The war to find workers intensifies and takes the Phillips curve out of the catacombs in the US

Unfilled job vacancies at record highs, millions of workers changing jobs each month (of their own free will), wages rising at the fastest pace in years, and an unemployment rate that has fallen from 15 to 4.6% in 16 months. These are indicators of a ‘hot’ labor market, in which companies compete to attract workers who are in short supply amid the economic recovery. Now the hypothesis or question posed by the experts is the following: if the problem is already serious and the recovery has only been underway for a few months, what will happen next year? The worker’s war is about to begin.

The pandemic has reduced, at least in the case of the US, the supply of people available to work for various reasons (health, new preferences, early retirements …). At the same time that this is happening, the economic recovery driven by unprecedented fiscal and monetary stimuli has generated (and continues to do so) a demand that companies cannot satisfy with the factors of production (capital and labor) available. Companies are trying to expand workforce, but they are faced with reality: the workers they are looking for are not there and they may not be there in 2022. Labor participation was expected to recover in September with the opening of schools, but more well the opposite is happening.

“The tightness of the labor market it is the product of unprecedented labor demand and a structurally weak labor supply. After a detailed analysis of demographic trends, we estimate that the labor supply (unemployed and willing to work) is well below our estimates of labor demand. We expect approximately 4 million jobs to be created by the summer of 2022 and 5 million by the end of the year. This would leave the unemployment rate at around 3% by December 2022, a level not seen since the 1950s, “say Aneta Markowska and Thomas Simons, economists at Jefferies.

With these factors in play, the Phillips curve works again. In recent years it seemed that this curve, which measures the negative relationship between employment and wage inflation (the lower the unemployment rate, the more wages and inflation rise), had flattened or died. However, now we could be witnessing the return of this relationship, if it ever disappeared. Even the Fed has recently acknowledged that the Phillips curve could be taking a steeper slope, according to its latest minutes. This is the reflection of a real shortage of workers. From Jefferies they believe that it is not yet clear what shape this famous curve will take, but they do see a very close change as the employee regains bargaining power.

Several labor market indicators reflect this almost unprecedented situation. The figure for weekly unemployment benefits has fallen to 199,000, the lowest since 1969. On the other hand, unfilled job vacancies remain close to the historical maximum of 10 million, which coincides with the complaints from companies that in each survey put highlight the difficulty in finding the necessary personnel. The supply of workers in general is lower than the demand, but in specific sectors it can be much more pressing, since not all the unemployed have the characteristics that companies seek.

“The demand for labor is evident, with job openings far exceeding pre-pandemic levels by all available indicators. This is not an industry-specific problem. Job vacancy rates have reached record levels in almost all sectors, with the sole exception of construction. This means that there is a general excess demand for workers in almost all professions. A war for the worker “, they assure from Jefferies.

Another indicator that sheds light on the good shape of the labor market is that of people who leave their jobs voluntarily each month. Jason Furman, a former White House chief economic adviser and a Harvard economics professor, recently noted in a paper that “the rate of resignations (people who leave their jobs) is at record levels and the relationship between unemployment and job offers is the lowest in history. In the 18 years prior to the COVID crisis, the The relationship between unemployment and vacancies was a better predictor of headline inflation than the unemployment rate. ” This strength in the labor market reinforces the thesis that inflation will last longer than expected.

“Nominal wage growth and inflation expectations have risen. Normally, when the labor market is operating away from full employment, nominal wage growth is moderate. By contrast, nominal wage growth today is even faster than before the covid. This is consistent with the indicators that show that there are many job offers for few workers, “says Furman.

This war for the worker is allowing the worker factor to recover part of the ‘pie’ lost for years. Wages are gaining ground. Salaries are accelerating and have already risen 4.9% annually and 5.3% if the trend is annualized in the last six months. In addition, these large increases are occurring in an almost generalized way.

“Wages are accelerating in most industries, with the largest increases in leisure and hospitality (more than 11% annually) and transport and storage (8.2%). The Atlanta Federal Reserve wage indicator shows that wages are rising more for those who change jobs than for those who stay in the same company, “reveals a Berenberg report published last week. There is the key that explains why what millions of Americans are leaving their jobs each month. Good job market health and confidence It allows them to change jobs without looking back in exchange for higher pay.

This labor shortage is causing problems for businesses and the economy and has caused workers now have the upper hand, a turn from recent years in which companies seemed to have control, they explain from the German investment firm. “For several decades, the weight of wage income in GDP has shown a downward trend, while the share of capital income has risen. Companies enjoyed healthy margins, while wage gains were limited. The tide seems to be changing. “

More tools for the worker

Companies are ‘forced’ to hire to increase production to meet demand and rebuild their inventories. Today workers can take advantage of the extensive information streams offered by employment platforms and social media (such as LinkedIn) to find the job that best suits their skills and needs.

On the other hand, the social shield implemented by governments gives people a certain power to wait for the arrival of the ‘dream job’, which in turn is generating a marked increase in what are known as reserve wages, which is the salary required for a person to accept a job. All of this is intensifying the war to find workers, especially in sectors where wages were relatively lower.

How long will the shortage last?

“Several factors suggest that the labor shortage could be prolonged. The strength of demand is expected to continue to generate high demand for labor. On the other hand, it seems unlikely that the labor force participation rate will recover to levels soon. prior to the pandemic given the changes in preferences between work and free time, and the greater attractiveness of part-time work (less than 35 hours per week) “, they assure from Berenberg

On the other hand, other non-negligible factors must be taken into account. A recent investigation by the Federal Reserve of St. Louis estimates that 2.4 million people have retired early during the pandemic (“The Covid Retirement Boom”, 2021). This is a phenomenon that is focusing the studies of several research departments of the Fed.

It is not ruled out that these retirees return to the labor market, since salaries are more attractive than pensions, but the problem is long: “It is possible that a greater number of retirees will rejoin the workforce as the risks to health fades, “although economists at the Kansas Fed recognized that this process could be very slow or even incomplete.

Not even in the best of cases will labor participation recover to pre-covid levels quickly. Although a good part of these ‘early retirees’ decide to rejoin the workforce, it seems unlikely that the participation rate will return to pre-pandemic levels, experts say. However, “over time, the return of immigration (after the impass generated by the covid) could return to ‘feed’ the workforce, but it is unlikely that this will happen quickly enough to alleviate the current shortage of hand of work “, they point out from Berengerg.

The impact of the aid

The impact of government fiscal policies (direct aid) must also be taken into account, which have been able to ‘discourage’ a return to the active labor market of many Americans who can now refocus their careers by updating their studies and skills. The Biden Administration is also investing hundreds of billions of dollars in an ambitious, labor-intensive infrastructure plan. Biden himself has ensured that more than 1 million new well-paying jobs will be created.

This will increase the demand for labor in an industry already suffering from a worker shortage. “Filling those jobs will exacerbate shortages in other industries and distort their wages. This is of particular concern for retail and leisure and hospitality, which employ 31 million workers at an average hourly wage of less than 60% of the total. average salary in construction “, they assure from Berenberg.

A challenge for the hospitality industry

Many workers who today are waiters, clerks, cooks … could be attracted by much higher wages in construction, which will come from the hand of the Biden Administration’s plans. This will pose a significant challenge for the hotel and leisure industry, which in order to retain their workers will need to match, at least, the wages offered by construction (unless the supply of workers is increased through immigration). This war to retain and find workers will also skyrocket the costs of these companies and, ultimately, the prices of their final goods and services (the consumer will pay part of the party).

Jefferies’ work states that “a structural decline in labor supply is being observed, along with an unprecedented demand for labor. We believe that these two forces will create the strictest labor market conditions in decades … What does this scenario imply for wage growth? This is a difficult question to answer at this point, because the shape of the Phillips curve after the pandemic is not yet clear. For now, the pace of wage growth is much higher than it is. they imply the historical Philips curves, “say these experts.

“If you take recent salary dynamics at face value, it suggests that we could be reverting to see a much steeper Phillips curve than we have seen in the last three decades. This conclusion, while still very tentative, fits with recent increases in inflation expectations, which also suggest that the workforce enjoys much more pricing power than in the past, “say Jefferies analysts.

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