Last Friday’s strong payroll data sparked a lot of discussion about the current labor situation. Often oversimplified and devoid of context, it has created a somewhat misleading image.
I have a few thoughts that I’ve been thinking about that will hopefully provide some of the missing context.
The labor market presents challenges for investors. Take as an example the rash reaction to last week’s NFP decline only to see markets close in the green at the end of the day. But it also matters to policymakers like the Fed; they fear that strong labor demand is driving upward wage pressures.1 My view is that it is complex and nuanced, in a way the Fed could perhaps overlook.
Many long-standing trends have led to the current problems. I suspect the most underrated aspect of the Labor puzzle is that the United States suffers from a shortage of workers. (increasing rates won’t do much to compensate for this.2 These are earlier trends that have accelerated during the pandemic.
Why does America have too few workers? Consider:
The Great Labor Reset: The last 3 years have seen record creation of new businesses. There are various theories as to why this is, but I suspect it’s just a lot of people buying into the American capitalist dream of being their own boss. That’s what happens when you lock people in for 18 months and give them a few trillions of dollars: a significant percentage of them will upgrade their skills and start their own stores. This is one of the most intriguing aspects of recent years.
Late wages: Among the bottom half of workers, wages have lagged in just about everything: inflation, productivity, stocks, executive compensation and median wages. At the entry level or minimum pay scale, it’s even worse (see chart above). Then came the balance sheet: After half a century of wages as a deflationary force, the Altered balance of power. What has happened since then is mostly catching up.
In many areas, it’s not so much that there aren’t enough workers, but rather that there aren’t enough workers at the low wages that companies used to provide. This revealed challenges in specific business models, including fast food and discount retail.
Immigration: As we discussed earlier, legal immigration to the United States has been slowing for decades (see charts here). Immigration peaked in the 1990s, slowed in the 2000s, plunged under President Trump in 2016, and continues at low levels under President Biden in 2021-22.
If we were to return to the level of immigration we experienced in the 1990s, it would go a long way to solving our labor shortage – approximately ~3,000,000 workers in the last 5 years (pre-pandemic) .
Disability/Long Covid: The increase in disability claims dates back three decades, then increased during the GFC and accelerated during the pandemic. That’s a big number – about 32.7 million Americans – and nearly 1 in 4 people in the labor force.
There is a growing number of people suffering from “Long Covid” – some estimates put it at around 15 million or more. Many of these people find that they can no longer work in cognitive-intensive jobs.
Note that this is a different reading from NILF, which is a predominantly male statistical oddity in labor data regarding who is “not in the labor force.” (We discussed this earlier3).
Covid deaths: The United States has had nearly 100 million reported Covid cases and more than one million deaths. These are only the reported numbers, the actual final numbers are likely higher.
So many people lost, it’s an American tragedy. The mortality rate is older, as is the case with many (most?) diseases. Beyond the personal losses, there is a substantial loss of employees. This is yet another reason why there are not enough workers
The bottom line remains that a robust economy, pent-up post-pandemic demand and massive fiscal stimulus have combined with its labor shortage to support ongoing job creation. I expect this to continue until the FOMC’s overly aggressive tightening regime starts to bite harder.
Which is worse: inflation or unemployment? (November 21, 2022)
The Great Resignation is Long Over (July 27, 2022)
Generational Minimum Wage Reset (November 30, 2021)
Who stops and why? (November 19, 2021)
Elvis (your server) has left the building (July 9, 2021)
Real wages (November 22, 2021)
The Great Reset (June 2, 2021)
Changing balance of power? (April 16, 2021)
Salaries in America
1. It is sad but amusing that mainstream economists have spent decades ignoring the deflationary impact of the lower half of the lagging economic strata as a source of deflation (especially the minimum wage). Ironically we get a reset and a pay rise and suddenly that’s the biggest problem and we have to do everything we can to stop inflation immediately, even if that means doubling the unemployment rate and cause a recession.
Look for a future article on the Fed against the poor.
2. At least not without causing widespread damage to the economy.
3. I have been discussing the NILF as an aspect of the labor pool for over a decade; See this, this, this, this, this, this, this, this, this and this.
#arent #workers #Big #Picture