Where are all the workers?

United States 2018 JLL Research Where are all the workers? How a U.S. labor shortage impacts commercial real estate and potential remedies

United States labor shortage 2018 3 Contents Executive summary 4 Is there really a shortage? 6 Why does labor scarcity exist? 10 What does this mean for the economy? For CRE? 16 Potential remedies 18

The U.S. labor market is experiencing a chronic labor shortage

United States labor shortage 2018 5 When it comes to jobs, this decade has swung from one extreme to the other. Few other times in history have seen such a disparity beginning with unemployment numbers that rivaled only the Great Depression and closing out with a ravenous job market that refuses to be sated. And we expect it will only get worse. What does this mean for the economy? We'll take a look at the structural problems that have led up to this vast undersupply of labor and how it's affecting all sectors of commercial real estate. And then we'll show you a path forward, potential remedies to help companies, investors and even policymakers find talent and fill jobs.

Is there really a shortage? What is a labor shortage? Quite simply, it's a lack of qualified workers. This takes two forms: 1 2 An absolute lack of workers to fill openings, leaving them completely vacant. Workers who have less-thanideal skills, which allows them to fill a job but perform at a subpar level.

United States labor shortage 2018 7 How do we measure this shortage? First, we consider the number of open but unfilled positions. As of January 2018, roughly 6.3 million positions remained open but unfilled a record high. American companies have been creating an average of between 150,000 and 200,000 net new jobs per month in recent years but those jobs are just keeping pace with labor force growth. Recently passed fiscal stimulus measures could make the problem even worse as greater numbers of companies are incentivized to hire additional workers. It's a significant problem. According to the Manpower Group, roughly 40 percent of employers report difficulty filling jobs due to insufficient talent. And it's not just tech or IT jobs the jobs gap is impacting the skilled trades most of all. Just try finding an electrician or carpenter.

Total nonfarm openings Thousands, seasonally adjusted 6500 6000 5500 5000 4500 4000 3500 3000 2500 2000 2000-12 2001-08 2002-04 2002-12 2003-08 2004-04 2004-12 2005-08 2006-04 2006-12 2007-08 2008-04 2008-12 2009-08 2010-04 2010-12 2011-08 2012-04 2012-12 2013-08 2014-04 2014-12 2015-08 2016-04 2016-12 2017-08

United States labor shortage 2018 9 Now let's consider wage growth. Shouldn't a lack of qualified workers equal more money in the pockets of existing workers? Sort of. A tight labor market definitely drives wages upward as employers compete for scarce, qualified labor. And, in fact, that competition is likely to intensify this year. But wages fundamentally are a function of inflation and productivity growth, both of which have remained notably weak during the current economic expansion. If both inflation and productivity increase as we expect, while at the same time competition for workers increases, we should see continued upward pressure on wages. But looking at average wages doesn't tell the whole story. Just because average wages aren't growing quickly doesn't mean there's an abundance of labor. Wages for employees with jobs that are in demand are going up on a sustained basis. One example is within the nursing industry, where they've seen sustained wage growth and employment over the last few decades. Some hospitals have even resorted to signing bonuses and free housing to recruit nurses. And workers with the best skills and the most experience benefit most of all, with wages rising far faster than their average counterparts. The top 10 percent of workers have clearly benefitted from skills and knowledge that are undersupplied, but it's tough to capture this within broad geographical or industry categories. But for workers outside this elite group, inferior skills and experience create a labor mismatch that hurts both the labor market and the overall economy.

Why does labor scarcity exist? There are those who say labor scarcity doesn't exist, that there are plenty of workers who are simply "waiting on the sidelines" for wages to get high enough for them to jump back into the market. Our response? The facts don t support this. What we have is a tale of two charts. The first is the headline labor force participation rate, which shows that among all workers, participation in the workforce has fallen to 62.7 percent. But roughly 10,000 baby boomers retire every day, which skews the numbers. Now look at the chart for labor force participation rate for prime-age workers (those between the ages of 25 and 54), which we think is a better indicator. While this rate is currently rising, it's still below levels of the last 20 years. In fact, it peaked in January 1999 and has been falling ever since. We argue the declining numbers are due to structural, not cyclical, factors

United States labor shortage 2018 11 Labor Force Participation Rate (%) 85.0 80.0 75.0 70.0 65.0 60.0 55.0 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 Prime-age participation rate (%) 85.0 80.0 75.0 70.0 65.0 60.0 55.0 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018

Supply... The male equation Labor scarcity exists today because of both supply-side and demandside issues. These are the key supply-side problems: From October 1949 to today, the men's participation rate has fallen more than 18 percent. Men with a high school education or less are a big part of that, since many jobs once held by these workers have been eliminated due to technology/mechanization and offshoring. That causes a mismatch between many of the jobs that are open and the qualifications of unemployed men who could fill those roles. The result for those underskilled men? Long-term unemployment, the atrophying of existing skills and even opioid abuse. Ultimately, they become virtually unemployable, even in instances where compatible openings exist. Time use surveys show these men have basically dropped out of the labor market entirely and are instead watching more television and playing more video games.

United States labor shortage 2018 13 The female equation And what of the female portion of the equation? From the postwar era on, the participation rate of women in the workforce rose from 32 percent in January 1948 to 60.3 percent in April 2000. But that number now stands at just 56.7 percent. Part of this is a structural change ultimately running its course. But the labor market also presents problems for many women, particularly mothers. And when you consider the fact that roughly half of the 18 million women of prime age who aren t working have at least some college education, while another quarter (4.8 million) has at least a bachelor s degree or higher (compared to 1.7 million prime-age unemployed men who hold a bachelor s degree or higher) that s a lot of qualified women who could fill open positions but do not. In the end, this deprives employers of a significant number of prime-age, educated workers. The lack of guaranteed paid maternity or paternity leave, wage disparity relative to their male counterparts, a lack of affordable day care, and inflexible working schedules are all contributing to a significant portion of qualified women who have simply left the labor force. Some happily, while others...not so much.

...and demand On the demand side, two key problems exist. The first is widely called "credential creep." Companies and recruiters increasingly use degrees to screen job applicants. A recent Harvard Business School study found that companies consistently require job applicants to have degrees, even though only a minority of people actually working in the jobs have them. This limits opportunities for those with less than a college education. And the problem is pervasive. In fact, right now roughly 26.5 million workers in the U.S. are working in positions that were once held by non-graduates. Even if some of those positions have become more technical, many have not. This makes it difficult for non degree holders to get jobs that would have been readily available in the past. It also makes it difficult for companies to fill jobs at a time when the unemployment rate for workers with a bachelor's degree or higher stands at just 2.5 percent. Location, location, location Lastly, there could also be a geographical mismatch between where available jobs exist and where potential labor lives. Increasingly, jobs are becoming concentrated in metropolitan areas. If available labor lives in suburban or rural areas that are located too far from job centers to commute, this labor theoretically could move to job-laden locations. But it is often too problematic to relocate into these areas, particularly because housing is too expensive.

United States labor shortage 2018 15 There's another demand-side issue that's similar to credential creep. Occupational licensing, or governments regulating who can perform certain occupations, is often touted as necessary to protect consumers. But it also excessively restricts who can enter certain professionals and the problem has increased significantly over the past few decades. In 1950, only one in 20 workers required a license to work. In 2017, that ratio had gone up to one in five. The trend isn't driven so much by governments protecting consumers but rather by workers in certain industries successfully lobbying state governments to restrict entry. This impacts workers across the educational spectrum, particularly more highly educated professionals. There's also a cost to obtain these credentials, which, along with the difficulty in obtaining them, limits the number of workers who are eligible to work in these professions. Couple that with inconsistencies across states, which limits the ability of workers to relocate. It's a problem no matter how you slice it.

What does this mean for the economy? For CRE? So what does this mean for the economy? Fewer workers means a smaller economy, and a more slowly growing labor force means a more slowly growing economy. And any mismatch between the skills needed for a job and the skills possessed by a worker will result in less productivity, ultimately resulting in slower economic growth. And that drags on commercial real estate performance. Labor shortages result in higher vacancy rates, lower asking rents and greater concessions across markets. So what would happen if all of the open positions were filled and workers and skills were better matched?

17 United States labor shortage 2018 17 1 1. The national office asking rent would rise by roughly 5 percent and the national office vacancy rate would fall by roughly 2 percent. 2 2. The national industrial asking rent would rise by roughly 4 percent and the national industrial vacancy rate would fall by roughly 1 percent. 3 3. The national apartment asking rent would rise by roughly 5 percent and the national apartment vacancy rate would fall by roughly 1.5 percent. 4 4. The national retail asking rent would rise by roughly 3 percent and the national retail vacancy rate would fall by roughly 1 percent.

Potential remedies 1 Don't be fooled by some workers returning to the labor force, particularly as tax cuts temporarily spur new jobs. The tax cut is no quick fix for the labor shortage; this is a long-term problem. What will help? Improved education, including increasingly college enrollment for qualified students. Primary and secondary instruction needs to get with the times, particularly in terms of technology. Many current open jobs don't require a bachelor's degree but do require a certain skill set. Better education in technical and vocational training, at places like community college, could produce a better labor pool. Better reeducation and retraining could also help workers displaced by trade, offshoring and technical improvements.

United States labor shortage 2018 19 2 Any measure that makes it easier for women, especially mothers, to remain or reenter the labor force would be a huge boon to the economy and labor market. Women hold the majority of bachelor's degrees in the U.S., and losing millions of them in the prime working years (childbearing years) hurts the economy. Any policy that increases paid maternity/paternity leave, improves wage disparity, increases availability of affordable pre- and afterschool care, offers a more flexible schedule or improves work-life balance would encourage more women to reenter the labor force. 3 Last, any policy that facilitates movement of labor between areas with a lack of job opportunity to one with excess job opportunity could help. Subsidies for housing, relocation and interview costs as well as improved infrastructure that better connects outlying areas could remedy the labor shortage.

For more information, please contact: Ryan Severino Chief Economist, JLL + 1 732 590 4182 ryan.severino@am.jll.com About JLL JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2017, JLL had revenue of $7.9 billion and fee revenue of $6.7 billion; managed 4.6 billion square feet, or 423 million square meters; and completed investment sales, acquisitions and finance transactions of approximately $170 billion. At the end of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of 82,000. As of December 31, 2017, LaSalle had $58.1 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com. About JLL Research JLL s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. 2018 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.