clock menu more-arrow no yes

The labor market is tightening. Will that mean raises for employees?

Gustavo Caballero/Getty Images

America's labor markets are tightening, and you can see that playing out in the slew of stories in recent weeks about employers struggling to recruit enough employees:

Here's what you should know about America's tightening labor markets.

The best solution for worker shortages is to raise wages

(Glenn Koenig/Los Angeles Times via Getty Images)

Often, stories about shortages in a specific industry focus on identifying industry-specific causes for the shortage and industry-specific strategies for alleviating it. For example, some trucking companies that traditionally demanded at least two years of experience behind the wheel have begun paying for new employees to go to trucking school. In education, as another example, some schools are seeking permission to have teachers teach subjects outside their certified area of expertise.

But in the long run, the best solution to a worker shortage is simple: Pay more. Any one employer can almost always get more workers if it pays enough, and if wages rise in an industry as a whole, that will attract more entry-level workers and career switchers.

Many workers haven't seen serious wage increases for years

One sign that worker shortages haven't gotten too serious yet is that wages are still rising more slowly than in previous economic recoveries:

Workers raises have been smaller since 2008 than they were in previous decades.

This chart, which shows the rate at which average wages have been rising over the past 25 years, is not adjusted for inflation. In inflation-adjusted terms, American workers' wages have been flat since the start of the Great Recession.

That's a difference between the current economic boom and previous ones. During the boom periods of the late 1990s and mid-2000s, workers saw their wages rise by an average of about 4 percent per year. So far that hasn't really happened during the current economic recovery.

So while labor markets have obviously tightened a lot since the depths of the Great Recession, there's little sign that the economy is overheating. If the Federal Reserve maintains its current low interest rate policies, the economic environment could continue improving for workers for several more years without producing much inflation.

American businesses can afford to give raises

Of course, many business owners say they can't afford to give raises. For example, a lot of restaurant owners say they just don't have the money to pay their chefs more without raising prices. And in a competitive restaurant industry, that might not be an option.

That might be true in the restaurant industry, but it's not true across the economy:

Corporate profits as a share of GDP has been rising.

FRED

For the past few years, corporate profits have been at record highs. Businesses could be using those profits to boost worker pay. And if labor markets continue to tighten, they might be forced to do so.

A tight labor market could heal a lot of damage from the Great Recession

The Great Recession, like all recessions, hurt a lot of American workers. The worst hit were people who were laid off and never found another job.

There were also workers who wound up stuck in jobs and careers they didn't like. During a recession, people have few job options and may be worried about investing in training if they're not sure it will lead to a better job afterward.

A tight labor market is a boon both for long-term unemployed people and for people looking to change careers. Employers often pass over job applicants with long periods of unemployment on their resumes, but a worker shortage forces them to give some of these workers a second look.

And it's a lot easier to switch careers in an environment where employers are hiring every qualified applicant they can find. Some employers will be willing to hire inexperienced career switchers for entry-level positions and train them on the job. And employees will feel more confident going back to school to train for a new career when demand for workers is high.