Demographic denouement, an end to an era of fluid labor supply leaving the world exposed to the eventual maybe inevitable, they say, sustained rise of cost pressures. A globalized economy, as it was from the fifties until, say, August 9, 2007, had meant a widely available cheap pool of previously untapped labor easily mobilized once the (euro)dollars were secured. The whole world benefited from the exchange, though some far more than others.
The labor theory of inflation is as old as AW Phillips’ work linking higher levels of employment with a possible acceleration in consumer prices. If companies have to compete for few remaining workers, wages skyrocket which forces rational profit-seeking companies to pass those surging input costs to their consumer customers.
With oceans of possible foreign labor unlocked in the eighties and nineties, competition for the marginal worker tumbled as did the structural rates behind CPIs the world over.
Nowadays, deglobalization is as ever-present as economic “cooperation” had been only fifteen years ago. Most are pressed into thinking about it in terms of inventory or the creation of goods, meaning in the post-COVID world companies first had to come to terms with the downsides to just-in-time flows of raw materials all-too-easily interrupted, it would turn out, by government busy-bodies here, there, and everywhere in between.
You hear it all the time, how it is time for each to “rethink” their individual supply chains; and that’s even before getting into the geopolitics closed over everything from rare earths to basic Ukrainian-grown wheat.
Not just in materials, though, labor, as well. Should China grow even more adversarial, Heaven forbid mimicking the Russians’ reckless adventure with its own attempt to secure Taiwan, such might further section off what had been the primary ocean of human endeavor for that prior globalization period (or, from China’s perspective, Socialism with Chinese Characteristics, Deng Version).
There’s also the not-insignificant fact Western Societies themselves are undergoing their own internal transformations. Demographically speaking, we got old; really old. Children and child-rearing less of a life goal in wealthier societies, population growth (and the spacing out of child births to older mothers, on average) has materially slowed, too, in many places alarmingly low rates of births far below replacement.
This somehow adds up to 1975, according to some. Without those favorable labor trends, the two “D’s” of demography and deglobalization are about to unleash a tidal wave of cost-pushing pressure no economy will be able to withstand.
Among those making this case is British Economist Charles Goodhart. In an interview with the Wall Street Journal this week, the former member of the Bank of England’s Monetary Policy Committee (because they’re all Economists) warned that inflation will go higher than it is now and will stay this way “for decades.”
As if the Phillips Curve-centered view hadn’t burnt enough policymakers sufficiently over the last decade, the Journal further warns us how, “Central bankers around the world are listening” to Goodhart.
Good God.
To this day, there is a fierce brand of Economics which still insists upon the so-called cost-push version of inflation predicated on workers making “too much.” Forget populism, this is just bonkers and betrays a tradition steeped in pure academy. You can practically hear the speeches of Samuelson and Solow from 1961 echoing to the rest of us as a warning about what not to believe when for many inside the Ivory Tower it remains as canonical law despite the world’s experience during the Great Inflation.
In some sense, this is understandable – even if by no means commendable. The labor market (not just in the US) has had these Economists confused for years. Red hot, they’d say, downright booming, and therefore predict the Phillips Curve trade off (even if not the original predicted relationship, covered in the modern trappings of an Expectations-based Curve it is no different) to set fire to CPIs.
Quite famously, the more the financial media reported there must have been a “labor shortage” in 2018, the more aggressive helpless Jay Powell became in his Quixotic quest for Volcker-like inflation-fighting glory. He found neither the consumer price acceleration nor the stardom he sought, only the embarrassment of 2019 long since forgotten.
Because “we” never learn even from recent experience, the labor shortage began making its comeback around this time last year. But something was off about this one, too. At the end of last year, confounded The Washington Post called it “the most unusual job market in modern American history.”
“…despite companies going all out to hire, millions of workers either retired early or stayed on the sidelines. These two forces collided to create the most unusual job market in living memory — and an economy afflicted not by too few jobs, but too few workers.”
Unusual, though? No. This was the standard line of thinking put forward three years ago. That companies were falling all over themselves to secure labor, only they reported – and media outlets like The Washington Post reported it as fact – tremendous, awful difficulties in hiring. The demand for labor was through the roof, for “some” reason American workers just couldn’t be located or if found couldn’t be convinced to come on in and sign up.
Thus, labor shortage.
As widespread and intense as it was made to seem back then, last year’s complaining put it all to shame. Back in May 2021, Bloomberg upgraded the alarm calling this a full-on “jobs paradox” which was baffling Economists (apart from Mr. Goodhart). Again, the same basic premise put forward:
“As the U.S. job market comes roaring back, there’s a growing debate about whether there are enough workers to power faster economic growth.”
What should have been baffling instead is how such claims would be made given the actual data. Anecdotes had been all-too-frequently substituted for it during the 2018-19 “labor shortage” debacle. By 2021, even with reopening processes turbo-charging the pace behind the return-to-work phenomenon, the shortfall was always right there visible to anyone who might be honest enough to look behind the reporting.
Not only is the US economy (and other economies around the world) to this day still several million jobs short of its prior peak set all the way back in February 2020, now a full two years behind, that did not count at the very least four if not far more realistic five million jobs which never had a chance to get created through the bureaucratic-inspired nightmare of pandemic politics and their effects on actual, formerly-living and breathing businesses.
Yes, there’s an enormous shortage, all right, but it’s not a labor shortage at all.
Undeterred, mainstream commentary shifted its ire back onto the American workforce, just as it had been told to do three and four years ago. In the initial runup to the 2018 “labor shortage”, ever since the unemployment rate first dropped below 6% way back in 2014, Economists have scapegoated US workers for all economic (small “e”) ills great and small.
Of the great variety, the participation problem was said to be lazy, drug-addicted low-skilled laborers who refused to get off opioids and go back to school. The labor force participation rate had plummeted in the wake of the Global Financial Crisis’s Great “Recession”, and rather than believe that contributed a permanent shock to economic potential and therefore a recovery not labor shortage, it was rather easy to so casually cast blame to the very powerless Americans who have suffered the most for all these other harms.
Beyond disgusting.
Last year these factors were given a name to go along with a new excuse, called the Great Resignation. In addition to still being riddled with addictions and near-universally averse to classroom training, supposedly the laziness of the American (and others) workforce has found another angle promoting post-2020 still-lower participation: vacay.
Live your best life, someone said, and according to the 2021 labor shortage theory that’s what many have decided to do. Corporate America wants to hire millions upon millions more, but those multitudes cannot be lured back into the job market for the leisure-time which awaits the bold.
There’s even data for this one, apart from the unemployment rate. In the BLS alternate series on labor turnover, called JOLTS, it includes rates for hiring as well as quitting. As to the latter, Quits, the government’s labor-watching people believe the number of formerly employed American workers who have said “take this job and shove it” to their employer has gushed well beyond any past experience, appearing to give credence to this YOLO labor laziness.
While almost certainly there are some significant numbers who are doing the Great Resignation for strictly personal life reasons, there are other far more likely and comprehensive explanations; starting with the same one which had solved the labor puzzle before.
Companies, for all the media fury, are either unwilling or unable to pay the market-clearing wage or weekly pay (meaning hours, too) to pull former workers back into the labor market and keep current workers from fleeing.
When the Quits number from JOLTS first accelerated, I wrote in early June 2021:
“Companies, especially small and medium-sized businesses, the same who claim to be most hard-pressed to find workers, are and have been deeply hurt by the recession. Thus, the pay mis-match. We’ll start you out low because that’s all we can afford, but don’t worry we’ll bump you up just as soon as this red hot economy (Warren Buffett said so!) gets only hotter. But if all that heat turns out to have been hot air? The longer real recovery doesn’t happen, the more it becomes apparent to newly rehired or hired labor it isn’t going to. See ya!”
Not only gross economic lethargy described in the payroll count, there’s also spending data which remains truly atrocious even after Uncle Sam last year injected his trillions.
Spending on durable goods has been epic and historic, meanwhile consumer spending has been awful on services; the latter the far larger category. Whereas all attention and, yes, price behavior has been focused on goods, the ongoing recession in services goes on and on unappreciated. Combined, huge spending on goods with under-spending on services has left the entire US economy with materially less consumer spending overall than it would have had had the 2020 recession not gone on.
That ends up with too few jobs, not too many lazy.
And when I write “jobs”, it’s always a double-whammy. Companies that aren’t paying enough to get new workers in the door (or rehire workers that they previously laid off), those recovery-starved businesses also aren’t going to be offering the employees they do have much by way of opportunities for advancement. Macro-constrained labor hits hard in several different ways.
Earlier this week, Pew Research Center dove deep into the Great “Resignation” in order to find out from those quitters just why they quit. Was it living their best life after all? Of course not.
“A new Pew Research Center survey finds that low pay, a lack of opportunities for advancement and feeling disrespected at work are the top reasons why Americans quit their jobs last year. The survey also finds that those who quit and are now employed elsewhere are more likely than not to say their current job has better pay, more opportunities for advancement and more work-life balance and flexibility.”
An equal 63% of those Pew surveyed who had claimed to have resigned in 2021 cited pay or lack of advancement as either the major or one minor reason why they did so. More than a third said those were their primary reasons.
Pay.
Companies are not paying the market-clearing wage, many can’t because the economy just isn’t as red-hot as consumer price indices might make it seem. On the contrary, the hotter the CPI the more these firms will struggle to afford labor; rising materials input costs given minimal revenue growth or worse (remember, CPIs are being driven by a narrow subset of consumer goods meaning only a small slice of businesses are having any success passing along rising inputs) will leave firms even less room for wages.
Advancements suffer, too.
Again, this economic illiteracy remains widespread even though it has been thoroughly explored for half a decade already. An example, here’s what I wrote back in July 2017 when, yes, that far back, the labor shortage thesis had already begun being put forward:
“Instead, there is an unspoken stipulation that is never explicitly stipulated. Businesses are surely finding it difficult to hire good workers at the rate they today want to pay. Obviously, that rate is insufficient so as to clear market demand for supply. Why don’t they pay that market-clearing rate?”
That is the only question we should be asking ourselves even today. There is no labor market paradox, nor is there some labor shortage. The economy, put simply, is nowhere near some inflationary minimum - should such a thing actually exist.
And yet, Jay Powell has let himself be cowed into acting as if one was reached quite some time ago, back last year; the Great Resignation is right at the top of the FOMC agenda instead of an honest review of actual, workable economics. Policymakers will be raising rates starting next week because…of course they will.
Markets easily bet against these rate hikes and the inflation-labor theories backing them. Demographics may pose serious challenges down the road, but not where spiraling consumer prices come into anything. Deglobalization, on the contrary, grounded to that singular question, really understanding why businesses can’t seem to pay sufficiently, this, sadly, remains the future and it is one where rates hardly advance anywhere just like the far, far too many American workers.
