skip to Main Content

What’s at stake if the Federal Reserve intervenes in today’s tight labor market

About the Author: J.W. Mason is Professor of Economics at John Jay College, City University of New York and a Fellow of the Roosevelt Institute.

The labor market is exceptionally tight, at least by the standards of recent history. This matters for monetary policy, but its importance goes beyond inflation or even material living standards. We are used to a world where workers compete for jobs. A world where companies compete for workers would be very different.

Today 3.5% unemployment rate is lower at any time between 1970 and 2019. While the prime-age employment-to-population ratio is still below its pre-pandemic level, other measures imply an even hotter labor market than at the height of the boom in the late 1990s. Both the historically high rate of workers quit their job and the almost two job offers for every unemployed suggest this might be the best time to look for a job in most Americans’ working lives.

How long this will continue largely depends on the Federal Reserve, where the question often comes down to whether inflation expectations are anchored. If businesses and households come to believe that prices will rise rapidly, the argument goesthey will behave in ways that cause prices to rise, validating these beliefs and making it harder to reduce inflation.

Curiously, there is little discussion of all the other expectations which may also be anchored in different ways, suggesting a very different set of trade-offs.

Companies that expect low growth, for example, are unlikely to invest in increasing capacity, which makes high growth much more difficult to achieve. Workers who find it impossible to find a job may stop looking for one, confirming expectations of weak job growth. Both of these shifts in expectations played a role in the “lost decade” after the crash of 2007.

Today’s tight labor markets are reshaping expectations in a different direction, which could lead to lasting shifts in employment dynamics. As economist Julia Coronado observed, one lesson companies seem to have learned is that staffing can be slower and more difficult than in the past. This makes companies more hesitant to lay off workers, even when demand slows.

Fewer layoffs, of course, help to tighten labor markets – another example of expectations being confirmed. But these new expectations also mean a different kind of working relationship. A company that expects labor to be cheap and plentiful has little reason to invest in recruiting, retaining and training its employees. Conversely, a company that cannot count on quickly hiring workers with the necessary skills must focus more on developing and retaining the workers it has. These qualitative changes in the organization of work are not taken into account in the aggregate figures on employment and wages.

To be clear, there is no labor shortage in absolute terms. One thing we have clearly learned over the past year is that total employment is not just a matter of how many people are ready to work. Back in spring 2021, some economists have argued that generous pandemic unemployment assistance was holding back job growth. When some states prematurely ended unemployment assistance, it offered the perfectly controlled test of this theory. It was decisively refuted. As labor economist Arin Dube said showJob growth was no faster in states that ended pandemic unemployment assistance earlier than in those that kept it on longer.

What is true, however, is that the types of jobs people will take may depend on their other options. For the economy as a whole, the current high rate of job mobility is a clear positive. A big reason why people can get raises by changing jobs is, presumably, that their new job is more valuable than what they were doing before. But from the perspective of employers, it’s a process with winners and losers. Some companies will adapt by offering higher wages, because many food service and detail the giants are already doing – and nonmonetary benefits like predictable timelines and advancement paths. Tight labor markets will also favor high-productivity firms, which can afford to pay higher wages. Those who are married to a model that treats labor as cheap and disposable, on the other hand, may struggle or fail.

It’s not just employers who have to adjust to tight labor markets, of course. There is little doubt that the upsurge in unionization that we have seen in recent years owes a lot to labor market conditions. When jobs are plentiful, the fear of losing yours is less of a deterrent to standing up to the boss. And people who are reasonably sure of getting at least one paycheck may start to wonder if that’s all their employer owes them.

Historically, periods of rapid union growth have followed sustained growth, not depressions and crises. During the 1972 strike at the GM plant in Lordstown – one of the high points of labor militancy in the 1970s – a union leader Explain why young workers were so ready to quit their jobs:

“None of these guys came from the old country poor and hungry, grateful for any job they could get. None of them went through depression… They just aren’t going to swallow the same kind of treatment what their fathers went through. That’s a big part of what the strike is about. They want more than just a job for 30 years.

Strikes like Lordstown are not only rooted in conditions at the particular workplace, but also in how a prolonged high pressure economy alters what workers expect from a job. Significantly, the demands of the Lordstown strikers included a say in the design and organization of the factory, as well as better wages and benefits.

Not everyone would appreciate a revived American labor movement, of course, or a move towards German co-management. While some see unions as a pillar of democracy and a check on corporate political power, others see them as an illegitimate intrusion into the rights of business owners. Either way, whether organized labor can reverse its decline is a question with implications far beyond next month’s inflation numbers. And much depends on how long today’s tight labor market lasts.

It may seem utopian to imagine workplace transformation when the headlines are dominated by fears of inflation and recession. But the real fantasy is to imagine that we could reap the benefits of an economy under high pressure – faster productivity growth, a fairer distribution of income, more resources to solve our most pressing problems – without bringing changes to the way businesses and labor markets operate. organized.

In his last press conference, said Federal Reserve Chairman Jerome Powell, “we all want to get back to the kind of labor market we had before the pandemic.” Do we all really want this, or could we aim higher? But in any case, simply going back is not an option. An economy adapted to slow growth and cheap and abundant labor cannot adapt to tight labor markets without profound change.

Some may rejoice in an economy where chronically scarce labor means businesses are under constant pressure to increase productivity and attract and retain employees. Others may hope for a deep recession to reset expectations about the relative scarcity of workers and jobs. One way or another, those are the stakes.

Guest comments like this are written by writers outside of Barron’s and MarketWatch newsroom. They reflect the views and opinions of the authors. Submit comment proposals and other comments to [email protected].

Back To Top