The dual nature of labour shortages

This working paper examines the dual nature of labour shortages: their impact on productivity growth and their role as a symptom of labour market frictions that lead to low-paid, low-quality jobs (e.g., carers, transport workers). 

Using data from World Robotics, DG ECFIN Business and Consumer Surveys on reported labour shortages, Eurostat Structure of Earnings Survey, and sectoral data from the KLEMS database, it investigates key questions. How do labour shortages affect productivity growth and its driving mechanisms? What is their impact on wages and wage growth? Do increases in minimum wage help to address labour shortages in low-wage occupations and what is their effect? 

Results show that while persistent labour shortages reduce labour productivity growth, lowering total factor productivity, this effect is partially offset by an increase in capital intensity (investment), including automation. At the same time, low wages are often seen in occupations facing chronic staffing problem and could be addressed by higher minimum wages, particularly in those sectors where workers are paid close to the minimum wage. This can further improve productivity growth through firm selection and increased incentives for investment and innovation.