Briefings

Why fed-up workers are quitting their jobs

Workers are leaving their jobs at an astonishing rate, especially in the US, leading to a shortage of workers. What will that mean for our economies? Simon Wilson reports

What’s going on?

After years in which inflation and wage growth have been subdued across rich-world economies, labour markets are tightening and prices and wages rising fast. Take Japan, Italy and the UK, for example. In all three countries, according to calculations by The Economist, the spending power of average hourly pay was about the same in early 2020, at the start of the pandemic, as it had been 15 years previously, before the financial crisis.

In this placid context, recent real growth in US wages – averaging 2.9% from 2015 to 2019, with inflation below 2% – was a “rare triumph”. But as we emerge from the pandemic, all that is changing. US hourly pay rose by 4.6% in the year to September, while consumer-price inflation of 5.4% has wiped out the increase. In Germany inflation is 4.1% and the main public-sector union is demanding a 5% pay rise.

In the UK, job vacancies soared to a record high of almost 1.2 million in September, but the overall number of people on payrolls was also at a record high, of 29.2 million – 120,000 above pre-pandemic levels.

Why are prices rising?

Resurgent demand as we recover from the pandemic has crashed into constrained supply, bottlenecks and surging energy prices. The reasons for wage growth and tighter labour markets are less clear and more various. Potential explanations include lower ability or willingness of people to move for work; lingering fears over Covid-19; early retirements; and changed lifestyle choices.

Some labour shortages are obviously sector-specific, due to temporary or permanent shifts in activity during the pandemic (many countries are experiencing problems in sectors that closed completely, such as hospitality). But overall the size of the labour force, and participation rates, have been depressed by the pandemic in many countries, and they are recovering at different rates, says Vicky Redwood of Capital Economics.

Some countries have seen a rapid rebound, including Canada, France and Spain. In others, such as Germany, Japan and the US, the overall workforce remains 2%-3% smaller than early 2020 – and 3%-4% smaller than if it had grown on trend.

Why is the US so affected?

The US news media is full of stories about disappointing jobs growth and higher wages threatening inflation, says former US labour secretary Robert Reich in The Guardian. What they are missing is “the big story”, which is actually a good one: US workers are flexing their muscles for the first time in decades – and leaving their jobs at the highest rate on record.

Last week official statistics showed that some 4.3 million people quit their jobs in August. That’s around 2.9% of the workforce, beating the previous record of four million set in April. “Workers are reluctant to return to or remain in their old jobs mostly because they’re burned out,” says Reich. Some have retired early, but many “just don’t want to return to backbreaking or mind-numbing” low-wage jobs.

Average earnings rose 19 cents an hour in September and are up more than $1 an hour (4.6%) over the last year. But “clearly, that’s not enough”.

Are high rates of quitting a bad thing?

Not necessarily, says Sarah O’Connor in the Financial Times. “Job quitters might not just be a barometer of economic health – some economists believe they are a driver of it”. A lot of the coverage of the “Big Quit” in the US has focused on sociological explanations: people using the pandemic to re-evaluate their lives.

In fact, what Nicholas Colas, co-founder of DataTrek Research, calls the “Take This Job and Shove It” index is also a hard-headed economic indicator. That’s because people are more likely to leave when opportunities are plentiful – and they tend to get paid more and contribute to wider productivity having done so.

After the financial crisis and recession of 2008 onwards, it took until 2016 for the rate of quitting to recover – in the US and also here in the UK. According to Andy Haldane, then chief economist at the Bank of England, that reluctance helped explain the economy’s “lost decade” for pay and productivity growth. An OECD study also found that higher labour reallocation is correlated with higher productivity growth.

So it’s good news?

It could be. Unlike in the great recession, the job-quitting rate has bounced back fast. The monthly quit rate in the US fell from 2.3% to 1.6%, but has rebounded to higher than it started. So far, these are mostly people in low-paid sectors such as retail, food and hospitality: workers are using the resurgent demand and tight labour market to nudge up wages and conditions.

The question is, will inflation wipe out the gains? Here in the UK, the government is of course trying to spin the idea that the country’s current labour shortages were part of a plan to transition to a high-wage, high-productivity economy post-Brexit, says David Smith in The Sunday Times.

The reality is likely to be that, although shortages may be good news for some workers such as HGV drivers, the more such shortages there are, the more costs will rise, and the more inflation will be a problem, squeezing the real wages of everybody else.

In the long run, pay rises without an accompanying rise in productivity will push up unit wage costs – a route, over time, to higher inflation and lower living standards.

So we need to boost productivity?

Yes, but solving the UK’s low productivity problem is a longer-term challenge that will require “hundreds of thousands of small changes in businesses across the economy”, and close co-operation between business and government, says Smith. It would demand such things as more spending on skills and infrastructure, and simpler and lower taxes to incentivise entrepreneurship and business investment.

Brexit uncertainty and labour market disruption was a “bucket of cold water” over all that; the Johnson government’s tax rises and anti-business rhetoric will not help either. Meanwhile, inflation, like winter, is coming.

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