Labour shortages have risen across OECD countries, here's how to plug the gaps

Labour shortages can tamper economic activity, aggravate supply bottlenecks, and trigger increases in inflation. This column presents a recent cross-country analysis by the OECD which shows that labour shortages have been on the rise in a number of advanced economies, and tend to be concentrated in industries characterised by contact-intensive, low-pay, and, more generally, low-quality jobs. Public policy interventions encouraging flexible working arrangements, training, and adequate pay could help address labour shortages while spurring economic growth and social mobility.

In the aftermath of the COVID-19 pandemic, labour markets have been recovering strongly, notwithstanding important differences across countries and groups of workers. Despite the rebound in employment, firms have been reporting severe recruitment difficulties, as documented in previous Vox columns (e.g. Kiss et al. 2022, Summers 2022). Based on our recent work with Chiara Soriolo (Causa et al 2022), in this column we present new evidence on rising labour shortages in advanced countries since the pandemic, emphasising the comparative perspective with a view to drawing policy implications.

Job vacancy rates and vacancy-to-unemployment ratios – standard trackers of labour shortages – suggest widespread shortages across most advanced economies since the beginning of the pandemic (Figure 1). In some countries, such as the US, this took place in a context of already tight labour markets, while in others, such as France, the labour market was relatively slack before the pandemic.

Figure 1 Labour markets have been tightening

Panel A) Job vacancies per unemployed, OECD Total and selected countries, 2019Q4-2021Q4

Panel B) Job vacancy rates, 2019Q4=100

A closer inspection at industry-level data suggests that the rise in labour shortages has been broad-based across industries, being particularly pronounced in Manufacturing, Accommodation and food, and Health and social work (Figure 2).

Figure 2 The rise in labour shortages has been broad-based across industries

Job vacancy rates across industries, 2019Q4=100, OECD average

Rising job vacancy rates have gone hand-in-hand with rising quit rates, particularly – but not only – in the US (Figure 3).

Figure 3 A 'Great quit' has been taking place across a number of OECD countries

Quit rates across countries, 2019Q4 - 2021Q3

This ‘Great Quit’ or ‘Great Resignation’ may be driven by a mix of cyclical and structural factors. On the cyclical side, tighter labour markets tend to increase workers’ bargaining power, resulting in higher job-to-job mobility (Bachmann et al. 2021, Abendschein et al. 2022). On the structural side, the COVID-19 crisis may have triggered a change in workers’ preferences (e.g. IMF 2022, Faberman et al. 2022, Parker and Horowitz 2022). Workers, especially those who were on the front line during the pandemic, may no longer be accepting jobs characterised by low-pay, bad working conditions (shift hours, health risks and strenuous tasks, poor social benefits, etc.). Indeed, low pay, a lack of opportunities for advancement, and feeling disrespected at work are the top reasons for quitting jobs among US respondents to a Pew Research Center survey, and respondents who switched jobs are more likely to say their current job has better pay, more opportunities for advancement, better work-life balance, and more flexibility (Parker and Horowitz 2022). Official statistics on quit rates by industry in the US (Figure 4) provide further evidence of the importance of job quality: higher quit and vacancy rates are generally found in industries characterised by lower pre-pandemic earnings and worse working conditions, such as Retail trade, Food and hospitality, and Manufacturing.

Figure 4 Quit rates are strongly negatively correlated with wages pre-pandemic across industries

Panel A) Quit rates in 2021M12 and hourly earnings in 2019M12 across industries, US

Panel B) Vacancy and quit rates across industries, United States, 2021M12

What can policy do to address these issues?

While priorities will vary depending on country-specific context, a number of policy options can be considered to make jobs more attractive to workers where labour shortages are most acute:

Enhancing the coverage of social protection (health insurance, sick leave, unemployment benefits, temporary short-time work schemes) to, for example, non-standard workers.

Encouraging firms to offer flexible working conditions in terms of, for example, hours worked and, when feasible, teleworking, accompanied by adequate digital skills training and infrastructure.

Pursuing policy efforts across a wide range of areas, from family policies to labour regulations and taxation to reduce gender gaps in the labour market; in particular, ensuring access to affordable quality childcare and well-targeted child-related benefits.

Stepping-up active labour market policies to encourage requalification and reallocation for jobseekers.

Promoting workers’ bargaining rights over pay and working conditions in highly-concentrated labour markets where firms have monopsony power, with caution to avoid potential wage-price spiral effects.

Facilitating inflows of international migrants while ensuring complementary integration policies and effective recognition of qualifications acquired abroad.

Abendschein, M, O Causa and N Luu (2022), “Getting on the job ladder - The policy drivers of hiring dynamics”, VoxEU.org, 2 May.

Bachmann, R, C Bayer, C Merkl, S Seth, H Stuber and F Wellschmied (2021), “Worker churn in the cross section and over time: New evidence from Germany”, Journal of Monetary Economics 117: 781-797,

Causa, O, M Abendschein, N Luu, E Soldani and S Soriolo (2022), “The post-COVID-19 rise in labour shortages”, OECD Economics Department Working Papers, No. 1721.

IMF (2022), Labor Market Tightness in Advanced Economies”, IMF Staff Discussion Notes No. 2022/001

Kiss, A, A Turrini and A Vandeeplas (2022), “Tight euro area labour markets after Covid-19: The role of labour market mismatch”, VoxEU.org, 19 August.

Parker, K and J Horowitz (2022), "Majority of workers who quit a job in 2021 cite low pay, no opportunities for advancement, feeling disrespected", Pew Research Center.

Summers, L (2022), “How tight are US labour markets?”, VoxEU.org, 16 March.