Complexities of a Disordered Labor Market: Why Clamping Down on Inflation Could Get People Back in the Workforce

Complexities of a Disordered Labor Market: Why Clamping Down on Inflation Could Get People Back in the Workforce

Complexities of a Disordered Labor Market: Why Clamping Down on Inflation Could Get People Back in the Workforce

Wages jumped, but galloping inflation crushed the purchasing power of those wages.

By Wolf Richter for WOLF STREET.

Employers added 428,000 workers to their payrolls in April, according to the Bureau of Labor Statistics today, bringing the total number of employees to 151.3 million. Over the past three months, employers have added 1.57 million employees.

But the number of employees remains well below the pre-pandemic trend (green line), and remains below the peak just before the pandemic:

Employers of all kinds bemoan the difficulty of hiring people. They raised wages in order to hire and retain people, and now there is huge turnover, with employers attracting workers from other employers. But they are unable to attract enough new or sidelined workers into the workforce, and these “labour shortages” continue to limit hiring.

Households reported that the number of workers – including self-employed, gig workers and contractors who are not included in the employer data above – fell by 353,000 in April, but during in the last three months, it jumped by 931,000, bringing the total to 157.7 million workers.

This decline in April is reminiscent of the occasional month-over-month declines before the pandemic, such as in September 2015, October 2017 and August 2018 which, in hindsight, were not a change in trend but monthly noise. .

Labor and “labour shortages”.

The jobs report released today is based on two massive groups of surveys: a survey of employers; and the other goes to households. They each give a different vision of the labor market, one on the employer side, the other on the household side. The active population, the number of unemployed, the unemployment rate, etc. are based on the household survey.

The labor force – people working plus people looking for work – fell in April by 363,000 people, similar to pre-pandemic troughs and troughs along the trend line.

At 164.0 million people, the labor force was still well below the pre-pandemic trend (green line) and 537,000 workers below the peak just before the pandemic:

The well-below-trend labor force is another manifestation of the “labour shortage”. This shows that there are many people in the United States who could work but are not in the job market for some reason.

Among the reasons for the below-trend labor force are persistent health problems, difficulty finding affordable child care, a well-documented wave of above-normal retirements, people not working because they have earned a lot money through stocks, cryptos and real estate. over the past few years (now declining), and people who are out of work because they decided to day trade to make their way to a fulfilling life. There was some of that during the dotcom bubble, and some of that reversed during the internet crash. So let’s see.

The “labour shortage” is also documented by separate data from the Bureau of Labor Statistics by the spike in job postings which reached a record 11.5 million in March, up 36% from than a year ago, and up 57% from the same month in 2019. There were 4.2 million more job openings in March than before the pandemic! Employers all hammered home the same point: it has become very difficult to fill vacancies.

Wages jumped, but runaway inflation far outpaced them.

Overall average hourly earnings rose to $31.85 in April, up 5.5% from a year ago. Beyond distortions during the pandemic, April and March were the largest year-over-year increases in data dating back to 2006. This category includes supervisors and management, as well as employees of all kinds in all Industries :

The distortions during the pandemic occurred when millions of low-wage workers were laid off while office workers shifted to working from home, which took millions of lower-paid workers off the average hourly wage, thus inflating the average hourly wage. And when they returned to work, their lower pay brought the average back into range.

Average hourly wage of non-manager workers, “production and non-supervisory employees” is a data set that goes back several decades and includes workers in all industries in the private sector, and in all jobs that are non-manager jobs, ranging from servers to Google coders.

For these non-executive workers, the average hourly wage reached a record $27.12, up 6.4% from a year ago. Besides the spring 2020 lockdown distortions, the last five months have been the biggest year-on-year jumps since the start of 1982. This confirms other reports that percentage wage gains – not dollar wage gains!! – have been strongest at the lower end of the wage scale.

Galloping inflation and the active population?

These large wage gains were not enough to keep up with inflation. The consumer price index (CPI-U), the most often cited measure, jumped to 8.5%.

The less often quoted consumer price index for all urban wage earners and office workers (CPI-W), which is used for Social Security COLAs, jumped to 9.4%.

So, with average wage gains between 5.5% and 6.4%, the purchasing power of these rising wages has been crushed by runaway inflation.

Rampant inflation is the enemy of working people. For workers, inflation is not good. They are the losers of this deal. There are beneficiaries of inflation, including companies that can raise their prices to anything, and heavily indebted entities with fixed-rate debt, but they are not workers. They are being hammered by this inflation.

This galloping inflation could thus partly explain the particular phenomenon which explains why the strong wage increases have not been large enough to bring people back into the labor market: lower “real” wages are not enough of an incentive to join the frantic race.

One might then assume that much larger wage increases will solve labor shortages. But much higher wages would further fuel the wage-price spiral, and wages could never overcome it, and “real” wages would continue to fall, which would then in effect provide no incentive to re-enter the labor force, and would not improve labor shortages.

The other option is to repress inflation, which would allow wage gains to catch up with price gains and perhaps it would be worth joining the rat race again. That’s what the Fed is trying to do now, even if too little too late. And the Fed cited the labor market as one of the reasons for its inflation crackdown.

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