US Economic Growth vs. Immigration: Who Will Fix the US Labor Shortage?

As unemployment rates hit historic lows, the United States is currently in the midst of a severe skilled labor shortage. Coming on the backend of the longest continuous job creation in US history, the United States is facing its biggest shortage of workers in more than 20 years. The latest figures have seen the unemployment rate rise up from a record low of 3.8% to 4.0%. Various American industries and companies, particularity in the information technology, transportation, agriculture, construction and manufacturing sectors, are suffering from a range of shortages. Back in January 2017 The Associated General Contractors of America (AGCA) conducted a survey where 73% of businesses said they had a difficult time finding qualified workers and 55% identified worker shortages as bigger concerns than federal regulations and low infrastructure development. The U.S. bank did another study in 2018 in which 61% of small businesses said, “they were experiencing extreme to moderate difficulty in finding quality skilled workers in order to expand their businesses.” 

Erin Clemens, Vice President of Beach Nut Nutrition, one of the leading brands in baby foods in the US, said that, “There is definitely a [skilled labor] shortage in the Mohawk Valley [New York]…we’re exhausting the labor pool. The population is not growing. Unemployment is low.”

Apparently the transportation industry is also experiencing major consequences as it reported a shortfall of 51,000 truck drivers in 2018. Trucks account for approximately 70% of goods and services transportation across the United States. In order to keep their drivers some companies are having to firmly increase wages with Us Xpress, based in Tennessee, announcing $50,000 bonuses and four weeks holiday for certain driver teams. In an industry where the median annual income for a truck driver is US$43,000 and a typical driver is on the road more than 300 days of the year, this is unheard of. According to chief economist, Mark Zandi, at Moody’s Analytics, “Business’ number one problem is finding qualified workers. At the current pace of job growth, if sustained, this problem is set to get much worse… these labor shortages will only intensify across all industries and company sizes.

Now some may argue that the labor participation rate is currently at a slump and that one of the answers to the skilled labor shortage may be to reach outside the skilled labor pool and attempt to address labor and skill shortages internally. In doing so, there are four major domestic areas in which an economy could look in order to increase its labor shortage, as represented in the diagram below.

Currently there are various issues with attempting to solve the skilled labor shortage by reaching into these other talent pools.

Ø  Retired/ Older Workers - One first places employers turn to when looking for more employment are retired and older workers, but unfortunately for the United states, they face the reality of an aging population whose workforce is already at capacity. Currently in the United States 4.4% of individuals 85 or older are still working, which is the highest number on US record. The proportion of workers over the age of 55 in the workforce has also been at a historic high, after in 2016 it was reported that 22.4% of the workforce was over 55, while projections see it rising to 25% by 2024. As the oldest baby boomers already started retiring in 2011, a significant amount of workers from that era are above or around the age of retirement and while these figures show a lot of them are still working they represent the fact that the potential for an increase in retired workers entering the labor force, is most likely very near capacity.

Ø  Under Age / Part – Time Workers – The teen unemployment rate saw its lowest mark since 1969 at 13.3%, mid last year. Over the past three years Starbucks, according to Starbucks Senior Vice President John Kelly, has hired 50,000 workers between the age of 16 and 24 who weren’t in school or working. Even lawmakers are trying to expand the labor force as Minnesota state representatives are trying to change the law disallowing teens from working construction sites as there are such a limited number of workers available in the current labor market. In addition, the underemployment rate, measuring the amount of part – time workers seeking full time work was at 7.8% in June 2018. This was the lowest rate recorded since before the GFC in 2008, thus identifying severely strained pool of part – time workers.

Ø  Restricted Demographic – In certain critical cases the employers turn to largely overlooked labor pools, specifically those with criminal records. Surprisingly, some employers have reached such an extreme that according to the Financial times, “Labor shortages in the US Midwest are prompting employers to hire prisoners, ex – convicts and former drug addicts as they relax recruitment standards to fill vacancies.” This gives insight to the idea that employers are leaving no stone unturned in their search for workers, as their desperation levels are reaching an all time high.

Ø  Unskilled Workers – One of the options employers have is to attempt to retrain and educate unskilled workers in order to fill skill and labor gaps. This is already happening as General Electric Aviation’s staffing specialist, Betsy Enderle, said the situation is “very dire” and the company is more aggressively recruiting in high schools and lowering skill standards for jobs as there simply aren’t enough candidates with the right skills applying for the positions needed. Some companies are even trying to train students in the earlier high school years while attempting to put them in the workforce by their senior year, but the other issue with education and retraining is the time factor. One example of this, is the US’ current dire need of STEM related degrees and qualifications as June 2017 reported the US economy having 600,000 unfilled technology jobs. The time taken to educate, and train unskilled domestic workers will take money and time the US doesn’t have, as labor markets grow tighter and economic growth is being compromised.

One of the biggest issues with the current state of the labor market is that it is constraining economic growth. This year has already seen consumers starting to suffer from increases in food prices, longer wait times for products, and uncompleted services. The Federal Reserve released a report on January 17^th, 2018 stating that, “Most Districts cited on-going labor market tightness and challenges finding qualified workers across skills and sectors, which, in some instances, was described as constraining growth.” According to the Federal reserve in particular, increased labor costs which have been associated with attracting workers have been restraining growth in a number of its districts, especially in manufacturing, construction and transportation.

In addition to these problems, the current overall US labor market is shrinking as the population of eligible working age individuals is diminishing. Over the past 10 years the World bank reports that the percentage of working age individuals within the United States has decreased 1.2%, standing at approximately 65.74% of the population in 2017, which is its lowest rate since 1998. With a decreasing working population and increasing demand for goods and services, trouble is brewing for the future growth of the United States.

If there was any room left in the labor market domestically there would not be huge wage growth pressures in the United States as those outside the labor force, in the categories listed earlier, would see the given opportunities, and quickly enter. As stated by Jeffry Snider of Global Investment Firm Alhambra Partners, “there would be a clear rush of those not in the labor force to join it. Those millions right now outside the official numbers would be moving back into them if they were given a legitimate shot at fruitful employment.” Thus, with more readily people available employers would have options to hire more incoming workers, but this is not the case. Earlier in 2018, Bloomberg reported that the United States has seen the highest rise in wages in a decade, as  average hourly earnings rose 2.9% in the United States between January 2018 and January 2017.  Various CEOs have acted in alignment with these trends as they have made numerous wage related investments:

A further danger associated with high wage pressures is high risk of inflation which will significantly increase the prices of goods and services, subsequently costs of production, and evidently have a constrained negative effect on economic growth. Therefore, given the reports and related statistics, the United States is in the midst of a severe skilled labor shortage and increasing the labor participation rate, looking at domestic labor pools, will most likely not solve this issue. For solutions, immigration, may be part of the American answer.

What many people don’t realize is that many of America’s most successful individuals are not only foreign but originate form emerging economies and developing nations. For instance, Madeline Albright, the first woman to become US secretary of State in 1996, was from Czechoslovakia, which today is known as the Czech republic and only received developed status well after her appointment in 2006. Jan Koum, the co-founder and former CEO of WhatsApp, who started off as a cleaner in a grocery store is from the Soviet Union Ukraine. Patrick Soon – Shoing, the co – discoverer of Abraxane, one of the world’s top – performing drugs treating breast, pancreatic and lung cancer, and Elon Musk, currently the world’s 6^th most powerful entrepreneur, founder and CEO of PayPal, SpaceX and Telsa, are both from South Africa. Furthermore, PepsiCo’s current CEO, Indra Nooyi, is from India, while even American sports heroes like Dikembe Mutombo and Freddy Adu are from the Democratic Republic of Congo and Ghana. And the list can go on…. The point being that immigrants, particularly from emerging economies, can massively benefit the United States, and as mentioned, have significantly done so in the past.

Business Insider reports that between 1997 and 2013 the top three countries granted the most H – 1B visas (work visas for immigrants) were India, China, and South Korea. Brookings Institute senior analyst Neil Ruiz states that one of the reasons for the majority of H – 1B visas going to Indian applicants is because, “India has a competitive advantage in the global IT industry,” and therefore many places such as Silicon Valley have taken serious advantage of their skillsets, due to the lack there of in the domestic market. The American skilled labor shortage is particularly serious amongst the absence of STEM (Science, Engineering, Technology, and mathematics) field qualified workers. So much so, that even amongst the current ambiguity in American immigration policy, in July 2017 the United States government provided STEM related F1 – student visas in America an extra 6-month extension on their work authorization ability. This now provides foreign students in the United States studying in STEM fields with the opportunity to work a possible total of three years on their student visa before having to apply for a H - 1B work visa. This is an additional 24 months or two years longer than any other type of F1 – Student visa work authorization period. Economists from the National Bureau of Economic Research (NBER), ranked as the 2^nd best economic instution in the world, conducted a survey and found that, “immigration increases both labor participation and average wages for U.S. workers, but only when there is a difference in skill sets between U.S. and foreign workers.” As it may be, the current scenario is most likely a reflection of this disparity amongst skillsets and various labor shortages and thus immigration potentially holds various benefits for the U.S. economy.

America’s current policies are hindering the possible benefits which immigration could bring. H – 1B Visa applicants over the past two years have been led through strenuous amounts of red tape, paperwork and “extra evidence requests”. Even highly qualified individuals such as Frida Yu, who is from China and had earned law degrees in China and at Oxford, worked in Hong Kong as a lawyer at a top international firm, received an M.B.A from Stanford and landed a job at a start – up in Silicon Valley, working on promising new technology to improve the use of data, was denied a H – 1B working visa and at time of notice, was given 17 days to leave the country. The United States government even recently released a report proposing the intended removal of the International Entrepreneur Rule. This is a current policy, which was a late Obama program, aimed at luring the world’s most successful, elite, and intelligent entrepreneurs to America. It is a merit-based program which only 0.00004% of the world’s population is eligible for, while also having the potential to create 300,000 jobs for U.S. workers.

Other countries have implemented successful skilled and merit based – immigration policies, such as Australia. Australia has a unique program which targets immigrants with certain qualifications and experiences, aimed at filling skill gaps within the Australian labor market. Currently skill stream migrants account for approximately 70% of Australia’s total migrant intake and are dominantly from emerging economies. The top seven origins of Australian permanent migrants are from India, China, United Kingdom, Philippines, Pakistan, Vietnam, and South Africa. In April 2018, joint research conducted by the Australian Treasury and Department of Home Affairs cited that the International Monetary Fund estimates that Australia’s migration program will add up to 1% of annual GDP growth from 2020 to 2050, particularly because it limits various economic impacts, including those of an ageing population.

Thus, in conclusion, the United States is facing a severe labor shortage, which will most likely not be fully solved through increases in the labor participation rate and by reaching into domestic talent pools. While immigrants have already played a notably impactful and beneficial role to the United States, skillsets and talent pools in emerging economies can aid America in addressing its tight labor market. While current policies in the United States are not supporting the ideology of skilled immigration, given the kickoff of the US Presidential Campaign in the next 18 months, it is likely to see a renewed perspective on immigration from the United States based upon the presented scenario and projective consequences. If officials do not alter regulations and change their views on immigration, the U.S. economy could face detrimental constraints on economic growth in the near future.