Feb 10, 2021

Mishtalk

Getting Back to a Strong Labor Market

Please consider Jerome Powell’s speech today at the Economic Club of New York on Getting Back to a Strong Labor Market.

Despite the surprising speed of recovery early on, we are still very far from a strong labor market whose benefits are broadly shared. Employment in January of this year was nearly 10 million below its February 2020 level, a greater shortfall than the worst of the Great Recession’s aftermath.

After rising to 14.8 percent in April of last year, the published unemployment rate has fallen relatively swiftly, reaching 6.3 percent in January. But published unemployment rates during COVID have dramatically understated the deterioration in the labor market. Most importantly, the pandemic has led to the largest 12-month decline in labor force participation since at least 1948.

Fear of the virus and the disappearance of employment opportunities in the sectors most affected by it, such as restaurants, hotels, and entertainment venues, have led many to withdraw from the workforce. At the same time, virtual schooling has forced many parents to leave the work force to provide all-day care for their children. All told, nearly 5 million people say the pandemic prevented them from looking for work in January. In addition, the Bureau of Labor Statistics reports that many unemployed individuals have been misclassified as employed. Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10 percent in January.

Unfortunately, even those grim statistics understate the decline in labor market conditions for the most economically vulnerable Americans. Aggregate employment has declined 6.5 percent since last February, but the decline in employment for workers in the top quartile of the wage distribution has been only 4 percent, while the decline for the bottom quartile has been a staggering 17 percent.

In the past few months, improvement in labor market conditions stalled as the rate of infections sharply increased. In particular, jobs in the leisure and hospitality sector dropped over 1/2 million in December and a further 61,000 in January. 

No Disagreement About Employment

I have no disagreement with any of the above. In fact, it mirrors what I have written many times. 

 Here’s the key question: What to do about it?

Powell’s Answer

To counter the adverse economic dynamics that could ensue from declines in inflation expectations in an environment where our main policy tool is more frequently constrained, we now explicitly seek to achieve inflation that averages 2 percent over time. This means that following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time in the service of keeping inflation expectations well anchored at our 2 percent longer-run goal.

Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy. It will require a society-wide commitment, with contributions from across government and the private sector. The potential benefits of investing in our nation’s workforce are immense. Steady employment provides more than a regular paycheck. It also bestows a sense of purpose, improves mental health, increases lifespans, and benefits workers and their families

Powell Q&A

Q1: How the heck does higher inflation lead to more jobs?
A1: It doesn’t

Q2: Is the Fed interjecting itself into fiscal policy?
A2: Yes

Q3: Does the Fed like it when Congress comments on monetary policy?
A3: No it does not. It wants independence from Congressional oversight.

Question #1 is the most pertinent one.

More inflation does not promote jobs. If anything, it destroys jobs. Businesses have to pay higher prices and may not be able to pass them on.

Moreover, loose monetary policy leads to asset bubbles and it also severely damages those who do not find a job. 

Those who do not have a job have higher prices to pay, do they not?

Fed has Truly Lost It

The Fed has truly lost it. It does not have any idea how to measure inflation and is ignoring bubbles with a misguided focus on the CPI rather than inflation.

Powell accurately concludes the unemployment rate is understated but misses the equally obvious fact that inflation is understated as well.

Ignoring Inflation

Despite inflation and clear asset bubbles, the Fed says Monetary Policy Will Stay Accommodative For a Very Long Time.

Translated, that means forever or until a global currency crisis changes their tune.

Earlier today I noted As Reported, Consumer Price Inflation Is Lower Than Expected Once Again

It’s a mirage.

Last year I wrote an open letter to Powell on the CPI. Please give Hello Jerome Powell, We Have Questions a read.

Mish