What is causing the huge labor shortage?

Published on: 8 September 2022

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: macroeconomist and senior strategist Charles Kalshoven about the causes of the huge labor shortage.


Anyone who passes by a café can hardly fail to notice it: many catering establishments are trying to find staff with a poster in the window. But not only the hospitality industry is struggling with a lack of staff. The labor shortage is spread out across several sectors. What are the causes of this? And are there any solutions?


Covid and aging

Kalshoven believes there are two main causes. “The most obvious one is Covid. During the Covid crisis, many companies that would normally have gone bankrupt were kept afloat with government support. The number of bankruptcies is therefore much lower than normal. Employees are therefore still working at those companies, when they would otherwise be available for other jobs.” Covid not only affected the demand for personnel, but also caused a shift in the labor market. “In the hospitality industry and at Schiphol Airport there was temporarily less or no work. The people who worked there then started doing something else. Some of them found new work they enjoyed more or that paid better, so they decided to stay there.”


The other main cause is aging. “On the one hand, because of the aging population, the need for personnel in healthcare is increasing. If nothing changes in the coming years, 1 in 4 working people will be needed in care around 2040. You might expect that the aging of the population will also reduce the supply of labor, but for the time being this does not seem to be the case. Not only is the number of 20- to 70-year-olds still creeping up a bit, but the proportion of ‘active’ people is also rising. The labor force participation rate has never been higher since record-keeping of that began in 1969.”


Kalshoven points out that this is partly due to the increased retirement age, which means that more people over 65 are now working than before. “I think the changing age profile of society, with more older people and fewer young people - in the last decade the over-50s group grew substantially, but the over-40s group has fallen by 17 percent - is playing a role in the shortages in sectors that require a certain level of fitness. These include construction, the police, emergency rooms and baggage handlers at Schiphol Airport. And people who no longer can or wish to practice a profession at a later age will not always have the skills to find work elsewhere. A retiring police officer, for example, is not necessarily a good programmer.”



Although the causes are obvious, the labor shortage is not easy to solve. “In the past, it might have been a little easier by using labor migration. At that time, the shortages here were filled by Filipino nurses or Polish construction workers. But because of the current housing shortage, you can’t house those migrants now. Just as absenteeism reinforces the labor shortage, the housing shortage contributes to the labor shortage.” Another solution could be for the government or a sector to try to interest young people in a specific study, for example in engineering. “But that too is not always easy. Because supervising trainees requires an investment of time. And if the workload is already too much, who will let the interns gain experience in the workplace?”


What can also help is to try to persuade people who are currently working part-time to work more. “This is also where practical objections often come into play, such as expensive or unavailable childcare. Through higher wages, a company can try to attract new people. You might be able to attract new entrants to the labor market, but you often see that people from another sector or company will switch to the better paid job. This mainly leads to a different distribution of labor between companies or sectors. In and of itself, incidentally, that is positive for the economy: workers end up in a place where they are apparently more productive.” When there is a major labor shortage, as there is now, employers often are less adamant about the job requirements when there are openings, Kalshoven argues. “You see vacancies now where it says you don’t have to have completed your education yet. There’s a word for that: green pickings. As an employer, you pick the fruits that are not yet ripe, as it were. But that creates a risk that young people will not complete their education after getting the job, which could affect them later in their career.”  



And then there is automation and robotics as a solution. “You can already see that ordering in the hospitality industry today is a lot faster than it used to be. Now the waitress passes your order to the bar on a smart phone, where someone can immediately start preparing your drink. That prevents mistakes and saves time.” And you can let people do more themselves. “Before, you went to the bank where someone counted out the guilders or dollars for you. Later, you had to take your debit card to a machine to withdraw money. Nowadays you pay with your phone at the cashier. In fact, often there isn’t even a cashier, because nowadays you pay for your groceries yourself. These kinds of technological solutions are also a partial solution to the labor shortage.”


And will a recession relieve some of the pressure on the labor market? “The labor market always reacts to the economy with a delay. The economy has to grow for a while first, before people are hired. An increase in wages often follows a bit later. If the economy crashes now, companies will wonder whether it will be short- or long-term. Regardless, the recession will ease the scarcity as more companies go out of business and others wait a while before expanding. I do think that the labor market will be structurally more restricted due to the aging of the population. There are a lot of professional groups where the average age is quite high and an outflow is imminent.”