“Now Hiring.” This sign has shown its face everywhere in the past few years. At first, people said Covid had sent the employees home, and that many of them were happy to collect government benefits. But the emergency benefits ended in September 2021, and the labor shortage goes on.
Labor is in a new and strange market. I’m not in it — I’m retired — but in 2021, I noticed when my bank branch closed for months because it couldn’t get employees to come to work. I see that the Washington State Ferries cut back runs over Memorial Day because of the shortage of crew, and that King County Metro has had to suspend six bus routes because of a shortage of bus drivers. These are unionized deck crew and unionized bus drivers — not jobs normally subject to shortage.
I see “Now Hiring” signs at retail stores, restaurants, and even at my neighborhood post office. When I go shopping, I encounter retail employees who clearly don’t know what they’re doing. If you’re a warm body, you can get a job in this tight market. Even with the tech layoffs, the rising interest rates, and the falling real estate prices — classic warning signs of a recession — the unemployment rate for King County in April was a paper-thin 2.6 percent.
During my lifetime, I’ve never seen a labor market like this. Back in the 1980s and 1990s, when I worked at the Seattle Post-Intelligencer, I reported the unemployment rate every month. It was never this low. For lower-skilled workers, it’s wonderful — and good for them! But it needs to be explained.
Jacob L. Vigdor, a Harvard-educated economist who teaches at the University of Washington’s Evans School of Public Policy and Governance, has an explanation. It begins with trends that are common knowledge among demographers, namely changes in the share of the population ready and able to work.
For 40 years, beginning in about 1980, the number of persons of working age, usually defined as 18 to 65, was historically large. The large supply of labor limited the growth of wages per person.
That has now changed, and Vigdor thinks that a seller’s market will be the new normal for the next 30 or 40 years. As a consequence, Vigdor argues in a paper he presented at a conference of the National Bureau of Economic Research, the trend of the past 40 years of widening inequality has also reversed.
The widening inequality of pay, as measured before taxes and government benefits, has been a political issue. Pay has increased strongly at the middle and especially at the top, but not at the bottom. Progressives have blamed this on “neoliberalism,” the movement since the Jimmy Carter years toward freer markets. This bipartisan consensus includes the push for freer foreign trade, which has allowed imports to surge from 5 percent of American consumption in 1970 to 15 percent today.
In the labor market the neoliberal consensus includes the erosion of the federal minimum wage, which reached a peak in 1968 at $1.60 an hour, $14 in today’s money — compared with today’s actual federal minimum of $7.25. Neoliberalism also includes the decline in unions, which went from representing 20 percent of the workforce in 1983 to half of that today.
Reaching into the work of the demographers, Vigdor offers a different answer (which does not rule out the other ones). Part of it came to him several years ago, when he was doing a study for the City of Seattle on the effects of the local boost in the minimum wage. At the lower end of the market, economist Vigdor was seeing more and more over-educated workers. This was not entirely a new thing; Vigdor recalls a time in his youth, when he found himself in competition with a Ph.D. in philosophy for a job selling vacuum cleaners. (“He didn’t get the job, and I did,” he says.)
But since the late 20th century, the data showed more and more laborers, machine operators, child-care workers, sales persons, door-to-door sales people, waiters and waitresses, secretaries and clerks — all with university degrees that, for their work, they didn’t need. People with college education were competing for jobs at the bottom, which was not good news for the people already there.
Meanwhile, tech companies were bidding up the pay of programmers. In the financial world, investment banks, equity managers and hedge funds were bidding up the compensation of quants. All this widened the inequality of pay.
Imagine the pool of all workers as a share of the whole population. If the pool is big, employers have more to choose from, and the value of an unskilled worker — the “warm body” value — will be less. If the pool of workers is smaller, then the warm-body value will be more. A shift of a few percentage points in size of the pool will be like a rise in the sea level. It will matter.
And there have been related other changes. Before 1930, most people didn’t live much past 65, so the proportion of persons 18 to 65 was high. Inequality was also high. In the decades of the mid-20th century, as people lived longer, birthrates fell and immigration was cut off by federal law, the proportion of persons aged 18 to 65 fell. Labor economists call this period the “Great Compression,” because in the job market, the distance between the top and the bottom shrank.
Then, in the mid-1960s the pool of workers started growing. The large population bulge of baby boomers began coming to work. In 1965, Congress opened up the floodgates of immigration for the first time since the 1920s. (A higher proportion of immigrants than the American-born are of working age.) And from the mid-1960s to the 1990s, women moved into the paid workforce in huge numbers. For 40 years, the proportion of the population available for work increased, peaking in 2007.
The gap between the top and the bottom of the wage scale also peaked in 2007, and again in 2012.
The correlation between the relative size of the workforce and inequality of pay is remarkable, though Vigdor admits that “the timing is not always perfect.” But for the other explanations of inequality — tech, unions, minimum wages, and cheap imports — the timing is not always perfect, either. Reality is complicated. Trends may have more than one cause.
In his economics paper, Vigdor writes that “a simple calculation” shows that 28 percent of the rise from 1968 and 2022 in the premium for a college degree was caused by demographic shifts. “I don’t say that with a high level of confidence,” he tells me. “It could be 28 percent plus or minus 20 percent. But I’m speaking to a literature that has assumed it’s more or less zero. And it’s not zero.”
Vigdor’s explanation is not easily tested by experiment, but it does fit with classical economics. “If you had asked any economist between 1776 and 1976, they would have told you that the driver of inequality in the economy is the supply of workers,” Vigdor says. But as economists focused more on data and math, explanations that weren’t testable fell out of favor. That doesn’t mean they’re wrong.
Since the recession of 2007-2008, the share of the population of working age has fallen — and the labor market has tightened up. Vigdor noticed an effect in 2015, when he was commissioned to do a study of Seattle’s new minimum wage of $11 an hour — up from the state minimum of $9.47. Classical economics teaches that a high minimum wage will put people out of work. In 2015, Vigdor found that for Seattle workers paid the minimum wage, work hours dropped but the number of jobs did not. The negative effect of the minimum wage was offset by the strong demand for labor. The state’s minimum is now $15.74 — the highest of any U.S. state — and Seattle’s is $18.69. And the unemployment rate in King County is a drum-tight 2.6 percent.
What caused the tightening? One factor is that immigration is down, despite the lines of asylum seekers at the Rio Grande. A bigger cause is that the baby boomers have been leaving the job market. Since the mid-20th century, the year of the highest lifetime fertility rate was 1958, at an average of 3.582 births per woman. In 2020, the babies born in 1958 hit 62, Social Security’s early-retirement age. Covid also happened that year, workers were sent home, and a wave of aged boomers decided that it was time to pack it up. In 2021 came the “Great Resignation,” as millions of workers quit and looked for other work. The “lockdown” may have given them the idea, but the demographics gave them the leverage.
Vigdor recalls that recently his 18-year-old son went out looking for a job. He applied to one employer, and quickly got a $20-an-hour job. He and I exchanged knowing looks: That’s not the labor market we ever knew.
It won’t be this tight always. When a recession comes, that 2.6-percent unemployment rate will go up, and the “Now Hiring” signs will come down. But Vigdor writes in his paper, “With current projections, the Census forecasts that the working-age share will decline another 6 percentage points between 2020 and 2050 before stabilizing or reversing.” Vigdor argues that Americans may be looking at “the emergence of a ‘seller’s market’ for labor, which may in fact prove to be the ‘new normal’ in the United States” — which will bring about “a 40-year reduction in income inequality.”
The strongest effect will be at the bottom of the wage scale. There’s not much policymakers can do to reduce inequality at the top other than to tax it more. They could let in more high-skill immigrants. Vigdor suggests that they could loosen the barriers to entry into certain lines of work. (Tenured teaching positions at universities, maybe?) But that’s a separate topic.
A seller’s market for labor will ease the struggles of many Americans. For unions, it should make organizing easier. For employers, it will mean accepting applicants they wouldn’t have in the past, and working harder to train them. For consumers, Vigdor says, it will mean paying more for service workers and restaurant meals. People should also expect more labor-saving devices. “Maybe we’ll have lawn-mowing robots,” Vigdor says.
A final thought about the inequality of pay. A market economy requires a large measure of inequality in order to work. Vigdor’s example: Why would an 18-year-old study medicine for 10 years to become a neurosurgeon, if he could make the same pay immediately by flipping hamburgers? “There would be a shortage of neurosurgeons,” Vigdor says.
Some inequality, then, is a positive good. I asked Vigdor the obvious question: How much? Is there an optimum level? “Yes,” he said. “And no, I can’t tell you what it is.”