By the end of 2021, there were 50-80% more unfilled jobs in Australia, Canada, the UK and the US than before the pandemic. Vacancies were also at or above their 2019 levels in other advanced economies and rose steadily in all sectors, including those that require more contact, such as hospitality and transport. Increases in job vacancies were greatest for low-skilled jobs.

The sharp increase in job vacancies partly reflects the strength of the economic recovery in advanced economies until the start of the Ukraine crisis, with companies recruiting en masse to meet growing demand.

But, as a new IMF study shows, that’s only part of the story.

Why are vacancies not being filled?

Vacancies have been difficult to fill for several reasons, some of which have been described in a previous blog post. One concerns health issues related to the pandemic. For this reason, some older, less skilled workers who previously worked in contact-intensive industries remain out of the labor force, reducing the pool of available job seekers.

In the median advanced country, low-skilled workers account for more than two-thirds of the gap between overall employment and its pre-pandemic trend. Older workers, as a group, contribute about one-third of this employment gap. In some countries, such as Canada and the UK, declining immigration also appears to have amplified labor shortages among low-skilled jobs.

Another reason vacancies have been hard to fill is that COVID-19 may well have changed workers’ job preferences. In the United States, resignations have increased beyond what their historical relationship to vacancies would imply, suggesting that workers are not just seizing opportunities in a boiling labor market, but are also looking to better working conditions. In the UK, quits have increased the most for low-wage jobs that require a lot of contact, are physically demanding or offer little flexibility, such as in transport and storage, wholesale and retail, or hotels and restaurants.

Impact on wage growth and inflation

Labor market tightness (measured by the ratio of job vacancies to the number of unemployed) boosted wage growth across the board. But the impact on wage growth in low wage sectors was more than twice as large, at least in the United States and the United Kingdom. Indeed, wages react more than twice as much to strains in low-wage sectors, which have also seen larger increases in strains than other industries. We estimate that the annual nominal wage growth rate in low-wage industries increased by 4 to 6 percentage points between mid-2020 and the end of 2021 due to increasing tightness in the labor market, which contributed to reduce wage inequality in some countries. However, on average, these wage gains have not yet resulted in additional purchasing power due to higher prices.

The overall impact of increased sealing on wage inflation has been more subdued so far, by at least 1.5 percentage points in both countries. This is partly explained by the low overall share of low-wage industries (and jobs) in total labor costs.

To the extent that tight labor market conditions persist, they should keep overall nominal wage growth high going forward. The impact on inflation should be manageable unless workers start demanding higher compensation in response to recent price increases and/or rising inflation expectations. Central banks should continue to signal their strong will to avoid such price-wage spirals.

Policies can help bring workers back

Stemming COVID-19 outbreaks would allow older and low-wage workers to re-enter the workforce, easing labor market pressures and inflation risks. Keeping schools and daycares open will also be important so that women with young children can fully return to work.

Well-designed active labor market policies could also accelerate job matching, including through short-term training programs that help workers acquire the skills needed for new, fast-growing, digital-intensive occupations. such as technology and e-commerce, or more traditional jobs. who have experienced acute shortages, such as truck drivers or caregivers. To accommodate shifting worker preferences, labor laws and regulations must also facilitate teleworking. And where falling immigration is amplifying labor shortages, its recovery could still “grease the wheels” of the labor market.

The tightening of labor markets in several advanced economies is good news so far. They raised wages, especially for low-wage workers, with a manageable impact on price inflation (the rise was mainly due to other factors). But some workers who left during the pandemic have yet to return, while others have lingering concerns about their current jobs and new expectations, which are restricting labor supply. By doing more to help these workers, governments can make the labor market recovery more inclusive while limiting the risks of inflation.