The Labor Shortage Is Why Supply Chains Are Disrupted
July 9, 2021
Pervasive supply chain disruptions result mostly from labor shortages, with transportation bottlenecks a much lesser factor. Here in the United States, imports totaled $2.3 trillion last year, compared to GDP of $20.9 trillion, Ships continue to be delayed in their arrivals and unloading at U.S. ports, but that’s not nearly as great a problem as the labor shortage.
Port delays certainly slow deliveries of merchandise around the world, from the Suez Canal blockage to recent slowdowns at Chinese ports. Increased waiting times for ships to unload in Los Angeles/Long Beach and Oakland mean that those ships cannot return to Asia right away. In effect, the world has lost a good bit of its shipping capacity. International trade, though, is not the greatest cause of back-orders for goods and services—that’s the labor shortage.
The labor shortage limits economic growth in local areas according to 90% of local chamber of commerce leaders surveyed by the U.S. Chamber. Their report also includes a good summary of the government statistics on job openings and labor availability.
Small business owners and corporate executives hammer that point home. Every week I talk to a few of my newsletter subscribers (as a substitute for the cocktail reception conversations I used to have when I spoke at board meetings or trade associations). I’ve learned to ask open-ended questions, starting with “How’s business?” and moving on to “What challenges are you coping with?” and “What opportunities do you see ahead?” So I don’t ask about labor issues until my contacts bring them up.
An Arkansas manufacturing company owner said that her company has had trouble hiring unskilled factory workers. An equipment wholesaler covering the Pacific Northwest market has 15 openings for warehouse workers and drivers across all of his locations. His suppliers blame their backorders on the labor shortage. An Iowa banker reported more job openings than ever before at his company, and that their clients include four companies that could each hire 50 people, if only 50 people would apply for the jobs. A Washington state credit union president named staffing as his organization’s top challenge, a view echoed by a banker in a nearby city.
The value of U.S. manufacturing output totals $5.3 trillion, much greater than the value of merchandise brought into the country. Lack of factory labor is the first problem in the supply chain. Then goods need to get from factories to distribution centers, which means that truck drivers workers are critical—and in short supply.
In warehouses (frequently called distribution centers), workers move the items from the incoming trucks to the outgoing local-delivery trucks. But those warehouse workers are also in short supply. Demand for local delivery drivers exceeds job applicants. Then both retail sales people and installers are not available in the numbers that companies want. Labor shortages weave throughout the supply chain.
We economists usually scoff when business managers speak of worker shortages. We think, “There’s a shortage of people willing to work for what you are offering to pay.”
Today’s situation does not justify such skepticism. Companies are facing sharply higher demand for goods and services, with sharply less labor availability, and substantial uncertainty about their ability to pass higher costs on to their customers. Businesses are offering higher wages and benefits but getting little response. It’s understandable that they are hesitant to offer extremely high wages to prospective employees, who may or may not turn out to be good workers.
A particular company may be able to raise its wages high enough to lure workers from other businesses, but that’s not an economy-wide solution without significant inflation of prices that customers pay. We have seen some inflation, but not enough—yet—to justify significantly higher wages.
Forecasting the economy requires recognition of supply chain disruptions caused by the labor shortage. In this environment, companies begin by eliminating sales promotions, special offers and other discounts. That is inflationary, even if the price tags are unchanged. Outright price hikes are becoming more common, too.
This labor shortage is the preferred result of the Federal Reserve. Their goal in the past year has been to run the economy so hot that employers will jump to hire anyone who walks past the business, even a high school drop-out with a prison record. Although we all want good opportunities for disadvantaged people, widespread shortages of goods and services, triggered by labor shortages, are the price we pay for the tight labor market today. These shortages will turn into inflation, which will be the price we pay in the future.
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