Labor Shortages Forecast to Persist for Years

​Economists are predicting a slowdown in labor market activity in the U.S. in 2023 due to a likely recession, a continued battle with inflation, more layoffs and higher unemployment. But data shows the far greater concern lies in something that's not so changeable: demographics.

"Demographic shifts and aging populations mean countries like the U.S. will experience an ongoing shortage of workers and hiring will remain challenging for years," said Svenja Gudell, chief economist at Indeed. "Without sustained immigration or a focus on attracting workers on the sidelines of the labor force, these countries simply won't have enough workers to fill long-term demand for years to come."

She said that according to the World Bank, over the next decade, the number of people of working age (between ages 15 and 65) will decline in the U.S. by over 3 percent.

"And that trend will continue beyond 10 years," she said. "It is a fundamental error to think that as COVID-19 recedes, hiring difficulties will evaporate. Deep-seated and long-term supply dynamics will continue to be a major force that creates a persistent gap between employer demand for new hires and the supply of candidates."

Nela Richardson, chief economist at ADP, said that since 1990, the global labor force participation rate has fallen steadily, from more than 65 percent of working-age people to less than 60 percent, according to a World Bank analysis. "In the past, worker mobility and immigration helped even out differences as wealthy countries attracted skilled and unskilled workers in search of better pay and prospects," she said. "Now the political winds are shifting on globalization and immigration. Physical mobility might be supplanted by remote work that allows people to stay put while their jobs migrate. The impact of this new dynamic on wages is uncertain and could determine how tight the global talent market will remain in the future."

Bledi Taska, executive vice president and chief economist at Lightcast, a labor market data analytics firm headquartered in Moscow, Idaho, said that policymakers and employers can build up the diminishing labor supply by working toward immigration reform, especially attracting and retaining high-skilled foreign workers; finding ways to entice discouraged workers back into the labor force; and shifting to a skills-based hiring model instead of expecting people to go through traditional higher education.

Gudell said that offering more flexible opportunities will help make it easier to find talent in the face of labor supply constraints. "We've seen in the data that people with disabilities have been able to enter the workforce in much higher numbers when employers offer remote work," she said. "Flexibility in areas such as work scheduling is also key to attracting and retaining older demographics as well as women, who must juggle jobs and child care responsibilities more often than their male counterparts. Being open to remote work also means that you can hire beyond your local radius and consider people from all over the country or across the world."

Fair chance hiring is another solution. "The formerly incarcerated is a fairly large pool of people, and we've seen interest from job seekers from that population looking for new opportunities," Gudell said.

Experts believe that job candidate expectations altered by the pandemic—in which job seekers felt more leverage to seek more flexibility, higher pay, better benefits, and support for health and wellness—will continue this year and in the years ahead.

"The employee voice has mattered more than in the past," Gudell said. "Given that we are going to deal with an aging demographic and labor supply will remain tight, we will see quite a bit of bargaining power among job seekers, especially in certain in-demand sectors like health care or technology."

Labor Market to Normalize in 2023

Economists agree that the labor market theme of the year will be "a return to normal." The number of job openings, which reached its highest level in 21 years last year, has already begun to fall and will continue to slowly decline in 2023. The Great Resignation started to lose steam last year, and the average quit rate steadily decreased. And although fears of a recession are mounting, the unemployment rate has held steady within the narrow range of 3.5 percent and 3.7 percent since March 2022.

"A few things will weigh on the labor market this year, starting with inflation controls," said Jay Denton, chief analytics officer at LaborIQ, a compensation and labor market analytics software company based in Dallas. "Higher interest rates, the lack of available talent and the shift to pre-pandemic behaviors will all impact the labor market."

Hiring should start to moderate, Denton said. "There are simply not enough people in the available talent pool. The labor force is at least 2 million people below where we had expected to be by now without the pandemic happening."

Hiring may slow, but hiring activity will still be elevated, Taska said. "We will still see a lot of hiring, because companies still have a lot of roles to fill," he said.

Mallory Vachon, senior economist at LaborIQ, said their forecast shows substantial hiring across almost all sectors. "We predict 102 million job openings, a drop from 2022, but still much higher than the pre-pandemic average; and 63 million hires, a drop from 2022 and a bit under historical average."

According to LaborIQ, the most optimistic scenario would see over 1 million net new jobs as "evidence of the 'soft landing' economists have been talking about where interest rate impacts are constrained to only a few industries and the backlog of open jobs offsets layoffs," Vachon said.

Denton added that from a hiring manager's standpoint, moderated hiring trends may bring a sigh of relief. "Lower levels of job openings and hires also means lower turnover as people leave one role for another," he said. "While fewer people voluntarily resigning is good news for hiring managers, it also means recruiters are having a harder time pulling people away from their current jobs."

Experts agreed that unemployment will rise this year. Taska predicted a small uptick in the unemployment rate to 4 percent, while Gudell said that it "could hit 5 [percent] or even 6 percent" later in the year.

"Unemployment can't get much lower," Vachon said. "The national unemployment rate is at historic lows, but in many sectors, unemployment is even lower, making it harder for businesses to find talent. There's almost never been a time where the supply has been so low, and the demand has been so high."

Layoffs also remain historically low, even in the midst of daily reports of downsizing, mostly in the technology sector. "Layoffs are currently near historic lows, despite the headlines you see," Denton said. "That number should start to rise. The labor market cannot maintain the hiring volumes and net new job gains seen over the last two years."

Taska said the spate of recent layoffs is due to over-hiring during the pandemic and natural leveling is now occurring.

Quits will remain above average through much of the year but start to normalize as well, Gudell said. "Wages will also stay high," she said. "Wage growth has slowed down but is still very strong. The higher number of quits drives wages up."

Richardson pointed out that real wage growth adjusted for inflation has been falling. "Wages have been eroded by inflation," she said. "While the cost of living has soared in many places around the world, wages have not kept pace. Even with inflation set to moderate this year, wage growth will need to remain robust in order for workers to feel the full benefit of slower price gains. Higher and more irregular pay jumps, elevated worker turnover, and wage compression between new hires and tenured workers have reset pay scales around the world as employers try to keep up."

Inflation and Recession

The persistence of inflation and the specter of recession will be major drivers of economic speculation all year. "Globally, inflation is expected to moderate in 2023 from the sky-high levels we endured in 2022," Richardson said. "But it's unlikely we'll return to the same decades-long inflation slumber that Europe, Asia and North America enjoyed before the pandemic."

She added that whether a recession is officially declared or not, declining labor productivity has become a worldwide challenge.

If a broad economic recession does happen, it should happen early in the year and hit bottom by midsummer, Denton said.

If that were the case, adaptability is key to remaining competitive, Vachon said. "Things would improve by the latter half of the year, and businesses need to think about retaining talent and positioning their teams to weather a downturn. Instead of being reactive, stay aware of labor market trends and have your hiring plans ready once things turn around."