MNI INTERVIEW: Room For More Labor Market Gains– Fed's Rodgers

A jump in U.S. inflation over the past year coupled with a rockier stock market may be curbing Americans’ appetite for early retirement, suggesting further room for gains in the labor force, St. Louis Fed economist William Rodgers III told MNI.

“The big factor that we’re beginning to think about is the role that inflation could be playing,” said Rodgers, who is vice president and director of the St. Louis Fed’s Institute for Economic Equity.

“When inflation started to tick up at the end of the year, that’s when we also started to see a little bit of a downward trend in the retiree population. These people are on fixed incomes. Their income is not going to go as long or as far as it could have.”

In addition, stock market gains that left many older Americans more secure about their nest eggs now look less sturdy after a turbulent start to the year compounded by Russia’s invasion of Ukraine and surging energy and commodity prices.

“You get a double hit, the value of your portfolio goes down and the value of the income you’re living off of goes down.”

ROOM FOR IMPROVEMENT

Rodgers cautioned against describing the job market as characterized by full employment.

“The reason I would prefer saying we’re returning to pre-pandemic conditions is if you look at where we were pre-pandemic, yes we had very low unemployment rates, but participation, the employment-to-population ratio, the labor force participation rates, overall and certainly among some of the vulnerable groups I focus on – their participation rates were not higher than they were in the 1990s,” he said.

Rodgers touted the benefits of a sustained job market expansion, citing his own studies that show states with unemployment rates consistently below 4% or even 3% helped narrow wage and employment gaps for the lowest income groups.

Other Fed economists have taken a different tack, arguing that the labor market is already tight, or may even be tighter than it looks. (see MNI INTERVIEW: KC Fed Index Implies Jobless Rate Nearing 3%)

WAGE PRESSURE WATCH

Rodgers, also a former chief economist at the U.S. Department of Labor, said he was seeing signs that inflation, previously driven primarily by supply chain kinks, is increasingly showing a wage-push component.

Last year, “the story seemed to be connected to supply chain challenges and then also getting wages higher such that they would attract and retain individuals,” he said.

“Over the last few months, now I’m starting to hear, well, because of the inflation last year, companies are now raising their wages. They’re raising their wages by 3% or by 4%.”

He said this is happening because workers are seeing inflation prints of 7% or higher and realizing that their incomes are not keeping up.

“So I think the dynamic has been more price push, there has been a little bit of a shift over to, the wage growth is now following price increases,” he said.

Rodgers said the sustainability of a strong labor market that saw the jobless rate fall to a pandemic low of 3.6% last month depends on how much inflation permeates consumer psychology.

“Do people think inflation is going to be with us and start to change their behaviors and start to consume less? Do people really retrench or do they just slightly pull back? That’s the wildcard in terms of your sustainability question,” he said.