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Labor's low share of GDP should absorb some of the inflationary impact of wage rises, a former member of the White House Council of Economic Advisers tells MNI.
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Newfound bargaining power among U.S. workers due to job availability and strong fiscal support, not a shortage of labor, helps explain a moderation in the pace of hiring, Betsey Stevenson, a former member of the White House Council of Economic Advisers, told MNI.
"I don't think it's a shortage of workers, I think it's a massive glut of openings giving people confidence," Stevenson, also a former U.S. Labor Department chief economist, said in an interview. "It's like a big game of musical chairs -- all the chairs are lined up and people are like, 'I'm going to find a comfortable one because there are a lot of chairs out here.'"
Economists, including policymakers at the Federal Reserve, have been puzzled by a mix of surging numbers of people quitting, at a record 11 million in July, and a jobs market still some 5 million short of pre-pandemic levels.
Some fear potentially permanent changes to labor markets could lift the "natural" rate of unemployment and thus generate inflation more quickly than the central bank anticipates. But Stevenson pushed back against that notion.
"In a lot of workplace situations there's a lot of room for workers to be getting higher wages without needing to raise prices," said Stevenson, previously visiting scholar at the San Francisco and Philadelphia Feds. "The thing about the labor share of profits being lower than it has been in the past, is that means there's less need for pass-through."
Stevenson sees no immediate need for the Fed to worry about raising rates given what she sees as the transitory nature of recent price rises and covid-related headwinds to growth. The U.S. generated 194,000 jobs in September, a second month of disappointing gains.
"There are a lot of reasons coming out of this pandemic why we may have transitory inflation a little bit higher, but that doesn't mean that transitory inflation can necessarily be reigned back in by monetary policy without doing a whole lot of harm to the recovery," she said.
Stevenson took issue with the idea that Fed officials are being cavalier about price risks, defending its shift toward a flexible average inflation targeting framework.
"The idea that their inflation target was a target and not a ceiling was always supposed to be true. And there were many people, myself included, arguing in the last recession that they were acting as if it was a ceiling," she said. "You'd see inflation starting to creep towards 2% and they'd want to pull back. So I think what they wanted to do is make sure that they're communicating that an actual target of 2% is going to leave us above 2% some of the time and they're okay with that as long as we keep long-run inflation expectations anchored at 2%."
WOMEN TO RETURN
Stevenson, a discussant on this year's Jackson Hole paper on labor force participation, expects women to make a full return to the labor force after millions dropped out during the pandemic, albeit with a delay linked to caregiving and broad reassessments of the workplace.
"There has been a lot of concern that parents, particularly moms, might not return to the labor force. But so far, moms are returning to the labor force," she said.
"And I think that's partly coming from the fact that most moms in the labor force had a lot of work experience before covid hit, because people are having children at older ages. So they weren't just sort of dabbling with work prior to covid. They had an enormous amount of work experience and they're going to find their way back in."
Increased bargaining power is giving women, like other workers, growing options.
"A lot of employers have algorithms that basically toss applications out for anybody who wasn't working for six months or more," said Stevenson. "I don't think you can afford to do that in a post-pandemic world. If that causes employers to get rid of that, this could change people's willingness to or interest in taking those kinds of breaks going forward. We don't know what back to work looks like but we do see people are being bolder about making requests."
Stevenson said people who retired early due to the pandemic were much less likely to return to the workforce, but added this applies only to those retiring over the past year. She also wondered whether some of these early retirements would not lead to increased "home production" in the form of unpaid but necessary labor like childcare by a grandparent.
"That's just as productive as somebody paying a stranger" even though it doesn't show up in measured economic terms, she said.