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Explaining labor shortages and how to overcome them

A labor shortage occurs when demand for workers exceeds supply, often leading to unfilled jobs, delayed services and potentially higher wages.

With 3 million more jobs than people, a tight labor market has put employers in a difficult position to fill vacant jobs and conduct operations as planned.

In 2023, the number of job openings increased to 9.6 million on Aug. 31, while unemployment has remained at 3.8% throughout August and September, The Bureau of Labor Statistics reported.

What is a labor shortage?

A shortage occurs when there aren't enough workers in the job market to fill the roles available. A labor shortage can be identified by comparing the number of available jobs against the unemployment rate; if there are significantly more jobs than job seekers, there is a labor shortage.

For workers, a labor shortage can be beneficial as it means their skills become more in demand. There might be the opportunity to negotiate higher wages or better benefits -- or enter into new industries that were formerly too competitive. The existing labor force may be able to lobby for better conditions as employee retention becomes more critical.

For employers, however, a labor shortage can create issues for productivity, cash flow and innovation. Without top talent, it's harder to develop new products.

Why are there labor shortages?

While the definition of a labor shortage is simple, the reasons for one can be complex and varied. It isn't always a case of there not being enough eligible workers; sometimes it's more to do with there not being enough jobs that workers are willing to take -- whether due to pay, conditions or other factors.

Recurring causes

Labor shortages have occurred throughout modern history, each in different circumstances but often with related causes. Broad national trends that might impact the labor market include an aging or shrinking population, growing private industries that can offer more competitive pay, and a shift in migration rates.

An aging population may occur because fewer people are having children or because young people are moving away at greater rates than before. Whatever the root cause, the outcome remains the same: More people leave the workforce than enter it, leaving more jobs unfilled than in previous times. Even if older workers choose to stay in their jobs and not take retirement on schedule, there is a reduced number of young workers to fill entry-level and junior positions than in previous generations.

This can create a labor shortage on its own, but the situation is made worse when there is growth in the private sector that allows it to offer higher pay rates than other industries, especially government-funded ones. While the private market may not experience a labor shortage, shrinking talent in the public sector leaves a recruitment gap for many key jobs -- such as teaching and law enforcement. This is one example of why some industries are affected more severely by a labor shortage than others.

Finally, migration patterns can substantially affect the number of available workers in a market. During periods of low migration, fewer prospective workers are added to the labor market, which makes it hard for specific industries to recruit workers. Currently, international migration is at its lowest rate in decades, which has hit many sectors that rely on seasonal employment.

Unique causes in 2023

On top of cyclic trends, there are unique moments in history that can upheave the workforce. The coronavirus pandemic immediately disrupted business operations when it began in 2020, and the repercussions are still being felt.

Most notably, America experienced what has become known as The Great Resignation. Between April 2021 and April 2022, 71.6 million people left their jobs, which averaged 3.98 million people quitting each month. Key industries affected included leisure, hospitality, food services and retail -- often incurred after poor pandemic-related experiences such as temporary mass layoffs, essential employees being forced back to work in unsafe conditions, and poor treatment from customers during a stressful time.

The pandemic forced many people to change how they worked and led to a permanent expectation shift from some workers, with many now demanding the option of remote work or greater flexibility in their hours. This creates challenges for employers trying to fill in-person roles; even if workers are available, they may not be willing to take the open jobs. Finally, some workers' health was severely affected which removed them from the full-time workforce.

Other timely factors include increasing childcare costs, which have made many parents choose to stay home rather than pay to outsource care. This has removed many potential workers from the labor market, especially women. Lastly, growing sectors such as AI are fairly new to the economy and lack trained professionals to meet the demand. But there's a skills gap that must be addressed first.

Industries most affected by labor shortages in 2023

As mentioned, America's labor shortage is not affecting industries uniformly. There are several sectors that have been affected much worse than others, either because they are no longer as desirable to workers or because there is a lack of skilled talent for that sector.

Service jobs

One of the most notable industries to be hit by the worker shortage is the service sector, which includes roles in leisure, hospitality and retail. Unlike other industries, there have been more vacancies filled in this industry than others, with hiring rates matching or rising above quit rates in recent months; 100,000 more workers were hired than quit in March 2023, reports the U.S. Chamber of Commerce.

However, these gains can't overcome the huge deficit of workers from earlier in the pandemic as retention rates remain so low. The Accommodation and Food Services industry has had the highest quit rate since July 2021, consistently above 4.9%, reports the U.S. Chamber of Commerce.

While it was expected for many of these jobs to disappear during the beginning of the pandemic when many businesses closed altogether, employment has not returned to pre-pandemic rates even now that job opportunities and hiring are back. Workers are simply not happy in these roles and continue to quit, even as the conditions have stabilized. The U.S. Chamber of Commerce puts overall job fill rates for leisure and hospitality at 65%, which has kept the industry in a labor shortage.

Public sector jobs

The public sector is struggling to compete with the higher salaries of the private sector. Inflation has made pay a more motivating factor for workers, while industry conditions have worsened for many public sector jobs.

Teachers in particular are in high demand, with many current employees leaving the workforce and fewer joining. The struggles of teaching remotely during the pandemic and working with children who were severely affected by it, combined with an uptick in school shootings, are some of the main causes attributed to teachers burning out. Pay has stagnated over the last decade as well, resulting in a shortage in the labor supply despite the large number of open jobs. Estimates show at least 55,000 vacant positions and 270,000 underqualified positions in schools nationally according to research by Tuan Nguyen, a professor at Kansas State University.

Law enforcement and correctional facility workforces have experienced similar shifts. Minimal increases in pay alongside difficult working conditions have made these jobs much less appealing to prospective employees. The popularity of the Black Lives Matter movement and a related movement to abolish the police has politicized some of these jobs, as has public discourse around the prison system. This has made it harder for these industries to attract sufficient workers.

Tech jobs

Some sectors are experiencing an opposite problem: They have very appealing jobs available but the workforce is insufficiently trained to fill them. This might be because an industry is new and there aren't yet established education programs to train future employees, leaving a temporary skills gap.

For example, artificial intelligence has been an area of study for years, and there has been a resurgence in attention given to AI thanks to recent technology developments. This has created a demand for AI specialists in a range of sectors, as each industry seeks to take advantage of the latest innovations. Due to the speed of job growth, the supply for these jobs has not been able to keep up and organizations must wait for more workers to join the labor force.

Other industries may be long-standing but going through a period of unpopularity, so fewer people are entering the training programs by choice. This creates a glut of open roles that businesses can't recruit for.

Specialized skilled jobs

Other sectors, such as manufacturing, air traffic control and health care, have been hit hard by the labor shortage due to a declining number of available skilled workers. Many manufacturing jobs were eliminated at the beginning of the pandemic, which pushed workers out of the industry -- and they haven't returned, even though the jobs have. Health care -- particularly nursing -- was similarly hit after many workers left the industry during the pandemic due to burnout.

States most affected by labor shortages

Just as some industries are affected by labor shortages more than others, so, too, are some states. The U.S. Chamber of Commerce broke the 50 states and Washington, D.C., into categories from least to most severely affected by comparing the number of available workers in each state against every 100 open jobs. The most severely affected are North Dakota and South Dakota, each with only 35 workers for every 100 jobs. Other states that are struggling in this labor market include Nebraska (40), Maryland (40), and New Hampshire (41). This may be due to the states not offering competitive wages or due to workers being less attracted to living in those places.

These numbers differ sharply from those states that are currently seeing minimal impact from the labor shortage. California (115), New York (105) and Texas (103) all have a strong available workforce, which may be due to the number of businesses based there; the large population size and general appeal of these states; or simply competitive compensation packages.

How to overcome labor shortages

Individual responsibility is limited when it comes to ending a labor shortage; many economists believe that federal action must be taken to stabilize the labor market. While it may seem positive to have a smaller number of unemployed people in the country, the Federal Reserve has spoken about the potential risks of having too low an unemployment rate: Tighter labor markets can drive up consumer prices and stifle business productivity. President Joe Biden has also spoken of the prospect of increasing immigration to help add numbers to the workforce.

However, there are a couple of actions that companies can take to best position themselves during a labor shortage.

Employee retention

Focusing on employee retention can help make sure that companies don't find themselves in a worse position than the one they're currently in. A labor shortage can give workers the edge in finding better employment, so management would be wise to assess how their workers are feeling and make sure they feel valued. While compensation and benefits packages cannot always be increased, work-life balance and reducing the chance of burnout can go a long way in many industries that are plagued by long hours or stressful responsibilities.

Employee recruitment

Another approach is to make the business as desirable a place to work as possible. In a more competitive job market, workers will choose the role they want the most, so recruiters and staffing teams should consider ways to make job openings more compelling. Competitive pay and benefits, a good company culture, flexible working and exciting job responsibilities will be top of mind for prospective workers.

Madeleine Streets is a senior content manager for Custom Content at TechTarget. She has also
been published in 'TIME,' 'WWD,' 'Self' and 'Observer.'

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