About the author: Joe Sullivan is a senior advisor at the Lindsey Group. He served from 2017 until 2019 as the special adviser to the chairman of the White House Council of Economic Advisers. His views do not necessarily represent those of his employer.
Federal Reserve Vice Chair Lael Brainard has spotted something “very unusual” in the labor market. The number of job openings remains high. But not enough people want to take these jobs, and the share of America’s population that either has a job or wants one, its rate of labor force participation, isn’t rising.
For the crime of aiding and abetting an acceleration of inflation well beyond its 2% target, the mighty Fed is about to put an end to this scarcity of labor. The device that the Fed plans to use to end these “demand-supply-imbalances” is one familiar to previous campaigns waged by the central bank against rising consumer prices: higher interest rates.
This new effort will fail. Interest-rate hikes cannot alleviate the scarcity of people who are able and willing to work, relative to how many people businesses want to hire. Sure, holding up today’s labor market relative to a static snapshot of its prepandemic self tends to make it look “very unusual.” But labor markets are never static. The US economy was evolving towards a new normal of relative labor scarcity even before the pandemic. That new normal is now here to stay. Even the Fed can’t kill it now.
A statistic often touted in today’s headlines illustrates the problem: there are more job openings than there are people who are unemployed, that is, who want a job but don’t have one. This is true, but it was also true for the two years before the pandemic. According to data from the Bureau of Labor Statistics, job openings first exceeded unemployed persons in March 2018. By February 2020, there were 1.3 million more job vacancies than unemployed persons. (A month later the pandemic caused unemployed persons to outnumber job vacancies by 1.2 million.)
At 4.28 million, the excess of job openings over unemployed persons in October 2022, the last month with available data, towers over its February 2020 level. But is it really higher than it would be without a pandemic? The Fed’s army of Ph.D. economists would surely try to answer the question with models and techniques decipherable only to those schooled in the requisite Greek. But a simple analysis can find at least a preliminary answer: no.
If you were to try to predict the current level of job openings over unemployed persons based on pre-pandemic trends, completely ignoring the pandemic disruption, you would end up with a guest estimate of 6.95 million more job openings than unemployed people, relative to a true value of 4.28 million. This estimate simply assumes continuity in the trend that prevailed between August 2009, the first month after the 2008-2009 recession ended, and February 2020, the last month before the pandemic ravaged the economy. If that trend simply kept going after February 2020, by October 2022 there would have been 6.95 million more job openings than unemployed persons. In reality, in October 2022, there were 4.28 million.
That forecast would have been wrong by 2.67 million jobs, to be sure. But the error’s significance is in its direction rather than its size: it produced a number that was higher than the number, in fact, is. The implication is that today’s labor market, however tight it may be, is looser than it would be if the pre-pandemic trend had simply continued. That should caution you against assuming that tales casting today’s labor market tightness as a creature of the pandemic are accurate. Statistically, naively extrapolating the trend that prevailed between August 2009 and February 2020, knowing nothing about any pandemic, you’d expect a labor market that is at least this tight.
For all its economic naivete, this exercise does trace out the reality of a tectonic shift in America’s economy: the arc of its labor market has, for decades, been bending toward scarcity.
This arc’s shape is clear if you view America’s overall supply of labor as the sum of male and female labor supply. For as long as the Bureau of Labor Statistics has been collecting the data, since the 1940s, it has been measuring declines in the rate of labor force participation among men. From the 1940s until the early 2000s, however, the “quiet revolution” allowed a rising share of America’s women to work outside the home and increase female labor-force participation. Because this increase more than offset the decline in male labor participation, the overall rate of labor force participation rose from the 1940s until the 2000s. But women’s labor force participation reached a plateau in the 2000s. And once that plateau emerged, the decline in rates of male labor force participation finally started to drag down the overall rate. The overall rate has been declining, along with the male rate, ever since.
These dynamics are unfortunate for those at the Fed who are set on correcting “imbalances” in the labor market. Because recessions cause men to leave the labor force, if the Fed raises interest rates high enough to cause a recession, it will only worsen the US labor shortage. With the exception of the recession that ended in April 1958, every recession since World War II has ended with a rate of male labor-force participation lower than it began. This is a reflection of the pattern that appears within layoffs during recessions. At least since 1969, in every American recession until 2020, men have lost more jobs than women.
On why it is men who have been leaving the labor and facing the brunt of layoffs during recessions, interpretations vary. But they are beside the point when it comes to the Fed’s course of action. The point is that higher interest rates would hasten the departures of men from the labor force, which, barring a surge in women’s labor force participation that has yet to show any sign of appearing, would exacerbate the “very unusual” scarcity of labor in the United States.
In 2017, Brainard, already a governor on the Federal Reserve Board but not yet its vice chair, was of the view that lower interest rates and looser monetary policy could arrest the long-run decline in labor force participation. Now, in 2022, she is of the view that tighter monetary policy and higher interest rates can arrest, even halt, the long-run decline in labor force participation. If the Fed is now planning to wait for labor force participation to increase to pause or reverse its increases in interest rates, it will end up, if not raising interest rates to a higher level, then at least keeping them high for longer than it otherwise would . That would worsen the pain felt by all that suffers when interest rates rise: the size of GDP, the affordability of housing, and the value of financial assets.
Fed Chairman Jay Powell has invoked the historical precedent of Paul Volcker, the Fed chair widely credited with taming inflation in the 1980s, when talking about the Fed’s bout with inflation today. But he should keep in mind that history tends to rhyme rather than repeat. He is entering the battle facing a labor market unlike the one that existed in the 1980s.
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