The complexities of a cluttered labor market: Why a downturn in inflation could bring people back to the workforce

Wages rose, but furious inflation crushed the purchasing power of these 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 is still far below the pre-pandemic trend (green line), and remains below the peak just before the pandemic:

Employers of all kinds have lamented the difficulty of hiring people. They have raised wages to hire and retain people, and there is now a huge churn, with employers luring workers from other employers. However, they are not able to attract enough new or juxtaposed workers into the workforce, and this “labor shortage” continues to limit employment.

Households reported that the number of people in employment – including the self-employed, concert workers and entrepreneurs not included in the employer data above – decreased by 353,000 in April, but over the last three months jumped by 931,000, bringing the total to 157.7 million workers.

The decline in April is reminiscent of sporadic falls from month to month before the pandemic, as in September 2015, October 2017 and August 2018, which in retrospect was not a change in trend, but noise from month to month. .

The labor force and «labor shortage».

The job report released today is based on two massive groups of surveys: one survey goes to employers; and the other goes to households. They each give their views on the labor market, one from the employer side, and the other from the household side. The labor force, number of unemployed, unemployment rate, etc. are based on the household survey.

The labor force – those who work plus those who are looking for work – fell by 363,000 people in April, in the same way as the decline and the decline before the pandemic along the trend line.

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

The labor force far below the trend is another manifestation of the “shortage of labor”. It shows that there are many people in the United States who can work, but who are not in the workforce for whatever reason.

Among the reasons for the labor force under the trend are ongoing health problems, difficulties in finding affordable kindergartens, a well-documented above-normal wave of retirees, people who do not work because they made a lot of money on stocks, crypto and real estate. in recent years (now declining), and people have not worked because they have decided to trade themselves into a fulfilled life. There was some of it during the dotcom bubble, and part of it turned under the dotcom bust. So let’s see.

“Labor shortages” are also documented by separate data from the Bureau of Labor Statistics in the increase in vacancies which reached a record 11.5 million in March, up 36% from a year ago, and up 57% from the same month in 2019. There were 4.2 million more vacancies this March than before the pandemic! Employers have all hammered in the same point: It has become very difficult to fill vacancies.

Wages rose, but furious inflation far exceeded them.

Overall average hourly earnings rose to $ 31.85 in April, up 5.5% from a year ago. Beyond the distortions during the pandemic, April, along with March, was the largest year-on-year increase in data dating back to 2006. This category includes supervisors and management, along with employees of all kinds in all industries:

The distortions during the pandemic occurred when millions of low-paid workers were laid off while office workers switched to working from home, taking millions of lower paid workers out of the average hourly wage, thus inflating the average hourly wage. And when they returned to work, their lower wages reduced the average back to the interval.

Average hourly earnings of non-management workers, “Production and non-supervisory staff” is a data set that goes back many decades and includes workers in all industries in the private sector, and in all jobs that are non-management jobs, from waiters to Google encoders.

For these non-management workers, average hourly earnings rose to a record $ 27.12, up 6.4% from a year ago. Apart from the lockdown distortions in the spring of 2020, the last five months were the biggest year-over-year jumps since early 1982. This confirms other reports that percentage wage gains – not dollar wage gains !! – has been strongest in the lower part of the wage spectrum.

Furious inflation and the labor force?

These large wage gains were not enough to keep up with inflation. The headline Consumer Price Index (CPI-U), the target most often cited, jumped to 8.5%.

The less frequently quoted consumer price index for all urban workers and office workers (CPI-W), which is used for COLAs for social security, jumped to 9.4%.

So with average wage growth in the range of 5.5% to 6.4%, the purchasing power of rising wages was crushed by furious inflation.

Furious inflation is the enemy of the people who work. For workers, there is nothing good about inflation. They are at the end of this agreement. There are inflation recipients, including companies that can raise prices to anything, and heavily indebted entities with fixed-rate debt, but they are not workers. They are being hammered by this inflation.

This furious inflation may thus partly explain the peculiar phenomenon why the large wage increases have not been large enough to draw people back to the labor force: Effectively lower “real” wages do not provide enough incentive to join the rat race again.

Much larger wage increases can then be assumed to cure the shortage of labor. But much higher wages would give the wage-price spiral further momentum, and wages would never be able to run out of it, and “real” wages would continue to fall, which in reality would not provide any incentives to rejoin the labor force. and not improve labor shortages.

The second option is to crack down on inflation, which will allow wage gains to catch up with the price gain and perhaps make it worthwhile again to participate in the rat race. That’s what the Fed is trying to do now, even if it’s too little too late. And the Fed has cited the labor market as one of the reasons for their breakdown of inflation.

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