MNI INTERVIEW: Job Mkt Tighter Than Last Boom-Chicago Fed Econ

America’s labor market is tighter now than it was before the pandemic -- when unemployment dipped to half-century lows -- as Covid deters some from returning to more casual jobs, Chicago Fed economist Jason Faberman told MNI.

Reduced desired hours of work combined with pay rises demanded by people quitting for better jobs are boosting wage and price pressures, he said. “Wage growth is also going to be inflationary, most likely, and as a result, we should probably expect to see inflation to persist as well because firms are going to continue to compete to attract these workers from wherever they currently are,” Faberman said.

Using New York Fed survey data, Faberman helped create a measure of the total hours people want to work versus their actual hours. That “aggregate hours gap” shows labor-market tightness even beyond today's 'Great Resignation' is more severe than what top Fed officials have been tracking through the participation rate or the unemployment rate, which has already tumbled to 3.8%.

“Slack is falling faster with our measures than with the unemployment rate” meaning “the labor market is actually quite a bit tighter than what the unemployment rate” implies, he said.

“Desired hours for everybody across the board fell substantially -- more so for those that are out of the labor force," he said, giving as examples recently retired people or students who move in and out of work to pick up casual shifts. “Since that involves millions of people making that same decision, it has huge aggregate effects that reduce the overall labor supply in the economy and led to a tighter labor market.”

LONGER-THAN-EXPECTED

While other changes in attitudes toward work beyond the pandemic may be happening, Faberman said the results also found little evidence the drop in labor supply is linked to enriched jobless benefits or mothers swapping paid work for more responsibility at home.

Labor supply remains a major question mark as the Fed tightens to check the fastest inflation in decades. If workers remain reluctant to come back, the task of rebuilding supply chains could be even more difficult and inflation pressure sharper. Chair Jerome Powell has recently expressed concern about a tight job market, a shift from last year when he called inflation transitory and worried about millions of workers being left on the sidelines in a slack economy.

The pandemic rebound is different from the global financial crisis according to the paper co-authored with Andreas Mueller and Aysegul Sahin, a Fed adviser and former New York Fed economist who teaches at the University of Texas. Workers who wanted just a few hours after the 2008-09 downturn struggled to find positions, while today employers are chasing after workers who don’t always want to go back.

“If you thought the labor market was fairly tight before reading this paper, this is telling you that it's potentially even tighter,” Faberman said in the interview. “There are forces here, particularly on the labor supply side, that are still at work to constrict labor supply, constrict labor force participation, and continue to give wage pressures and potential inflation pressures going forward, for longer than people may have expected.”

The number of hours Americans wanted to work plunged in the pandemic, by 4.6% through the end of last year. That’s steeper than the 2.3pp decline in the participation rate. The wage required to get someone to work at all, the so-called reservation wage, also rose 6.2% on average.

“A lot of those people said, you know what, even though I'm usually willing to work a few hours a week or a couple days a week here and there before the pandemic, I'm just not going to do that anymore,” Faberman said.