What if the workers aren’t coming back?
Seemingly every update on the US labor market — every incremental data point — forces economists to ponder that existential question. And make no mistake. It is existential. Economically speaking.
“Capitalism without competition isn’t capitalism,” Joe Biden declared, in July, while unveiling an executive order aimed at promoting competition across the world’s largest economy. “It’s exploitation,” he added.
As I put it at the time, capitalism without exploitation isn’t capitalism either. In fact, capitalism is almost synonymous with exploitation. Show me a capitalist who isn’t exploiting something (or someone), and I’ll show you a capitalist who’s either already failed and just doesn’t know it yet, or else on the way to failing.
Although capitalism exploits anything and everything, labor bears the brunt. As an economic actor, labor has seen its power steadily eroded for nearly a half-century. “Silver lining” seems uncouth considering the staggering loss of life, but you could plausibly suggest that a desirable economic side effect of the pandemic is the demonstrable enhancement of labor’s bargaining power in the US.
No longer are workers begging to be hired and willing to accept a pittance for the “privilege” of running full speed in a hamster wheel all day. Instead, they’re quitting in record numbers (figure below), leaving employers begging to hire and pleading with existing workers to stay on, no matter the cost.
The situation is likely to get more acute. The longer consumer prices remain elevated (and the more broad-based inflation becomes), the more concessions workers will demand.
For some employers, the situation will become untenable. Small businesses and those operating on razor-thin margins won’t be able to pay and will eventually exhaust their capacity to raise prices to consumers. At that point, you automate, institute other cost saving measures or you close the doors.
While we should reserve some measure of sympathy for small businesses (which are responsible for around half of all US jobs), few tears will be shed for large corporations and multinationals. They can afford to pay up. And many are — paying up, I mean.
But as Goldman wrote in their 2022 US economic outlook, labor force participation in the US may not recover entirely from the pandemic shock.
“Participation is likely to remain below the pre-pandemic demographic trend, with most of the early retirees — who account for almost 40% of the remaining gap — staying out, and even some of the younger and middle-aged workers staying out too,” the bank’s Jan Hatzius said. The bank sees the participation rate eventually rising to 62.1%, still a half percentage point below the pre-pandemic trend (figure on the right, below).
Hatzius went on to juxtapose the current conjuncture with the last cycle when “a lack of job opportunities led to widespread worker discouragement.”
The current environment is “very different,” Goldman said. Job openings have never been more abundant on almost any measure you care to consult, so “any decline in the participation rate that remains by the middle of next year is likely to be mostly voluntary or structural,” Hatzius remarked, before enumerating several “non-economic” reasons to explain sidelined workers.
The figure on the right (below) shows the evolution of “excuses” (and you’ll forgive the word choice — it’s not meant to be pejorative) over the past six months.
Goldman suggested the White House’s social spending plan — watered down though it most assuredly is — could have “meaningful” consequences for participation. Hatzius specifically mentioned the child tax credit.
Ultimately, the bank said, “strong labor demand coupled with tight labor supply should generate sustainably strong wage growth.”
The near- to medium-term question is whether wages can keep up with inflation, especially to the extent higher pay feeds into higher prices (i.e., the “spiral”).
Coming full circle, the longer-term question is whether labor, 50-years scorned, decides to simply stay home. Forever.
Labor has been attacked, beaten, and raped since it snuggled up to Ronald Reagan during the Reagan revolution. Organized labor will never be as organized as it once was. But neither will job markets be as limited as they were in the 20th century. The tendency to take advantage of workers is biting employers on the tail wanes today. But more worker organizing is happening. And individual workers willing to take risk are asking for better compensation. As always the question is: what will the market bear? But it’s about time.
I believe I must disagree with some of Goldman’s conclusions/forecasts. Those who decided to retire early during COVID, resulting in a decline in the workforce, may not fare very well, income-wise, if the market corrects. Already I am reading several opinions that the so-called “4% rule” for spending one’s nest-egg is too generous and with a 5-10% correction early in the retirement process the sequence of returns risk will quickly rear its ugly head. Couple that with higher inflation and low real rates and it would be shocking if many of that 40% lump of missing workers won’t be ready to look at picking up some gig work, if not returning to the workforce in the next 12-18 months.
Student loans kicking in, open airports, foreign workers will have some effect. Labor will take the win anyway they get it.
Well put, sir.
Early last summer a semi-well-known fund manager was in our office. He was fairly anguine about the labor supply rebounding once school closings and benefits rolled off. I suggested that more workers might be available once many marginal small businesses that rely on minimum wage labor would inevitably shut down. Especially since larger national chains might be better able to offer and absorb higher wages than the local sandwich shop.
His eyes widened in horror but he did not contest that notion.
But I even wonder about the similar low-wage models underpinning larger companies, such as Uber. How much pricing power to offset higher driver payouts do they actually have?
H-Man, the WSJ published a piece today that talked about corporate America is doing just fine passing on all the increased costs, including labor, and is making more profit than before the onset of Covid. I think labor has a lot more pricing power than credit is being given.
And labour still has to eat.
OK. But what do we make of the statistics showing that salaries offered, after inflation, are up meaningfully for leisure and fast food, arguably important sectors but that’s about it. Other sectors are far less impressive…
I think what everyone needs to remind themselves of is, how labor participation was viewed in the golden years. As labor’s power diminished, so too did the value of labor to the economy more broadly. Executives and investors reaped the rewards of labor’s fruits while labor was viewed as an easily dismissed and replaced entity. From a creative and technologic standpoint, the only reason we have anything cool is because labor created it, not some shiny executive who showed it off during a scripted conference.
In order to solve the labor problem, the view of what labor is and does inside of the world’s largest economy needs to change. Labor should be viewed as an equal partner in participating in the economy. With all of the government support being weighted towards capital and supporting that piece of the economic exchange, labor has been diminished to an almost serf like status. If you want labor to return, willingly, then labor needs to be given the respect that it is due.
What I suggest needs to happen is that instead of treating labor like a given. Employers need to start asking existing and potential new hire employees what they want in exchange for their labor. Instead of paying hundred million dollar CEO’s, companies are probably going to have to revisit things like stock options, pensions, and full healthcare benefits. If labor is creating “the next big thing” and spending 80-120 hours a week doing it. The probably want a share of the profits from that creation too. While very few would agree that labor deserves this level of compensation, it’s how this arrangement was supposed to work.