Levelling Up the Labour Market and the Impact on Firms

Britain’s recent fuel crisis, owing more to a shortage of lorry drivers rather than fuel itself, symbolises the wedge between supply and demand for labour within the economy. While the fact that the number job vacancies in Britain between July and September rose to above one million for the first time could be due to a fall in migration since Brexit, a walk around Dublin – with vacancy signs in almost every shop or restaurant window – shows that this labour market shortfall might not be nation-specific.

Supply Shortages

While Ireland’s job vacancy rate is not as high as in other European countries like Belgium (4.2%) or the Netherlands (3.8%), it rose nonetheless in Q2 of 2021 to 1.1% (from 0.7% in Q2 of 2020). However, perhaps most concerning is the OECD’s recent report which suggests Ireland will not recover to pre-Covid unemployment levels until the middle of 2024, putting its labour market rebound among the worst in Europe. This is likely due to labour market tightness alongside a fall in the job finding rate, with those unemployed prior to Covid only returning to their job search now. Meanwhile, this is aggravated by a reshuffle of the employed, as many have reevaluated their career paths, or find out their jobs no longer exist. In fact, in Ireland, almost 30% of the hospitality sector have moved into other job roles since the pandemic began. Ultimately, the current shortage of workers, most acute in hospitality, healthcare and agriculture, is likely to have a large impact on firms and businesses. To solve this mismatch between supply and demand, it is helpful to further explore the causes of this situation.

Why So? 

Covid-19 gave workers a chance to re-evaluate their job roles and career paths. Despite the fall in Scotland and Northern Ireland, the rise in nursing applicants in England this year illustrates a re-evaluation of career prospects and perhaps a wish for some to enter more rewarding job roles since the pandemic began. Higher expectations of worker satisfaction has caused a huge shift in the labour market as people move away from jobs which do not suit their lifestyle. The fact that the catering industry is particularly vulnerable to shortages is not surprising given the unsociable hours that bar staff and chefs work alongside the heated and stressful kitchen environment for minimal pay. Similarly, despite the evident shortage of truck drivers plaguing Britain, the UK has 600,000 people with an HGV licence who do not drive for a living. This is largely due to the poor working conditions, the negative health impacts of lonely work away from home, and poor pay that truckers face; all these factors are pushing many out of the industry.

The roles that people are shifting out of were arguably always unpopular. However, only now after the pandemic – in an economic environment of rising inflation – has the bargaining power shifted towards the supply of labour within these struggling industries. This suggests that those working in these industries have been under-remunerated for their work; only now can they bargain for higher wages as supply becomes scarce.

The pandemic has also uprooted the housing market, with house prices in rural areas increasing as people sought more green space during the various lockdowns. This means that commuting times for workers are rising, adding another factor to account for when applying for and accepting jobs; this also affects their willingness to work in certain job roles. Indeed, jobs in industries such as catering often require late nights, which, in the absence of nighttime public transport to rural areas, becomes an issue for those living outside urban districts.

Finally, the transition to a high-skilled economy is also a factor impacting the supply shortages. The ability for individuals to shift from a low to a high skilled job role can be challenging, particularly if firms begin asking for too much from candidates. For example, in Ireland the requirement that a waiter have their HACCP qualification, alongside 1+ years of experience is often seen, which is a huge barrier to entry for new workers. The mismatch between workers who think they have the right skills for a job and employer expectations means that firms are oftentimes inadvertently worsening their own supply shortages.

What Does This Mean for Firms?

These barriers to entry for roles which are facing particularly acute shortages are only furthering the labour supply crisis. This means that firms could be more proactive in filling the shortages. This would be through accepting unskilled or newer workers into the industry and train them with the necessary skills for a role. Therefore, firms could work to improve training programmes and lower their own barriers to entry to reduce the shortage.

Perhaps the most obvious way to address this shortage would be to increase wages and add additional benefits, such as a scheme rewarding/providing bonuses to non-salaried workers who work over-time for a firm. However, this rise in costs for firms is likely to exacerbate the current period of rising inflation. While consumers are likely to feel the pinch of this cost-push inflation, a rise in general cost of inputs for firms, many of whom’s balance books are already struggling post-Pandemic, is likely to bring additional accounting challenges.

While increasing pay for workers will help to bring the labour market to a new, temporary equilibrium level, whether through seeking capital replacements for labour, using their staff more productively and efficiently (while also maintaining staff health and welfare), being willing to implement new training schemes or changing their business structure, firms need to use innovation and knowledge of their business environment and industry in order to react to this changing labour market.

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