In the late 1960s, U.S. economic policy makers misjudged how hot they could run the jobs market without fanning inflation. The miscue paved the way for an economically debilitating wage-price spiral the following decade.
Now, some economists are wondering whether Federal Reserve Chairman Jerome Powell and his colleagues are making the same mistake. They’re aggressively pushing for a return to the pre-pandemic labor market of half-century-low joblessness despite widespread worker shortages, rising wages and surging inflation.
Fed policy makers meeting this week are expected to decide to scale back their massive bond-purchase program as the economy continues to recover from the pandemic.
Powell acknowledged recently that the risks to inflation are “clearly” to the upside but stuck with his base case that price pressures will eventually ebb as supply-chain kinks are worked out. The personal consumption expenditures price index—the inflation gauge the Fed targets—rose 4.4% in September from a year earlier.
“We can be patient” in raising interest rates and “allow the labor market to heal,” Powell told a virtual panel discussion on Oct. 22.
The Fed chair, who will hold a post-meeting press conference on Wednesday, faces a conundrum when it comes to the labor market.
‘Very Tight’
He recognizes that it’s “very tight by many measures.” Job openings are elevated and workers are leaving their employers for new opportunities in record levels.
But he’s also suggested that a lot of slack remains, pointing in particular to a 5 million shortfall in payrolls from the pre-pandemic level. Unemployment—at 4.8%—is well above February 2020’s 3.5%, while labor-force participation is down.
Powell is betting that the dichotomy will be resolved by Americans returning to work and filling some of the 10.4 million open job positions as Covid-19’s latest wave subsides. “My expectation is that jobs growth moves back up closer to the high levels we saw last summer and the reopening of the service sector continues,” he said.
The first test of those expectations will come on Nov. 5 with the release of the October jobs numbers. Payrolls are expected to show a 450,000 gain—bigger than September’s 194,000 but below the 1.03 million monthly average in June and July, according to the median forecast of economists polled by Bloomberg. Unemployment is forecast to edge down to 4.7%.
Hidden Shift
The risk for Powell is that Covid-19 has wrought more lasting changes to the jobs market than he apparently believes, making it difficult to return to pre-pandemic levels without spurring inflation. Some service-sector jobs may be gone forever, from downtown restaurant workers who used to serve fully staffed office buildings to maids in hotels no longer packed with business and other travelers.
In Nevada, where joblessness is 7.5%, “we do know there are about 50,000 jobs that just are not going to come back” in Las Vegas casinos and supporting industries, Elisa Cafferata, director of the state’s Department of Employment, Training and Rehabilitation, told National Public Radio on Oct. 24.
The Covid-19 shock has probably also prompted some Americans to permanently leave the workforce. A recent St. Louis Federal Reserve Bank study found that more than 3 million Americans have retired early because of the crisis.
“This idea that many people have, that somehow the pre-Covid unemployment rate is a relevant benchmark or that the pre-Covid employment ratio is a relevant benchmark, that’s been blown out of the water,” said former Treasury Secretary and paid Bloomberg contributor Lawrence Summers.
Staffing agency executives on the ground of the labor market say that it in some ways it’s tighter than it was in 2019.
“Unemployment is higher based on the services industry due to Covid,” said Tom Gimbel, chief executive officer of Chicago-based LaSalle Network, an employment agency. “But if you remove the Covid aspect of it, unemployment is at historic lows in blue white and blue collar America.”
Gimbel, who said LaSalle’s business is up 50% from 2019, added that it’s especially tough to get workers to fill temporary jobs. “To get somebody off the couch and going and taking a job is harder than it’s ever been.”
Worker Demands
Michael Stull, senior vice president for Manpower Group North America, called the jobs market “unprecedented.”
“The big difference between today and yesterday is the fact that workers don’t see the value of working and they’re waiting for better jobs,” he said. “The pandemic has created a great awakening of workers and they are demanding more.”
One result: Wage increases are “higher and much more broad-based than they were” before Covid-19 struck, he said.
Powell and the Fed face a dilemma as the economy recovers, said University of Chicago professor Veronica Guerrieri. Some sectors, like autos, are booming, while others, such as airline travel, are lagging.
In the case of an uneven shock like Covid-19 that is likely to have permanent effects, the Fed should pursue an expansionary monetary policy to generate a “little bit of extra inflation,” she said. That will help ease the transformation of the economy and the transition of workers from one sector to the other.
But there are limits to how far the Fed can go. If inflationary expectations start to mount, it may need to change tack, said Guerrieri, who presented a paper on the topic at the Fed’s Jackson Hole conference in August.
“It’s a very tricky job for the monetary authorities,” she said
