About the Author: Joe Sullivan is a Senior Advisor to the Lindsey Group. He served from 2017 to 2019 as Special Advisor to the Chairman of the White House Council of Economic Advisers. His opinions do not necessarily represent those of his employer.
Federal Reserve Vice Chairman Lael Brainard spotted something “very unusual” in the labor market. The number of job vacancies remains high. But not enough people want those jobs, and the share of the US population that has or wants a job, its labor force participation rate, is not growing.
For the crime of aiding and abetting inflation accelerating well beyond its 2% target, the mighty Fed is about to end this labor shortage. The device the Fed plans to use to end these “supply-demand imbalances” is familiar from previous central bank campaigns against rising consumer prices: higher interest rates.
This new effort will fail. Interest rate hikes cannot alleviate the shortage of people able and willing to work, relative to the number of people companies want to hire. Of course, holding today’s job market to a static snapshot of its pre-pandemic self tends to make it look “very unusual.” But labor markets are never static. The US economy was moving towards a new normal of relative labor shortages even before the pandemic. This new normal is now here to stay. Even the Fed can’t kill him now.
A statistic often touted in today’s headlines illustrates the problem: there are more jobs to be filled than there are unemployed people, that is, those who want a job but do not have not. It’s true, but it was also true for the two years before the pandemic. According to data from the Bureau of Labor Statistics, job openings exceeded the number of unemployed for the first time in March 2018. In February 2020, there were 1.3 million more job vacancies than unemployed. (A month later, the pandemic caused the number of unemployed to exceed the number of vacancies by 1.2 million.)
At 4.28 million, the excess of job vacancies over the unemployed in October 2022, the latest month for which data is available, exceeds its February 2020 level. But is it really higher than it looks? would be without a pandemic? The Fed Ph.D. Army. economists would surely try to answer the question with decipherable models and techniques only for those who have learned the required Greek. But a simple analysis can find at least a preliminary answer: no.
If you were to try to predict the current level of vacancies versus unemployed based on pre-pandemic trends, completely ignoring the disruption of the pandemic, you would end up with an estimate of 6.95 million vacancies. employment more than the unemployed, compared to a true value of 4.28 million. This estimate simply assumes the continuity of the trend that prevailed between August 2009, the first month after the end of the 2008-2009 recession, and February 2020, the last month before the pandemic hit the economy. If this trend had simply continued after February 2020, in October 2022 there would have been 6.95 million more job vacancies than unemployed. In reality, in October 2022, they were 4.28 million.
That forecast would have been wrong by 2.67 million jobs, of course. But the significance of the error lies in its direction rather than its size: it produced a number that was upper that number, in fact, is. The implication is that today’s labor market, tight as it is, is looser than it would be if the pre-pandemic trend had simply continued. This should caution you against assuming that narratives that present the current tight labor market as a creature of the pandemic are accurate. Statistically, naively extrapolating the trend that prevailed between August 2009 and February 2020, knowing nothing of any pandemic, one would expect a labor market at least as tight.
For all its economic naivete, this exercise traces the reality of a tectonic shift in the US economy: the arc of its labor market has, for decades, bent toward scarcity.
The shape of this arc is clear if you consider the aggregate US labor supply as the sum of male and female labor supply. Since the Bureau of Labor Statistics has been collecting the data, since the 1940s, it measures declines in the labor force participation rate among men. From the 1940s through the early 2000s, however, the “Quiet Revolution” enabled an increasing proportion of American women to work outside the home and increased women’s participation in the workforce. Since this increase more than compensated for the decline in male labor force participation, the overall labor force participation rate increased from the 1940s to the 2000s. But female labor force participation reached a plateau in the 2000s. And once that plateau appeared, the decline in male labor force participation rates eventually began to drive down the overall rate. Since then, the overall rate has been falling, as has that of men.
This dynamic is unfortunate for those in the Fed who are determined to correct “imbalances” in the labor market. Because recessions push men out of the labor force, if the Fed raises interest rates high enough to cause a recession, it will only worsen the labor shortage in the United States. With the exception of the recession that ended in April 1958, every recession since World War II has ended with male labor force participation lower than it began. This mirrors the pattern that appears in layoffs during recessions. At least since 1969, in every US recession through 2020, men have lost more jobs than women.
On why it is men who quit work and face the brunt of layoffs during recessions, interpretations vary. But they are irrelevant when it comes to the Fed’s course of action. The point is that higher interest rates would accelerate men’s exits from the labor force, which unless there is an increase in female labor force participation which has not yet shown any signs of onset, would exacerbate the “very unusual” scarcity of labor in the world. United States.
In 2017, Brainard, already governor of the Federal Reserve Board but not yet vice president, opined that lower interest rates and looser monetary policy could halt the long-term decline in labor force participation. . Now, in 2022, she believes that tighter monetary policy and higher interest rates can arrest, if not halt, the long-term decline in labor force participation. If the Fed now plans to wait until labor market participation rises before pausing or reversing its interest rate increases, eventually it will, if not raise interest rates higher, at least hold them there. a high level for longer than it otherwise would. . This would compound the pain felt by all who suffer when interest rates rise: the size of GDP, housing affordability and the value of financial assets.
Fed Chairman Jay Powell invoked the historic precedent of Paul Volcker, the Fed Chairman widely credited with controlling inflation in the 1980s, when he spoke of the Fed’s fight against inflation today. But he must bear in mind that history tends to rhyme rather than repeat itself. He enters the battle in the face of a job market different from that which existed in the 1980s.
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