Help for the Fed
2022.12.08 06:35
Help for the Fed
Budrigannews.com – The U.S. Federal Reserve had hoped that a rising supply of workers would help cool inflation. However, the complex flow of people entering and leaving the labor force in the United States, which typically involves more than 12 million people per month, has changed.
The COVID-19 pandemic caused a huge shakeup in the job market in the United States. Tens of millions of people lost their jobs, some left because of health or family care issues, and others chose to retire.
In the beginning, Fed policymakers anticipated that these distortions would lessen over time and that various measures of the labor market, particularly the proportion of the population that is either employed or seeking employment, would roughly return to their previous levels.
Instead, 2022 was a wasted year. The labor force participation rate of 62.1 percent in November was virtually identical to that of January, with little variation in between. It is still about 3.4 million people, or 1.3 percentage points lower than it was before the pandemic.
Last week, Fed Chair Jerome Powell acknowledged the constraints a slow-growing labor force imposes on the economy and, by extension, the Fed. “It has been very disappointing and a little bit surprising,” he said. Because there are fewer workers, there is less potential output. As a result, the Fed will need to exert more effort by raising interest rates in order to bring demand down to levels that the economy can sustain.
The behavior of the labor force has been one of the most perplexing and, in some ways, the most concerning for the economy’s long-term prospects among the many perplexing developments in a year when the Fed raced to catch up with an outbreak of inflation.
There are three possible causes for an increase in the number of people who are able to find work: immigration, the aging of young people into adulthood, or adults making the decision to look for work.
The first two have been constrained by low birth rates and restricted immigration, and the pandemic appears to have exhausted the third.
More Bank of England will raise the rate at the next meeting-Reuters
From 2011 to 2019, the number of people working in the United States increased by roughly 0.7 percent annually, reaching a peak of approximately 164.6 million just before the pandemic. However, the number of people working saw a sharp decline at the beginning of the health crisis. Even though it reached 164.7 million in August, when it was at its highest point before the pandemic, it has since fallen slightly, effectively depriving the economy of nearly three years of growth in the labor force.
Other data have begun to turn against the Fed, in addition to immigration and birth rates.
Millions of adults alter their employment status each month: Some individuals enter the labor market by accepting a job or beginning their job search; Others alternate between working and unemployed; Some people completely leave the labor market.
Although these monthly flows fluctuate, the Federal Reserve anticipated that more adults would enter the workforce than would leave it over time.
That was the case in 2021. Net inflows into the labor market increased steadily over the course of the six-month moving average.
However, the pattern turned around in the spring of 2022. By November, the six-month average had practically reached zero, largely due to an increase in people quitting their jobs or leaving the job market entirely for retirement or other reasons.
Recent research by TS Lombard economist Steven Blitz found that “workers leaving employment are dropping out of the labor force, not becoming unemployed.” “underscores the Fed’s concern about the supply-demand labor imbalance underpinning inflation,” according to recent changes in labor flow data.
The strong payroll job and average wage growth seen in November’s employment data indicates that workers are still in high demand.
Fed officials are concerned that the stage may be set for wage growth so strong that it becomes a primary driver of continued price pressure with the supply side, or the labor force, stagnant and possibly 10 million unfilled jobs.
The data on payroll jobs and the labor force are derived from two separate surveys—one of businesses and one of households—and may undergo revisions over time. The household measure indicates a weaker employment picture in particular, causing tension between the two polls at the moment.
However, Fed policymakers’ perspectives have begun to be anchored by the possibility of a persistent labor shortage, which has begun to be supported by additional studies.
Powell stated last week, “Looking back, we can see that a significant and persistent labor supply shortfall opened up during the pandemic.” That doesn’t appear to be closing completely anytime soon.”
Powell cited a number of recent studies, such as studies on the effects of trends like an increase in retirements and deaths from pandemics or persistent “long-COVID” symptoms on the labor force.
According to the chair of the Fed, the economy may have 3.5 million fewer workers than it would have had the pandemic not occurred. He attributed most of that to an excessive number of retirements, though COVID is to blame for some of it.
Even though the rise in retirements was noticed early in the pandemic, researchers, along with Fed officials, have come to believe that it is unlikely to reverse.
Fed economists Joshua Montes, Christopher Smith, and Juliana Dajon came to the conclusion in a paper that Powell cited that new population estimates based on the 2020 Census put to rest what had appeared to be a possibility that “unretirements,” or people returning to their jobs after declaring that they had quit for good, would aid in the recovery of the labor force.
The paper found that there were approximately 2 million “excess retirements,” which would not have occurred if not for the pandemic. These “excess retirements” pushed the labor force participation rate even lower than it would have been if the population was already aging.
According to the researchers, “We view it as unlikely…that the retired share will fall substantially towards its pre-pandemic trend and that those who retired early will return to the labor force in large numbers.” Retirement behavior may not become routine for some time.
