A smaller than projected workforce has kept employment up and wages rising

By Herbert Rothschild

Last year the Federal Reserve began a series of interest rate hikes to curb inflation. On Aug. 26, its chair, Jerome Powell, speaking at the central bank’s annual Jackson Hole Economic Symposium, said, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” In response, U.S. Senator Elizabeth Warren said during an interview with CNN’s Dana Bash, “What (Powell) calls ‘some pain,’ means putting people out of work, shutting down small businesses.”

Historically, putting people out of work has been the primary effect of Fed actions to bring down inflation, because rising wages worry the Fed much more than rising profits. The last time the Fed hiked interest rates so much and so fast was in the period between 1980 and 1982 under the leadership of Paul Volcker. The unemployment rate in 1979 was 6%. It rose to a high of almost 11% in 1982, then tapered back to 6.6% by 1986. Currently, every 1% increase in the unemployment rate means about 1.6 million people are thrown out of work.

No one would argue that inflation itself isn’t painful, especially to people who live on tight monthly budgets. But hiking interest rates isn’t the only way to control inflation. Taking more money out of circulation by increasing taxes is another.

Yet, even though Volcker had pushed interest rates to historic highs, the Reagan administration persuaded Congress to pass a tax bill that dramatically lowered the top tax rates. And as Warren points out, corporate concentration in sectors like food processing has allowed corporations to jack up prices, not under pressure of inflation, but under its cover, thus exacerbating the problem.

This time, however, the Fed’s goal of curbing inflation by inflicting pain on workers has been frustrated. The Fed’s annual Monetary Policy Report, released on March 3, reports, “The labor market has remained extremely tight, with job gains averaging 380,000 per month since the middle of last year and the unemployment rate remaining at historical lows (3.4% in January). Labor demand in many parts of the economy exceeds the supply of available workers, with the labor force participation rate essentially unchanged from one year ago. Nominal wage gains slowed over the second half of 2022, but they remain above the pace consistent with 2 percent inflation over the longer term.”

Not only is the job market good, it’s good for demographic groups that are usually last hired, first fired. The report says, “Tight labor market conditions have largely erased the pandemic-induced widening of the gaps in employment across different groups. . . (B)oth men and women aged 25 to 54 with a high school degree or less saw much larger employment declines in early 2020 than workers with at least some college education, but by the end of 2022, this gap had almost entirely closed. The same story is true among both Black or African American and Hispanic or Latino workers aged 25 to 54.”

Despite what the Fed regards as an unfortunately robust job market, inflation, which hit a high of 9.1% last May and averaged 8.0% during 2022, this January fell to 6.4%. The Fed attributed the decline to easing of supply chain bottlenecks and lower energy prices. Other forces may be in play as well. If people believe they’re in a recession, they spend less and save more.

What happened to frustrate the Fed’s war on workers? A section of the Monetary Policy Report provides an answer: “The labor force, or the number of people working or looking for work, is well below levels projected by most observers before the pandemic. This shortfall has contributed to a widening gap between labor demand and labor supply and to widespread labor shortages.” The current size of the labor force is perhaps 3.5 million workers short of what the Congressional Budget Office had projected two years ago.

The report goes on to explain this shortfall. Its answers — a lower labor force participation rate and slower than expected population growth — have implications well beyond the immediate challenge of lowering inflation.

According to the Fed, excess retirements — the difference between the actual and the expected number — account for about 2.2 million of the “missing” workers. Baby Boomers are retiring rather than working past 65. The pandemic encouraged retirements. Partly it was harder for older workers to find re-employment when it eased. Also, “research suggests that excess retirements have been largest among college-educated and white workers — the groups that likely benefited most from the stock market and house price gains earlier in the pandemic.”

The report cites two causes of lower-than-expected population growth, which accounts for the remainder of the “missing” workers. One is the excess deaths attributable to COVID (about 500,000), the other is reduced flow of immigrants since the pandemic started (about 900,000).

Undoubtedly, the Fed will keep hiking interest rates in quest of its unreasonably low goal of 2% inflation. It’s time, however, for the White House and Congress to take a more active role in addressing inflation, instead of allowing the handful of governors of the Federal Reserve System to inflict widespread pain at their own discretion.

It’s also time to acknowledge that this economy needs immigrants. Many people will find this a hard pill to swallow, but it’s an inexorable fact. The overall U.S. birth rate is low (it fell to about .5% starting in 2020), and in 2016, white deaths exceeded white births for the first time in U.S. history. White representation shrinks as the age cohorts get younger. For Hispanics, it’s the opposite. They are, numerically, the fastest growing segment of our population. Their labor will increasingly turn the wheels of our economy.

Herbert Rothschild is an unpaid Ashland.news board member. Opinions expressed in columns represent the author’s views and may or may not reflect those of Ashland.news. Email Rothschild at [email protected].