On My Mind: To Work, or Not to Work | Franklin Templeton
First, because it’s holding back growth and fuelling inflation pressures. Second, because it makes it harder to reduce income inequality. Third, because it undermines future employment growth by slowing the build-up of skills in the labour force and pushing companies towards automation.
What is happening to the US labour market, and why? Below I assess the five key issues:
While labour demand has been recovering at a strong pace, many workers don’t seem to want to get back into the game. Labour force participation suffered a prolonged decline between 2000 and 2015, stagnated for a few years, and finally began a timid recovery in 2018-19, but the pandemic lockdowns knocked it down again and now it seems unable to get back up.
This is partly due to older workers who decided to retire earlier (the 65+ age labour force is running approximately 1 million workers below the 2007-2019 trend); but partly to younger workers sitting on the sidelines—the participation rate for people of prime working age (25 to 54 years old) is 1-½ percentage points below the pre-COVID peak.
Rise in job switching
This makes little sense given that vacancies are especially high in leisure and hospitality, where most jobs do not require specialised skills. And companies are getting so desperate for workers that they would be happy to offer training to new workers.
Higher government subsidies
But probably more important is that households came out of the pandemic in a strong financial position, with high levels of financial assets and savings; and many households are still benefitting from generous government support.
Higher inflation has triggered a sizeable 5.9% cost of living adjustment (COLA) for Social Security beginning January 2022 (the highest since the 7.4% increase in 1982), affecting nearly 50 million retirees and their dependents. Retirees’ pensions should be protected from inflation, but this also implies that rising prices will not induce older workers to get back into the labor force.
All these factors suggest that the labour market response will remain sluggish for quite a while. Over the past couple of decades labour had lost bargaining power, and its share of income has declined in favour of profits. This is now reversing, due also to the retreat of globalisation and the government’s friendly attitude towards trade unions. This is not necessarily a bad thing, but in the short term, it is unambiguously inflationary. True, this is not like the 1970s, when wages were often indexed to past inflation; still, today employers have to raise wages to attract workers, and they have sufficient pricing power to pass higher costs down into higher prices.
For the medium term, the implications are more complex. If weaker labour supply dynamics become entrenched, they will tend to lower potential growth; technological innovation and automation will push in the opposite direction, boosting productivity. The net effect is as uncertain as it is important—with weaker economic growth, higher debt levels and rising social security obligations would jeopardise financial stability and could cause major bouts of volatility in asset prices. Stronger economic growth would have a stabilising effect, but the combination of faster technological innovation, lower labour force participation and higher government subsidies could entrench and perhaps worsen income inequality.
An acceleration in labour supply would be the best guarantee of stronger and healthier economic growth.
For now though, investors had better prepare for sluggish labour supply, persistent inflation and rising financial volatility.
Posted in Fixed Income, PerspectivesTagged COVID-19, economic growth, fixed income, Inflation, Monetary Policy, On My Mind, Sonal Desai, US labor market
Notes from the Trading Desk – Europe	December 6, 2021