Yves here. Even though most readers will be familiar with the broad outlines of this story, that current labor market tightness is due more to a decline in workforce participation by prime age workers than robust demand, the Fed has only one remedy for inflation. That is to kill demand to kill jobs to constrain wage growth.
This discussion is in layspeak and thus may be suitable for circulating among friends and colleagues who may not appreciate that our current inflation is largely the result of supply constraints (including labor) as well as sanctions-induced energy and commodity price increases, and not overheaded demand.
This author is not alone in arguing that the Fed, by using the wrong medicine, will induce an unnecessarily deep or long-lived recession.
By Edouard Wemy, Assistant Professor of Economics, Clark University. Originally published at The Conversation
In any other time, the jobs news that came down on Dec. 2, 2022, would be reason for cheer.
The U.S. added 263,000 nonfarm jobs in November, leaving the unemployment rate at a low 3.7%. Moreover, wages are up – with average hourly pay jumping 5.1% compared with a year earlier.
So why am I not celebrating? Oh, yes: inflation.
The rosy employment figures come despite repeated efforts by the Federal Reserve to tame the job market and the wider economy in general in its fight against the worst inflation in decades. The Fed has now increased the base interest rate six times in 2022, going from a historic low of about zero to a range of 3.75% to 4% today. Another hike is expected on Dec. 13. Yet inflation remains stubbornly high, and currently sits at an annual rate of 7.7%.
The economic rationale behind hiking rates is that it increases the cost of doing business for companies. This in turn acts as brake on the economy, which should cool inflation.
But that doesn’t appear to be happening. A closer dive into November’s jobs report reveals why.
It shows that the labor force participation rate – how many working-age Americans have a job or are seeking one – is stuck at just over 62.1%. As the report notes, that figure is “little changed” in November and has shown “little net change since early this year.” In fact, it is down 1.3 percentage points from pre-COVID-19 pandemic levels.
This suggests that the heating up of the labor market is being driven by supply-side issues. That is, there aren’t enough people to fill the jobs being advertised.
Companies still want to hire – as the above-expected job gainsindicate. But with fewer people actively looking for work in the U.S., companies are having to go the extra yard to be attractive to job seekers. And that means offering higher wages. And higher wages – they were up 5.1% in November from a year earlier – contribute to spiraling inflation.
This puts the Fed in a very difficult position. Simply put, there is not an awful lot it can do about supply-side issues in the labor market. The main monetary tool it has to affect jobs is rate hikes, which make it more costly to do business, which should have an impact on hiring. But that only affects the demand side – that is, employers and recruitment policies.
So where does this leave the possibility of further rate hikes? Viewing this as an economist, it suggests that the Fed might be eyeing a base rate jump of more than 75 basis points on Dec. 13, rather than a softening of its policies as Chair Jerome Powell had suggested as recently as Nov. 30. Yes, this still would not ease the labor supply problem that is encouraging wage growth, but it might serve to cool the wider economy nonetheless.
The problem is, this would increase the chances of also pushing the U.S. economy into a recession – and it could be a pretty nasty recession.
Wage growth still trails behind inflation, and for one reason or another people have been opting out of the labor market. The logical assumption to make is that to make up for both these factors, American families have been dipping into their savings.
Statistics back this up. The personal saving rate – that is, the chunk of income left after paying taxes and spending money – has fallen steeply, down to 2.3% in December from 9.3% before the pandemic. In fact, it is at its lowest rate since 2005.
So, yes, employment is robust. But the money being earned is eroded by soaring inflation. Meanwhile, the safety net of savings that families might need is getting smaller.
In short, people are not prepared for the recession that might be lurking around the corner.
And this is why I am gloomy.
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25 to 54 y.o. are back in the workforce at “normal” rates, 82-ish% (but still lower than than the all-time highs of >84% from 20+ years ago).
It’s every other cohort that has been altered by covid: under-25s (staying in school longer), over-55s (seeking early retirements and/or disability status).
Fed can’t fix that, particularly as the over-55s are a bigger cohort than in the past.
https://fred.stlouisfed.org/series/LNS11300060
Yep. It’s the over 55 cohort that I believe has fundamentally changed. Either by COVID policies, or overt age discrimination, or maybe that their assets blew up so fantastically that they figured that were good to go. That cohort has changed their work outlook and aren’t coming back without severe economic pain.
Not sure how fundamental – over 55s at 38.6%, high point being 40.3% in late 2019. Historically from 1975 to 2005 was running between 30% and 39%. Likely that a lot of boomers retired – still not too far off recent historicals.
The under-25s – steady decline from late 1980’s of ~79% to low 70’s from 2010 to 2019 – sharp drop to 64% during COVID, now little less than 71%, probably couple of points below where “new normal” is.
Age discrimination is the issue. I have many peers who have been discriminated out of the labor market. And once out in many fields you are done since so much is based on competition and not competence. The bottom percentile of earners are hurting but those with homes paid for and kids already through school decide they are not going to swallow their pride and take whatever they can get. And government workers expect early retirement. I would expect there are far more Chicago and New York cops in Florida than in New York and Chicago. And around here they have some pretty nice boats.
This is usually because of employer-based health insurance. Employers often contract with insurers to administer the health plan themselves. They are allowed to make a profit from the plan. Employer HR departments often believe that older employees are a drain on the health plan, forcing up the premiums for the rest of the employees. This creates an economic incentive to discriminate against older employees.
High school kids are having some difficulty getting jobs around here. Memphis/north Mississippi. Most get hired by restaurants. The restaurants are asking kids to skip school to work day shifts. Kids say they have school, so restaurants say they don’t want them. Restaurants, grocery stores, Walmart got used to kids working during the day when school was remote learning during the pandemic. Now that kids are back to school, they don’t have labor. During the pandemic, a lot of the adult labor got sucked up by Fedex and Amazon locally.
I find myself being dubious about that reported annual inflation rate of 7.7% and from what I have been reading this year, I would not be surprised if in fact that it was twice this rate. Regardless, I do wonder about the lack of worker participation in the work force. The first year of the pandemic when much was locked down gave people time off the treadmill to do some basic maths. And many decided to go their own way and downsize and/or depend on one partner’s wage to get by as it resulted in a better outcome in life terms. Does it make sense to work at a job if the low wages were balanced against the cost of getting to that work and back resulted in something that was about the break even point (after the inflation rate is cranked in?). And if the government is thinking that what is needed is a raging recession to put the workers in their place, then I think that they can kiss the consumer economy goodbye. Such a recession would probably alter people’s spending habits for a generation and radically change what the economy looks like.
There is no way the inflation rate is only 7.7%. Do they still leave out food and fuel? And as far as worker participation, unfortunately I know many people who refuse to play the game and have chosen to slip between the cracks. And I have lost three mechanics in the last five years. Two retired and one died. In my world we have been experiencing both inflation and deflation for quite some time. Inflation for things we need and deflation in things we don’t need. Good times!!!
$200 at the grocery store this morning for a few bags that used to cost half that not long ago. $1.89 for a [family blog]ing can of tomato soup. 7.7% my sweet Aunt Fanny.
“The first year of the pandemic when much was locked down gave people time off the treadmill to do some basic maths.”
We have neighbors who did something like this because of child care costs. During the pandemic the wife got a higher paying remote job, husband had been in construction (woodwork/cabinetry), which was at first drying up. They discovered that with him home and taking care of their two very young children, they came out better due to those aforementioned costs. I have heard similar stories at work from at least two other people.
Right now the labor force is back to where it was in Feb 2020
https://fred.stlouisfed.org/series/CLF16OV However, maybe there into different jobs. In my town I’ve never seen so many contractors servicing home owners, leaves removal, roofing, additions etc.
I think economist’s had projected a certain amount of labor force growth over time. Relative to projected long term trends, we are way below where the total labor force should be. Missing >50 year olds. Particularly ladies. I’m not surprised. Crap jobs are not worth dying for.
We have a mechanical repair shop in SoCal and I have detailed pricing of all our inventory going back about 20 years.
This year we have seen price increases from 20% to 180% on some articles.
We inventory about 160 items and there isn’t one article that has not gone up in price by at least 20%.
I dont know how it ends but so far customers are paying the increased prices.
At my mother’s assisted living facility the personal service rate (ie. bathing and dressing) is going up 15% in the new year.
Saw $17 an hour offered @ Panda Express last week for new hires, and that’s here in Godzone which is a lot cheaper place to live than SoCal or the Bay Area, but all they’re really offering is the equivalent of half of what the pay was worth a few years ago, in buying power.
If inflation gets out of control, you’ll see odd things happen such as nobody wanting to work as wages lag hopelessly behind what they’ll purchase, which in the case of Mexico in the 1980’s, led to a mass exodus up over, so as to send their American pay back home via remittance, to keep their families going.
Where would our would be immigrants go?
Right into the streets – to live in “Bidenvilles”. Coming to your city soon! /s
I know it’s not the same thing, but I am in my 40s and my whole adult life I and other people my age have gone abroad partly for economic reasons, mostly as “digital nomads” arbitraging US or Canadian income vs cost of living in medium-high developed countries, but also teaching English conversation, especially in the two economic recessions. And people would commonly say, “because I could never afford a one bedroom apartment in a nice part of my city.”
The US has been in steep decline for a while, to the point that most working-age Americans have little or no memory of anything else. Even the booms weren’t really booms because housing costs rose to swallow any income rises.
And senior citizens who watch cable news think the threat to democracy is “misinformation.” I would allow anyone who promised 1980s-level economic conditions to declare themselves dictator for life.
Well, that’s exactly what the Democrats are “fighting for”!
So, “promised” might not be enough.
Of course, the Trump Clown Show delivered real income increases, even after inflation (that was back in the day 3 years ago) for most of the lower rungs of the working class through the teeth clenched opposition of the Democrats “fighting for” them. I’m afraid a Putin like Spook State dictator is our most likely exit ramp from our ongoing catabolic collapse. It looks likely to take a while so we’ll get pretty feeble before we start putting things together again rather than continuing to place charges on all our own weak points.
Don’t you think many people are going to Mexico to live on disability benefits, social security or pensions? They have affordable national health insurance. Compare the standard of living for a working American in Mexico with the standard in the US?
SImilar experience here: $22/hr at Del Taco. To make tacos.
I was standing in line at Bank of America (they only allow so many people in at a time – a COVID throwback) and was chatting with the branch manager. I asked why all the branches near my house were either closed or had no Saturday service. He said “simple, can’t hire people”. They start prospective tellers at $22/hr for the training period and then increase it. I asked what the requirements were: high school diploma, be able to pass background check.
It amazes me that they don’t get any takers.
$22 an hour is 45k a year. Well below the median income of 70k a year (and average of 98). If they are at least offering good benefits, or are located somewhere with a cheap standard of living I might be surprised.. but 22 an hour would seem high for middle America.
It’s amazing. You lay off/ downsize tellers for 40 years, automate as much as you can, shut the doors during the pandemic and send them home, and then when you need them, people don’t want to come work for you any more. What can be wrong with them?
Part of this ‘unable to hire at $20 or $22 an hour’….(which in SF, I would take no kidding..just not food service…) is that the jobs are usually listed on internet sites like linked…in….etc…sites that are extremely hard to navigate AND ANNOYING if you just have a phone…..They don’t just put up a sign, or advertise in a local newspaper, that doesn’t exist. …like old times. It’s a screening process. And frankly, I’m old, and have met so many bosses of even service sector businesses (ex friends now) just lie about this stuff. They just won’t hire ‘certain people’, and immediately block out certain types of names, check addresses, etc. Everyone, including me, in the Bay Area that I know, working class, has gotten a job through a friend tip. Never from a listing….I may be generalizing, but I think the bosses that say such, are lying, and just not reaching out to the ‘rabble’…though skilled we may be….
During a labor supply crisis we passed a child tax credit that give people more disposable income precisely at a time where they’re reevaluating things. It did help a lot of people out but we could have done with same thing without screwing up labor supply.
…how about tax free childcare? Or free childcare? Universal pre-k?
Child care is part of it, I think, but the elephants in the room are COVID and the continuously rising contempt for workers, especially in the service/retail sector. Many families are simply saying that one parent can stay the hell home and be spared all of the nastiness and risk, while working around the house to cut living costs.
“Wage growth still trails behind inflation, and for one reason or another people have been opting out of the labor market. The logical assumption to make is that to make up for both these factors, American families have been dipping into their savings.”
Be nice to give one reason or another.. like age, pick up in under the table/informal econ, to much time unemployed, data picking to meet narrative and folks forced to dip into savings to eat and live….maybe kinda.
It gets to me when a big chunk of cohort critical data in ignored to give clothes to the naked emperor narrative. To me it seems a game of how to decorate and disguise the big ape in the room!
not one word about the real driver of inflation, lavishing the rich with free money, and the outrageous economic policies of bill clinton. that gave us a world wide monopolistic oligarchy.
Yes, yes, yes!
And low interest rates made a lot of financial schemes possible as people chased yields or financed private equity deals/stock buybacks.
Maybe crypto currencies were driven by low interest rates?
One can wonder if foreign USD holders will want to sell treasury securities and buy US assets.
Locking down Russia’s $300Billion took this money off the table..
The Fed lavishes the rich and the big corporations with very low to no interest rates. The corps in turn used the rates to finance their stock purchases with easy (bond) money. The spiked market then allowed them to float more bonds and use it to buy more of their stock. Finance companies and 401K dealers goose the market further with buying more stocks. Now the Fed is tightening the rates to (try to) give the corps. cheaper labor by efforts to create unemployment. The middle class and the poor are left scurrying to make ends meet. That’s how Capitalist economics work.
One quibble: Unlike past years, that’s how Capitalist economics work right now.
Me thinks the past 35 years of stock valuation growth is based on continuously falling interests rates from the early 80’s Volcker ‘shock’ of 20% fed interest rates. Rates in the past 5-10 years have been historically low, nearing 1.1% or less. Basically free money for the big Wall St banks with access to the discount window. Now rates are going up again. If the fed is raising rates to crush labor wages (how much more can labor wages be crushed from here?), the secondary effect, imo, will still be raising interest rates on Wall St. that will raise Wall St.’s costs probably more than wage labor cost … unless the Greenspan put is still in operation. Really Wall St. and Ukr Zelensky sound so much alike. “Send me money!” “Give us money.” ” Or else!” / meh
But, oh wait, the govt and fed had to give Wall St all that money ‘because they’re the job creators. Ask Milton. / ;)
adding: It was (1980) a beautiful one-two punch to crush labor. Raise interest rates to the moon – or 20% – to crush inflation by blaming the cost of labor for the inflation. Let corporations lay off thousands of workers and start moving manufacturing off shore. (To crush labor wages.) Let corporations start demanding all sorts of govt support and tax breaks and fed dollars by claiming they are the ‘job creators’, they need to be financially sheltered from financial loss in order to bring back jobs to the US worker. (The joke at the time was ‘Big businesses are the job creators…of jobs in other countries.’) Talk about chutzpah. / ;)
The current inflation seems close to Volcker’s era of 20% inflation, with the difference being that you could get an interest rate on a CD around 17%, versus really not much today, practically assuring more inflation.
Yep. Now there’s news the big banks may cut year end bonuses. Oh, the humanity!
https://www.yahoo.com/now/biggest-wall-street-banks-slashing-144232674.html
You would need to explain why we’re only facing inflation now even though the policy you reference has been going on since at least 2008. The rich generally dont spend their money on consumption goods (which is what inflation measures). They bid up asset prices like stocks and real estate which has been happening since 2008.
As much as I love jumping on the Fed for all of their handouts to the rich, this is one example where I’m not so quick to do so. Changes in demographics and supply side issues stemming from Russia/Ukraine confilct are the simpler explanations
I think the Fed’s money drop on the FIRE sector helped drive up rents and the cost of housing, although I am not sure how these higher costs are folded into the well-cooked inflation numbers. They definitely fold into my cost of living a simple life, which is how I feel my subjective measure of inflation.
The greatest period of inflation has happened since 1971.
There may be consequences.
The Rus will leave things hot until the banks have been reorganized. Then there will be all sorts of talks and some rubbing of noses in whatever.
For an economics blog, there are some very short sighted or shy readers!
Sorry if I am dense — your comment is at best Delphic for me. What do you see that’s hidden from some very short sighted readers like me? I am not shy and neither are many of the others who comment on this economics blog. I am mystified by the strange turns of events both foreign and domestic. I cannot understand who benefits from the madness, if there is any benefit to it. I suppose there might be some short term benefits to a very very few but the long term prospects are looking grimmer than I could have imagined in my most pessimistic moods. I had believed that even if I might live a very long life I would be gone from this world before the Fall of the u.s. Empire and the dire ravages of accelerating Climate Chaos as fossil fuels play out. Now with the present confluence of so many streams of foul forces accelerating the Collapse, I am not sure I will be so fortunate. Please share more fully what you see with your longer sight.
As Monopoly rents increase, supply chains remain long and narrow and u.s. government foreign policies put crushing pressures on this fragile and crucial scaffold supporting our Society. The u.s. economic policies have greatly enriched the obscenely wealthy while continually ratcheting up the costs of living even a simple life. “There may be consequences.”– Indeed! such as? I believe the u.s. government is working hard to push us over the edge into a major recession — or worse.
“The Rus will leave things hot …”? Are you suggesting the Russians have some interest in reorganizing banks and rubbing noses in offal? I believe the Russians have been as much driven as a driver of events. What interest do Russians have in reorganizing banks — and what exactly do you mean by “reorganizing banks”? Do Russians want to see new management at Wells Fargo or Citi bank or Credit Suisse?
Schumpeter essayed this fairly well, but was not the first.
To think that The Rus and those who own the world do not negotiate with each other is lacking in imagination. The power to destroy always guarantees a seat at every table.
The bloating bubble is too slow to deflate/disinflate, so ‘crises’ designed to reduce will continue. As far as the rabble are concerned it is always ‘the other’ that does this.
The “Rus”?
I think Mr. Donnelly would do well to be a bit less cute and clever and just make the point in a straightforward way that us short sighted readers can comprehend.
I suppose I am either lacking in imagination or relatively lacking in imagination.
“You can always count on the Americans to do the right thing, after they have exhausted all the other possibilities.”
― Winston Churchill
Exhausting all other possibilities will continue until morale improves.
Indeed!
The terrible task of ‘leaders’ is to follow the agenda, laid out for them. Doing ‘something’ to show their flock that they are not ineffective supporters of a credit cycle that enriches a few and is frankly a Ponzi.
Winnie also coined the ‘Truth is so important we must lie much’ not the quote but a translation.
How did Germany achieve full employment after the reorganization of currency? Hint: it ist verboten! Not much for the rich in that solution.
We have two political parties and a Mass media owned by the oligarchy. Until people are homeless, starving, and left with no other options I am not sure what you want them to do.
3 hots and a cot is survival for many.
USA the slave nation!
I could not pass this on to people to explain the situation, because it seems to make the assumption that wage growth is a bad thing. Wages have been artificially suppressed for many years, and if this is a time that they are being forced to rise by conditions, so be it. The Fed is not fighting inflation so much as crushing the workers before they gain any power versus the corporate establishment sitting on its hoards of profits.
After the inflation is crushed and as the rich buy up the useful assets at bargain prices, wages naturally increase their share of the economy.
The rich know this as they study history while ensuring that history is as obscured for others as they can possibly make it.
The Fed are merely pretending that they control interest rates, when they are controlled by those who control the bond markets. This is to preserve the fiction that inflation is the cause of the recent price increases…. Depression is going to deepen faster now, helping the distortions to disappear, eventually, but faster than if they continued to pretend that they can make money. Fictional reserve banking eventually peters out. Events are being managed to ensure that valuable fictions are undanaged as the old economy is reshaped.
Sept 2019 10% overnight interest rates …. that was the beginning of the end.
Interesting comment on this topic today at “Angry Bear.”
There are lots of surplus workers in the rentier sectors. Raise the margin requirements, maximize interest on re-po’s and minimize interest on reverse repo’s and Fed deposits, apply heavy taxes on speculative investments from house-flipping to credit-default swaps, institute a Tobin Tax, tax NGO’s. I’m sure I missed a lot. More brick-layers and fewer golfers means a decrease in GNP and an increase in NDP. De-growth can be a good thing.
Exactly!
FIRE has to resume its natural proportion. Property sales were seldom in the 1960s, pre inflation.
The worker “shortage” goes back to policy decisions made by the America oligarchs and American government. While most other governments paid workers to stay home, but stay employed, America had massive layoffs. Many Americans had to scramble their lives to survive.
Now, those same employers wonder what happen to all the workers (that they fired), and why won’t they “come back”. Those workers were FORCED to make other arrangements, and most will NEVER “come back”. In fact, the Fed policy is re-creating the VERY SAME CONDITIONS that created this situation – more layoffs, larger layoffs.
We are well into the definition of insanity with regard to American workers and employment, keep firing and laying them off, and expecting a different result.
Those employers that catch a clue, and offer more pay, more benefits, and STABILITY will most likely survive.
This writer and all the commentators, with their concern about “labor force participation” ratios in the US, seem totally oblivious to the–not an elephant, but a ten-ton mammoth–in the arena. This is a world-wide inflation, and its cause likewise is both world-wide and obvious: The planetary heating crisis. As global heating intensifies, so, and in greater proportion, does net planetary productivity (which determines the level of life for our, and most other, species), decline. Inflation, making all necessities of both consumption and production less affordable, directly enforces the ongoing reduction in quality of life made inevitable for most of humanity by the planetary ecological crisis.
There is of course, an exception. The topmost members of the ruling class, through their Central Banking Apparatus, can by unlimited credit creation inflate *their own* purchasing power is far as they wish beyond any price index. Which inflates even more the misery of the rest. As Intended.
Well, either that or a world-wide financial crisis. This financial crisis/inflation seems mostly man made to me. Otherwise the corporate profits wouldn’t be booming. Teh RU oil/gas imbargo drove up costs around the world for anything related to oi/gas. Oil companies are making out like bandits, as the saying goes. etc. Davos wants to tear it all down so they can build back better? Or something? ymmv. / ;)
See also Nouriel Roubini (paywalled)
The Unavoidable Crash
Dec 2, 2022
Nouriel Roubini
After years of ultra-loose fiscal, monetary, and credit policies and the onset of major negative supply shocks, stagflationary pressures are now putting the squeeze on a massive mountain of public- and private-sector debt. The mother of all economic crises looms, and there will be little that policymakers can do about it.
https://www.project-syndicate.org/commentary/stagflationary-economic-financial-and-debt-crisis-by-nouriel-roubini-2022-12?barrier=accesspaylog
There is a nice symmetry in today’s Macro-Economic policy and Foreign Policy.
Abroad: “We have to destroy the village in order to save it.” (Ukraine, Syria, Iraq….)
At home: “We have to destroy the economy in order to save it.” (Jobs, wages…)
Honestly, the Fed must known that most of inflation is being caused by companies to boost profits, not because they must. This smells of crushing the uppity proles, and their unions, into the mud to maintain the proper social order of things, here in the glorious empire.
I just don’t believe it is a ‘worker’s job market’ as this article claims, i.e. with plentiful jobs easy to obtain and employers eager to hire. Nonsense! It has never been like this in USA since at least the 1980s up to now. Getting a job in USA has always, always been a royal pain in the @ss! Get a permanent job? Dream on. Companies ALWAYS, ALWAYS use temp agencies so they can avoid paying vacation/sick leave/health insurance/etc. This is why the ‘gig job’ sector is growing exponentially: the last thing owners of a company want is to hire a permanent employee. If they can hire someone for a short period of time and then get rid of them when there is a lull or downturn–all the better: that means they keep more of the profit for themselves. USA is the very worst place to be a worker: no legally entitled maternity leave; a paltry week of paid holiday (many don’t take it as they are afraid of being replaced); no sick leave; no job security (most people are on temporary contracts or gig jobs); not to mention the cards are all stacked in favor of the owners or managers. You are essentially a wage slave in USA, what an awful place glad I got out :-)
Deschutes I concur. I too “ got out”. Left that Union job, which provided a living wage, benefits, ect… in 2019. Became a permanent resident in Mexico, 2022… originally, I was from Deschutes County, Oregon, North of Klamath County…your posting caught my eye due to this….
Why hasn’t anyone tried to use price regulation? It seems to me that the inflation was fabricated out of whole cloth, most particularly in the energy sector, which was the first to raise prices. Considering the enormously inflated profits the oil companies have taken in relative to the amount of oil they are selling, it looks an awful lot like predatory price gouging, which should be controlled.