If the labor shortage continues, the U.S. economy won't be able to recover

What’s more, not only did labor costs dramatically accelerate in 2021, but the inability to find workers impacted some companies’ operations and contributed to lower profits. Meeting demand for 3 million to 4 million more workers as the US economy continues to reopen in 2022 will be a major challenge…

If we do not address these issues, a continuing labor shortage would pose a serious risk to the 2022 US inflation and economic growth outlook. First, wages for new hires will continue to rapidly grow. That, on top of an escalating cost of living, will increase wage growth for workers who stay in their jobs. Across the board, higher annual raises and special adjustments to retain workers are likely to further increase companies’ overall labor costs.

For the first time in decades, the scenario of a wage-price spiral, where higher prices and rising wages feed each other, leading to faster growth in both, could actually hinder economic growth. In such an environment, the Federal Reserve will be forced to raise interest rates multiple times in 2022 and materially slow GDP growth by more than what is already currently being forecasted.