The intricacies of a corrupt labor market: Why a crackdown on inflation could put people back in the workforce

Wages rose, but rampant inflation crushed the purchasing power of those wages.

by Wolf Richter to 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 staffing remains well below the pre-pandemic trend (green line), and still below the peak just before the pandemic:

Employers of all kinds lamented the difficulty of hiring people. They have raised wages to hire and keep people, and now there is a colossal labor, With employers who lure workers from other employers. But they are unable to attract enough new or marginalized workers to the workforce, and “labour shortage” continues to restrict employment.

Households reported that the number of employed people — including the self-employed, temporary job workers, and entrepreneurs who were not included in the employer data above — fell by 353,000 in April, but over the past three months has jumped by 931,000, bringing the total to 157.7. million workers.

This drop in April is reminiscent of episodic month-to-month declines before the pandemic, as in September 2015, October 2017, and August 2018 which, in hindsight, were not a change of trend but month-to-month noise.

Labor force and ‘labour shortage’.

The jobs report released today is based on two massive sets of surveys: one that goes to employers; The other goes home. Each gives a different view of the labor market, one from the employer side and the other from the family side. The labor force, the number of unemployed people, the unemployment rate etc. depends on the household survey.

The labor force — people working as well as people looking for work — fell in April, by 363,000 people, similar to the declines and dips before the pandemic spread along the trend line.

At 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:

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

Among the reasons for a less-than-trend workforce are ongoing health concerns, difficulty finding affordable daycare, a well-documented higher-than-normal retirement wave, and people not working because they have earned too much money from stocks, cryptocurrencies, and real estate over the past few years ( dwindling now), and people are not working because they have decided to day trade their way to a fulfilling life. There was some of that during the dotcom bubble, and some of it was reversed during the dotcom crash. So let’s see.

The “employment shortage” was also documented by separate data from the Bureau of Labor Statistics through a sharp rise in Job opportunities that reached a record 11.5 million in March, an increase of 36% over last year, and an increase of 57% over the same month in 2019. There were 4.2 million more jobs in March than before the pandemic! Employers have all come to the same point: it has become very difficult to fill vacancies.

Wages went up, but hyperinflation far outpaced them.

Average gross hourly wage It rose to $31.85 in April, up 5.5% from a year ago. Besides distortions during the pandemic, April and March have had the largest annual increases in data going back to 2006. This category includes supervisors and management, along with employees of all types in all industries:

Distortions occurred during the pandemic when millions of low-wage workers were laid off while office workers switched to working from home, driving millions of low-paid workers off average hourly earnings, inflating average hourly wages. And when they got back to work, their average low wages again cut back into the range.

Average hourly earnings change management Workers, “Productive and Non-Supervisory Employees” is a data set that goes back many decades and includes workers in all private sector industries and in all jobs change management Jobs range from waiters to programmers at Google.

For these non-management workers, average hourly wages rose to a record $27.12, up 6.4% from a year ago. Other than the closing anomalies in Spring 2020, the past five months have been the largest year-over-year jumps since early 1982. This confirms other reports that the percentage of wage gains – not dollar wage gains!! It was the strongest at the lower end of the wage spectrum.

Blowing up the workforce?

These large wage gains were not enough to keep pace with inflation. The core Consumer Price Index (CPI-U), the most popular measure, jumped to 8.5%.

The often-cited consumer price index for all urban wage earners and clerical workers (CPI-W), which is used in Social Security Cola, jumped to 9.4%.

So, with average wage gains in the 5.5% to 6.4% range, the purchasing power of those higher wages has collapsed due to massive inflation.

Hyperinflation is the enemy of working people. For workers, there is nothing good about inflation. They are on the losing end of this deal. There are inflation beneficiaries, including companies that can raise their prices to anything, and debt-ridden entities with fixed debt, but not workers. They are affected by this inflation.

Thus, this rampaging inflation may partly explain the strange phenomenon that large increases in wages were not large enough to draw people back into the labor force: effectively low “real” wages do not provide enough incentive to join the rat race.

Hence it can be assumed that larger increases in wages remedy the shortage of labour. But much higher wages would further fuel the wage-price spiral, wages would never be able to outrun it, and ‘real’ wages would continue to fall, which would not actually provide any incentives to join the labor force, and never will be. Improving the labor shortage.

The other option is to crack down on inflation, which would allow wage gains to catch up with price gains and perhaps make rejoining the rat race worthwhile. That’s what the Fed is trying to do now, even if it is a little too late. The Fed was citing the labor market as one of the reasons for its crackdown on inflation.

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