MNI: US Payrolls Seen Subdued for Months, Fed Advisers Say

U.S. job hires are likely to slow and wages rise into the summer as more older workers retire and others strike harder bargains with potential employers, outside Fed advisors and ex-officials told MNI, predicting that the pace of hires should accelerate into the fall as the labor market reaccommodates itself after Covid.

Hires could stay in the range of 100,000 to 400,000 for months, said Aysegul Sahin, an adviser to the Dallas Fed, speaking after nonfarm payrolls increased by a much-less-than-expected 266,000 last month.

"I would be more concerned if the April trend were to remain the same three months into the summer," said Sahin. She forecasts the unemployment rate will dip to 5.0%-5.2% by year-end from 6.1% today, before reaching 4.2% next year, when it will be roughly in line with estimates of the natural rate of unemployment, which have risen slightly during the pandemic.

"We can't expect these matches to happen immediately like an on/off switch," said Sahin, who also advises the nonpartisan Congressional Budget Office. Wage growth should be higher than after the great recession, partly due to workers' lingering concern over health risks, a factor which could persist for an uncertain amount of time, she said.

Temporary layoffs, which peaked early in the pandemic at 18 million and are now down to 2.1 million, fueled last year's jobs gains, but many unemployed have seen ties with former employers permanently severed and may be more risk averse due to Covid. This may prompt them to press harder for higher wages than pre-pandemic, advisors say.

"We shouldn't expect the same pace of improvement in the employment situation going forward," said Giorgio Primiceri, a consultant at the Chicago Fed. "Most of the workers who are unemployed now are not temporary layoffs, so almost by definition the pace at which they can find a new job will be slower."

BABY BOOMER RETIREMENTS

While Federal Reserve officials insist they want to reach pre-Covid labor force rates and employment-to-population ratios, some advisors said that even if these indicators improve substantially over the next year, demographic headwinds apparent before the pandemic could have strengthened.

Over two million Americans have retired, in part spurred by government transfers that pushed up excess savings for older workers, and NY Fed data from March show the number of people expecting to work beyond age 67 fell to a record low of 32.9%. Census Bureau surveys indicate about 3.3 million workers age 55 and older plan to apply early for Social Security benefits, and labor force participation for those 65 and over is down nearly 3 million workers compared to February 2020.

"We would not necessarily expect to get all the way back to the labor force participation rate that we had in December 2019," said Jonathan Wright, a former member of the Fed Board's division of monetary affairs and current NY Fed adviser. "Even in the absence of Covid the aging of the population will take a few tenths of participation each year."

Retirements could eventually complicate Fed goals of attaining broad and inclusive employment and 2% prices on average if they fuel sustained wage pressures, advisors said. The pandemic's impact on older workers would differ from that of the financial crisis, which reduced older workers' wealth, prompting them to work longer and adding to downward pressure on wages.

HIGHER WAGES?

Dallas Fed President Rob Kaplan has pointed to early retirements contributing to a tighter labor market than some may have assumed, and on Thursday James Bullard of the St. Louis Fed said alternative measures suggest the labor market is much tighter than data suggest.

"These retirement vacancies will take some time to clear and ultimately it's going to end up with relocation and better wage growth. But these slower processes will take time," said Sahin.

Others said that these long-term trends should not drive early Fed policy adjustments. "The argument sometimes for a better labor outlook is that it is all about structural things, but the structural things sometimes turn out to not be structural," said David Blanchflower, ex-visiting scholar at the Boston Fed and former member of the Bank of England's monetary policy committee.

"What do we know about retirees and the labor force participation rate of those that are older after 2008? It rose and more joined the labor force," he said. "We have to see the data."