Guest Blog – Shortage Lurking in the Labor Market

In an effort to stay current on talent market trends, we consume information from a plethora of sources. About 2 years ago, I met Mike Burbank, Executive Director and Private Wealth Advisor at Morgan Stanley, based in San Francisco and subscribed to his weekly opt-in email titled: “Thoughts For The Week”. Mike and his business partner, Scott Haveli consistently serve-up well-written commentary to challenge conventional thinking. In the following article, they outline a broad concern for the US labor market and build a case for educational (and structural) reforms to address an impeding shortage of skilled labor in the US.

Thoughts For The Week – Shortage Lurking in the Labor Maket

The US Federal Reserve is focused on job creation. Fed Chairman Ben Bernanke has stated that the Fed will continue to suppress interest rates through “Quantitative Easing” as long as the U.S. unemployment rate remains above 6.5% (the rate was 7.5% as of April). Bernanke has called this persistent unemployment “a waste of human and economic potential” and stated “If we could wave a magic wand and get unemployment down to 5 percent tomorrow, obviously we would do that.” High unemployment implies more people looking for jobs than there are jobs.  But David Rosenberg of Gluskin Sheff, a Canadian investment firm, has a different view – that there is a shortage of skilled labor in the US, and that the price for skilled labor will rise, surprising the Fed, inflating wages, and ultimately forcing rates to rise and bond prices to fall.  Not exactly the consensus view.

We ran across this view courtesy of John Mauldin’s may 11th “Thoughts from the Frontline letter” – you’ll find a link below.  For those of you that don’t know John Mauldin, he is one of the best collaborators and synthesizers of data that we have found.  He’s basically a high end whiskey still for economic data.  We encourage you to sign up for John’s free weekly letter (link here:  We’ve been reading John’s letters for a decade – we’ve never met or corresponded but he is a digital “friend” of the partnership.  The May 11th Mauldin piece summarizes David Rosenberg’s concern with unexpected wage inflation and also addresses the broader problem of lack of skills in the labor force.

Now back to Mr. Rosenberg’s thesis – first an overview of the labor market:

  • Despite the “Great Recession” having ended four years ago, unemployment lingers near 60 year highs.
  • The unemployed are staying unemployed longer – the average length of unemployment is now 37 weeks versus 23 weeks when the recession started.
  • People have dropped out of the labor force in record numbers.  This affects data because when one is no longer looking for work, one is not counted in the total employment pool and therefore does not affect the unemployment number.
  • Alternatives to unemployment have become easier to pursue.  Government assistance often pays more than low wage jobs, disability rolls are up almost 2 million since the beginning of the Great Recession”, and many potential workers have gone back to school – student loans are the only form of consumer credit that has been on the increase.

With so many people out of the labor market one might assume that as the economy gets better these people will rejoin the workforce. And shouldn’t this create a supply of workers that keeps wages down? Rosenberg argues that there are already numerous jobs available and yet businesses can’t find people to fill them.

  • Layoffs are 10% lower than in 2007. Job openings are on the rise and are back to levels last seen in the middle of the previous decade.
  • Companies are using more temporary workers. Healthcare for lower-wage employees can be a huge percentage of overall labor costs and employers do not have to pay health insurance for temporary employees. Many employers are hiring temps in low-skill, low wage jobs.
  • Skills matter – and this is where the problem lies.  While low-skill labor is plentiful, higher skilled jobs are harder to fill.  And there is a dearth of skilled participants in the labor pool.
  • A two-tiered labor market is developing – and upper tier for those with skills; and a lower tier for those lacking skills that demand a premium.

Rosenberg is concerned that wage inflation could unexpectedly rise as employers are forced to bid up the services of skilled workers.  This is not something the Fed has publicly discussed, and could potentially lead to unexpected inflation.  And unexpected inflation can lead to higher rates.  We worry about these things as they can have a detrimental impact on family capital.

Our other takeaway, addressed at length in Mauldin’s piece, is a broad concern for the US labor market. Ultimately we believe, like Mauldin, that educational and structural reforms are needed – better vocational training as an alternative path to college and more emphasis on math, science, engineering and computer programming at the undergraduate level.  A higher skilled labor market can be the foundation for new businesses formation.  And a pathway to skill building provides incentives to hire and train younger workers. These are not issues that will be addressed overnight. So while we remain vigilant against threats to portfolios, we also hold out hope that structural problems, like the labor market, can be addressed, leading to a new economic dawn.


Thoughts from the Frontline, Skills, Education, and Employment ,By John Mauldin , May 11, 2013

The New York Times, Fed Ties Rates to Joblessness, With Target of 6.5%, By Binyamin Appelbaum, December 12, 2012

About the Burbank Hafeli Team:

The Burbank Hafeli Team at Morgan Stanley Private Wealth Management specializes in pre-liquidity planning and investment management for the founders of food, beverage and consumer product companies, and the private equity and investment banking professionals who focus on these industries.

Mike is an Executive Director with the Private Wealth Management division of Morgan Stanley. He was recognized in April 2013 by the Financial Times as one of the Top 400 Advisors in the United States. Scott is the CFA with the Private Wealth Management division of Morgan Stanley.


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