Jobs report in light of what Powell said: Fed can’t create labor supply, but could slow labor demand

Wolf Richter, editor wolf street. Originally published on Wolf Street.

layoffs in the tech and social media bubble quickly absorbed by other companies, including those in other industries, while the number of layoffs and layoffs in all industries is close to an all-time low, and unemployment insurance claims remain near historic lows. Wages continued to rise; and for those jumping out of work, wages have skyrocketed as desperate companies are willing to pay to fill vacancies, amid a giant pile of vacancies and massive job changes as workers take advantage of a tougher job market.

And today we got the same thing with the jobs report from the Bureau of Labor Statistics. The workforce — people who either have jobs or are actively looking for work — continues to be a key issue: it has declined even further and remains far below the pre-pandemic trend. This is a labor supply.

Powell, in his speech two days ago, focused on the labor force. He pointed out that the Fed cannot increase the labor supply and the Fed cannot increase the labor force; but the Fed can crack down on labor demand, align supply and demand, to tamp down inflationary pressures that come as companies pass on their rising labor costs through higher prices. This is especially a problem in services, where raging inflation has now taken over. And in many services, labor cost is a huge factor.

And it’s happening everywhere now: service companies are saving on their rising labor costs by driving up prices.

The Fed is now trying to reduce this demand for labor—in addition to lowering demand for goods, services, and investment—by fastest rate increase in four decades as well as with the fastest QT ever.

But it doesn’t work yet. Consumer demand is not growing, and the labor market is also not landing. Mrs. inflationary pressures persist, especially in “essential services” where labor costs are a huge factor.

The labor force is not returning to the trend.

Work force – people who either have a job or are actively looking for work – fell by 186,000 people in November, the third straight month of decline, to 164.5 million, roughly in line with pre-pandemic levels but still strikingly far below the pre-pandemic trend.

In other words, a workforce that had been growing for decades stopped growing as soon as it recovered from pandemic lows.

In a speech two days ago, Powell pointed to a labor force “shortage” of about 3.5 million compared to pre-pandemic trends, citing data from the Congressional Budget Office and the BLS. And I get roughly the same, based on the BLS data and my own calculations: a “shortage” between 3.5 million and 4 million:

Where does this deficit come from?

Labor force participation rate – the labor force as a percentage of the working-age population 16 years and older – decreased for the third month in a row to 62.1%. This year it went backwards:

Labor force participation rate in its prime – people aged 25 to 54 years, which offset the effects of the pension boom – also fell for the third month in a row to 82.4%, but close to what it was before the pandemic (83.1% in January 2020 and 83. 0% in February 2020).

This shows that the biggest problem in the labor force is not the “most working age” segment of the population, but the over 54 segment:

Powell on why there is a “shortage” of labor.

In his presentation, Powell discussed two categories of causes responsible for most of this “shortage” of about 3.5 million people in the labor force: excess retirement and slower growth in the working-age population.

“Superpensions”: 2 million of the 3.5 million arrears in the labor force. Extra retirement is more retirements than would normally be expected from aging alone. Powell was referring to a recent study at his store.

According to Powell, what could have caused these excessive pension contributions:

  • Health concerns: “COVID poses a particularly big threat” to older people.
  • For older workers who lost their jobs during the mass layoffs, “the cost of finding a new job could seem especially high given the disruption to the work environment and health problems caused by the pandemic.”
  • “Stock market gains and rising house prices in the first two years of the pandemic contributed to increased wealth, which likely contributed to early retirement for some people.”

According to Powell, they don’t retire:

“The data is so far gone No suggest that excess retirements are likely to decline as retirees re-enter the labor market. Older workers are still retiring at a faster rate, and retirees do not appear to be returning to the labor market in sufficient numbers to significantly reduce the overall number of excess retirees.”

Slowing growth in the working-age population: 1.5 million out of a 3.5 million deficit in the labor force. “The combination of a sharp decline in net immigration and a sharp increase in deaths during the pandemic likely explains about 1.5 million missing workers,” he said.

The Fed cannot increase the labor force, but it can reduce the demand for labor.

The Fed’s tools “work largely on demand,” Powell said. According to him, the Fed is not obliged to increase the supply of labor. But this may reduce the demand for labor.

And we knew that: Higher interest rates make consumption and credit-financed investment more expensive for consumers and businesses, and they go down, reducing the demand for labor. Declining asset prices increase uncertainty among businesses, new projects are being phased out, etc., further reducing the demand for labor.

“In the near term, a slowdown in labor demand growth will be required to restore balance in the labor market,” he said. It was very hawkish.

And he’s become even more hawkish in light of today’s job data. So higher interest rates and more QT because these are the tools the Fed needs to keep labor demand in check, which will reduce the rising cost of labor that companies are passing on to consumers through higher prices.

But the demand for labor has not cooled down: aggressive hiring has pulled people out of self-employment.

The number of people in the workforce who are not working has been close to historic lows. In November, it fell further to 6.0 million unemployed. There have been only three short periods in the past five decades when the number of unemployed in the labor force has been this low.

What are employers doing to fill their open positions? They aggressively hire and offer higher wages to attract workers who already have a job (creating current employee turnover) and to attract workers who are self-employed…

Transition from self-employment to regular wages manifests itself in the gap between the growing number of workers receiving regular wages, according to employers, and the stagnant number of all workers, including the self-employed, in line with the stagnant labor force, according to households.

Increased the number of employees receiving regular wages by 263,000 in November compared to October and up 816,000 in the last three months and 1.9 million in the last 6 months, to 153.5 million employees, up 1,044 million from February 2020, according to survey of employers.

But the total number of workers, including the self-employed, has declined. by 138,000 in November and down 262,000 over the past three months to 158.5 million, still down 396,000 from February 2020, according to the household survey.

Both indicators – wages and the total number of employees – are also well below pre-pandemic trends.

The stagnation in the total number of employees, according to the household survey, and the increase in regular wages, according to the enterprise survey, show that employers’ attempts to fill vacancies by offering higher wages and better benefits attract the self-employed to employment, while the total working people did not increase this year.

This situation where employers are struggling to fill jobs – the demand for labor is greater than the supply of labor – is good for workers. It changed the balance of power and it continues.

But now inflation is rampant, and that inflation is fueled by a complex combination of factors, including massive amounts of money printing, interest rate crackdowns, and stimulus spending, to create the most wildly overstimulated economy ever, and that money is still in circulation. there, and it still creates demand for goods, services, and labor. And the Fed is now trying to suppress that demand, including the demand for labor, through as Powell pointed out, even higher interest rates, even longer.

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