How Fixing Our Worker Shortage Can Fight Inflation

Concern for inflation is soaring among American consumers and business owners alike. According to our latest Small Business Index with MetLife, 88% of small business owners are concerned about the impact of inflation. Of those, 49% are very concerned, compared to 44% last quarter and rising from 31% in Q4 2021.

Another top concern right now for business owners: the labor shortage. It’s one of the top issues we hear about from businesses across the country.

But these aren’t two separate issues. The worker shortage is one of many contributing factors—alongside supply chain disruptions, strong demand, and monetary policy—fueling inflation.

Fill me in: According to the latest jobs numbers from the Bureau of Labor Statistics, the U.S. has 11.3 million open jobs, yet only 5.9 million unemployed people. That’s nearly double the number of open jobs than people available to fill them.

Business owners from retail to manufacturing and from hospitality to transportation have open jobs that they cannot fill. We’re also experiencing a “great reshuffling” of the labor force as workers are seeking jobs in different industries in the wake of the pandemic or rethinking their career paths altogether.

It’s become increasingly difficult for businesses to find the workers they need and to retain the workers they already have. In this growing competition for employees, businesses are raising wages. According to the Small Business Index, 60% of small businesses have implemented changes over the past year to improve employee retention, and one of the most popular tactics cited was increasing wages.

The bottom line: As the cost of payroll goes up, to maintain profitability to the extent they can, businesses pass along higher labor costs to their customers. But as prices rise, workers feel they need even more money to keep up with rising costs at the grocery store or gas pump.

Economists refer to this as a wage-price spiral. This happens when rising wages drive companies to raise prices, which, in turn, prompts workers to demand pay that keeps up with inflation.

In an op-ed for CNN Business, Mike Zaffaroni, U.S. Chamber Small Business Council member and owner of Liberty Landscape Supply in Jacksonville, FL, wrote about how inflation and the worker shortage is impacting businesses like his:

“We’ve never had so many potential opportunities to grow, serve customers and sell goods and services, and at the same time be limited in our ability to perform because we cannot find talent.

We currently have 15 job openings, and would be willing to hire even more employees in anticipation of additional future business growth. Operating while 20% understaffed forces us to increase wages to attract more team members. We then must raise wages for existing staff to remain equitable. Our entry-level wages have increased 27% in the last 12 months.

To pay the higher wages to our new and existing team members, we are raising our prices to hold our gross and profit margins and stay afloat.”

A perfect storm: In an inflationary environment, businesses raise prices when input costs rise—and input costs are rising right now not only for wages, but also for costs of goods, shipping costs, and as a result of the pandemic and U.S. monetary policy. It’s a perfect storm creating high levels of concern.

The solution: We can’t get inflation fully under control until we fix the worker shortage crisis. To do this, the U.S. Chamber has several policy solutions, part of the America Works initiative, that will grow our workforce. They include:

1. Helping Americans acquire the skills they need to fill today’s open jobs
2. Improving educational and job training opportunities for the jobs of tomorrow
3. Removing barriers to entering the workforce like a lack of access to childcare or having a criminal record
4. Expanding the workforce through immigration reform

Learn more about our America Works policy recommendations.

However, growing the workforce to ease the worker shortage is only part of the equation. There are further steps the government can take to ease inflation. The Federal Reserve has already begun to raise interest rates in an important step toward cooling demand. Other solutions to ease inflation include cutting tariffs and increasing domestic energy production.

We are calling on policymakers to take immediate action to help fix the worker shortage and curb inflation—a perfect storm causing soaring prices for American businesses and families.