The US economy has seen a growing labor shortage in the wake of the COVID-19 pandemic, as workers voluntarily leave their jobs in droves – a phenomenon dubbed the “Great Resignation.” This intense competition for workers has led to significant wage growth across many industries, which in turn is contributing to rising inflation.

The Great Resignation stems from pandemic-driven shifts in workers’ priorities and desires. With time for reflection, many employees decided to leave jobs that lacked flexibility or a sense of purpose. Others left the workforce entirely – for health concerns, early retirement, or caregiving duties. This created a massive churn in the job market.

At the same time, labor force participation remains below pre-pandemic levels. There were over 11 million job openings in the US as of March 2022, but only 6 million unemployed people looking for work. This lopsided dynamic has forced employers to raise wages and offer incentives to attract and retain talent.

The resulting wage growth has been sharp – average hourly earnings rose 5.6% in 2021. This applies upward pressure on inflation, as companies pass on higher labor costs to consumers in the form of price hikes. The Consumer Price Index, which measures inflation, is up 8.5% over the past year.

Rising wages and inflation form a concerning feedback loop, as workers then demand higher pay to offset increasing costs of living. The Federal Reserve faces the difficult task of dampening inflation through interest rate hikes without triggering a recession.

For now, the red-hot job market shows no signs of cooling. Employers must continue offering competitive compensation and benefits to engage workers. As long as the labor supply lags demand, the Great Resignation’s inflationary ripple effects will continue to be felt.