Labor, Inflation, and Supply Chain Problems Suggest a Slowing Economy

Economic Policy Brief #129 | By: Rosalind Gottfried | November 16, 2021

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Policy Summary

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The economic recovery has slowed in the third quarter and the unprecedented circumstances make it unclear what the indicators ultimately will mean for future growth. It is estimated that worker shortages are costing the economy sixty billion dollars in sales every month. Increased wages are failing to attract a crucial influx in returning workers. There are millions of pre-pandemic workers who have not returned to work. Workers are reluctant to return to work likely due to health concerns; childcare issues; and reconsideration of life priorities.

The severance of federal supplemental employment benefits did not result in a rush back to work. Worker shortages are attributed to people reconsidering priorities; early retirements; decreased immigrant workers; and workers opting to develop their own work with more flexible schedules and better potential for elevated incomes. Women have been especially less likely to return to work and there is fear that the decrease in women’s labor force participation, which drove the productivity of the post-World War 2 era, will have a lasting negative impact on the economic growth of the post pandemic era. The rate of women participating in the workforce had already leveled, prior to the pandemic, and the fear is that it will not recover; there are too many issues impeding women’s workforce participation, most notably the childcare pressures which affect women generally more than men.

Another factor affecting the economy is inflation which is higher now than at anytime in the past thirty years. Gas is averaging a national gain of $1.25 from a year ago and consumer spending in the third quarter grew only by 1.6%. Hope prevails that the fourth quarter, with the holidays, will improve spending to 3.3%. There is evidence that overall consumer confidence is increasing and credit card use is up. Federal spending is down but local and state expenditures are up, likely due to the re-opening of schools.

Disruption of the supply chain is another trend which is impacting the economic recovery. Some people who lost jobs during the pandemic have been turning to entrepreneurship to get through the pandemic and find that they are happier and will try to sustain their efforts. Small businesses, and independent businesses may be pushed out by the power of larger corporations to negotiate production, the importing, transporting and pricing of goods.

Policy Analysis

Clearly the economy and society are in transition in uncharted territory. How long it will take supply and demand to even out as goods can be obtained more predictably is anyone’s guess. The impact and ultimate resolution of the worker shortage is also difficult to foretell. There was guarded optimism relating to inflation but that seems to be lessening as prices rise to new heights. Some economists say that the recovery has slowed but still expect good times to return by the second half of 2022.

Childcare remains a basic issue in society which is not being sufficiently met and its impact on children and productivity can be far reaching. The paid family leave, which has been dropped and reinstated and dropped again in Biden’s Build Back Better program is a basic right in most high- and moderate-income countries.

Service staffing remains a problem in that even if wages increase the lack of flexibility and benefits characteristic of these kinds of jobs make them unappealing.

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Issues of scheduling also are often reported as contributing to poor working conditions. Restaurants where servers and kitchen staff are full time, and not dependent on tips, are doing better at maintaining staff and may foretell what the future needs to build upon. If the recovery is to be strong and imminent it would appear that structural change affecting labor will need to be made.