, such as finance and insurance and educational services (United States), public administration services and defense (United Kingdom), and mining and quarrying (both countries).

^¹ Prepared by Carlo Pizzinelli and Ippei Shibata.^² Annex 6 provides details on the data sources used and the computation of the quit rates.

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