Three Effects of a Tight Labor Market

September 30, 2022

Tim Courtney, Chief Investment Officer


In 2020, lockdowns forced layoffs across industries and unemployment soared. Now, just two years later, the pendulum has swung the opposite direction and we face a shortage of workers. The July jobs report showed a surge of 526,000 new jobs and a 50-year low unemployment rate of 3.5%.1 To put this into perspective: there were 11.2 million total job openings, which equates to two jobs for every unemployed person.2

Historically, the U.S. has been known for its robust work ethic, with workers averaging 1,791 hours per year, higher than nearly all other developed markets including Japan, Canada, Germany, Italy, France and the United Kingdom.3 However, the pandemic reshaped the workforce, with many older Americans opting to retire early and others seeking more flexible work schedules or jobs with reduced hours. Our labor force participation rate remains 1% below its February 2020 level,4 and people talk more openly about “quiet quitting” their jobs, or working at a minimal level. This is having an effect on inflation, the quality of goods and services produced and our economy overall.

Production: Anecdotally, we have all seen the impact of labor shortages with shortages of products, longer wait times for services and even reduced business hours for shops and restaurants unable to find workers. Following increased demand for goods during the lockdowns, demand has been shifting towards more labor-intensive service industries where companies have had to increase wages which, in turn, has impacted inflation.5 The assumption has been that supply would benefit from increasing productivity, but productivity remains flat.

GDP: Persisting production challenges due to labor shortages can slow economic growth overall. We’ve already seen real (after inflation) gross domestic product (GDP) decline for two consecutive quarters. Additionally, the decision by many Americans not to re-enter the workforce, or to do so in a limited capacity, means there is less disposable income that can be injected in the economy. This will also impact economic growth — consumer spending remains the largest component of GDP.

Automation: As mentioned, labor-intensive industries are hurting from the lack of workforce participation. One change that has been ongoing but will likely accelerate is automation with robotics and software to fulfill the roles of human workers. While this is not a short-term solution (robots are not being rolled off the assembly line to take human jobs), an unwillingness to take certain jobs is providing more incentives for companies to automate them in the long term.

In August, we saw a slight decrease in job creation with 315,000 jobs added, but the labor market remains tight. Short term, we expect the impact will be felt through continued high levels of inflation, slower productivity growth and more workers becoming burned out. If labor force participation in the U.S. continues to weaken, we might expect slower economic growth as we’ve seen in Europe. If you have any questions about how the labor market might affect your portfolio, please contact your Exencial Advisor.



  1. The Wall Street Journal (9/2/22) – August jobs report shows labor market has cooled but remains solid
  2. Reuters (9/22/22) – U.S. labor market resilient as recession signals grow stronger
  3. OECD Data (2022) – Hours worked
  4. Bureau of Labor Statistics (9/2/22) – The employment situation – August 2022
  5. Investopedia (6/29/21) – The importance of inflation and GDP


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