MNI INTERVIEW: Labor Hoarding Improves Odds Of US Soft Landing

Employers who are loath to jettison workers after going to great lengths to hire and train them during the pandemic raises the chances the U.S. labor market can cool and wage growth moderate without a spike in unemployment, Kansas City Fed economist Elior Cohen told MNI.

Post-Covid labor shortages have limited the effect of monetary policy on the labor market and raised the chance of a soft landing, even as employers increasingly expect demand for their goods and services to weaken, he said in an interview.

"As long as conditions remain, where you have those labor shortages and employers are still in need of those additional hands, they would be very reluctant to get rid of workers," Cohen said. "This is expected to keep unemployment rates at a very steady level."

The Fed last week significantly upgraded its view of how the labor market will handle higher interest rates, marking down the expected rise in joblessness to just 4.1% next year versus the 4.5% peak seen in the June projections. It also said growth will be better than earlier expected and core inflation fall a tad faster. (See: MNI INTERVIEW: Fed’s Wright Optimistic On Further Disinflation)

BLUNTED POLICY

The labor market has so far shown remarkable resilience to steep monetary tightening, said Cohen. August marked the 19th month in a row with a jobless rate below 4% even as rates have risen 525 basis points during that time.

However worker hoarding also leads to a skills mismatch that is likely to be a dominant feature of the post-pandemic labor market.

"Labor shortages are preventing the labor market from adjusting to monetary policy tightening even if workers are not fit for the job or not qualified," Cohen said. "That's why you don't see a lot of action in the labor market."

"This comes at the cost of lower labor productivity overall," he added.

VACANCIES FALLING

Companies are also posting fewer job openings rather than laying off workers, although the baseline level of vacancies-to-unemployed has been rising over time for years before the pandemic, Cohen said.

Reduced immigration from 2016 to 2021 exacerbated existing labor shortages and resulted in the increased growth rate of online job postings by employers heavily reliant on immigrant labor, according to his recent research.

"This trend is expected to continue to increase," he said. "Immigration is another piece to this growing trend."

Now that immigration has rebounded strongly, it's another factor helping to ease tight labor markets.

"It is not clear if increased immigration by itself would be enough to fill all of those labor shortages," Cohen said. "It will definitely create some relief."