Is there a labor shortage? It's easing in most places, but not much in the South. Here's why.

Worker shortages have eased across much of the nation this year as Americans sidelined by the pandemic have returned to the labor force and business demand for employees has cooled amid rising interest rates and recession risks.

In the South?

Not so much.

In March, there were 2 million more jobs than people to fill them in Southern states, according to an analysis of Labor Department data by Moody’s Analytics. The surplus of job openings is down by 13.8% from December but a historically high figure and it underscores the severity of the area's labor shortages.

During that period, the same measure of excess labor demand has fallen by 23% in the Northeast to 482,000, 44.3% in the Midwest to 716,000 and 57.3% in the West to 414,000. To calculate the figures, Moody’s subtracted the number of people looking for work from the number of job openings.

The South has a bigger population than other areas but it has the most excess labor demand even as a share of the population at 2%, compared with 1.3% in the Midwest, 1% in the Northeast and 0.66% in the West, according to Moody’s.

The persistence of the South's worker shortages could be helping keep wage growth and inflation elevated nationally.

“The labor market is tight nationwide,” says Moody’s economist Justin Begley. “There is more demand than there is supply across all regions. We do think it is more pronounced in the South.”

In other words, worker shortages are widespread but improving across the U.S. In the economically vibrant South, however, the crunch has been more severe and the gains have been more modest. Put simply, most of the nation’s labor gap is concentrated in the South, Begley says.

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Is increasing wages good?

Normally, tight labor markets are a good thing for employees because they force companies to bid up wages to attract job candidates. But the Federal Reserve is aggressively hiking interest rates in an effort to soften the demand for workers and curtail pay increases in order to bring down inflation, which hit a 40-year high of 9.1% last year. Rising wages are typically passed along to consumers through higher prices.

A stubbornly hot job market in the South, along with other factors, could lead the Fed to raise rates again this month instead of pausing as it has signaled it’s likely to do.

That would further lift borrowing costs for consumers and businesses, continue to roil the stock market and push up recession risks. The Fed already has hoisted its key rate by 5 percentage points in 14 months, the most in four decades.

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Are job opportunities increasing or decreasing?

On Wednesday, the Labor Department said job openings nationally unexpectedly jumped to 10.1 million in April from 9.7 million the prior month. That’s down from a record 12 million in March 2022 but a historically high figure, the Moody’s analysis shows

In its jobs report on Friday, economists expect Labor to report that employers added 190,000 jobs in May, a solid total but down from 253,000 the previous month.

In Greenville, South Carolina, Table 301 owns five full-service restaurants downtown, a quick-service eatery and a catering business. The company perennially has about 40 openings, or 10% of its staff, says CEO Carl Sobocinski.

That’s down from 20% vacancies during the depths of the pandemic but well above the 3% to 5% pre-COVID level, though the company is benefitting from an influx of high school and college students for the summer, Sobocinski says.

“Workforce has been the dominant issue since 2020,” he says, adding that some employees left the restaurant industry to become Uber drivers. While the area’s customer base has been growing rapidly, “The workforce is what’s depleted.”

To cope, Table 301 pays the highest wages in town, offers full-time workers health benefits and 401(k) plans, and doles out annual bonuses that start at $250 for employees who stay at least a year, he says.

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What is causing the labor shortage in the South?

◾ People have been moving to the area in droves. For years, the South has been the nation’s most populous region as Americans flocked there for its favorable climate and low costs. That trend intensified during the pandemic as employees who could work remotely fled large cities. Last year, the South had a net gain of 1.3 million residents while the West added just 153,000 and the Northeast and Midwest lost population, according to the Census Bureau.

Although an influx of residents expands the supply of workers, it has had an even bigger impact on the demand for workers in the South by increasing the number of job openings, Begley says.

◾ Other parts of the country have been more severely battered by the Fed’s rate hikes. In the West, the technology industry has lost lots of jobs, in part, because higher rates increase borrowing costs for capital-intensive tech companies.

◾ Higher rates also prompt investors to put their money in low-risk bonds instead of riskier tech startups. Amazon, Google, Facebook parent Meta and other tech companies have laid off about 364,000 employees nationally since last year, according to layoffs.fyi.

The Northeast also has been affected by high interest rates because of the financial industry’s heavy presence in the area, Begley says. When rates soar, consumers and businesses borrow less, hurting banks and other financial firms.

The Midwest is a manufacturing stronghold. High rates discourage companies from borrowing to buy new vehicles, computers, factory equipment and other big-ticket items, hobbling the manufacturing industry. Factory activity has contracted for six straight months, according to the Institute for Supply Management.

◾ More jobs in growing industries. At the same time, the South has a larger share of jobs in industries that are doing most of the hiring – leisure and hospitality, health care and professional and business services, Moody's says.

◾ The South is more insulated from the housing industry's woes. While high mortgage rates have hurt housing nationally, the South has been hampered less because its more affordable homes help offset the higher borrowing costs, according to Bankrate.com.

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How much does excess labor demand need to fall in the South?

To reduce wage growth and meet the Fed’s inflation goals, Moody’s estimates that excess labor demand needs to fall by 1.5 million in the South, 220,000 in the Midwest, 150,000 in the West and 100,000 in the Northeast.

How long is the labor shortage going to last?

Begley says he expects the South’s worker shortages to ease in coming months as the Fed’s rate hikes begin to take a bigger toll on the region and more workers idled during the pandemic return to the labor force.

This article originally appeared on USA TODAY: Labor shortages ease across US, but not much in the South. Here's why.