Last week, there were three different surveys of US jobs and wages. On Thursday there was the ADP household survey of employment. On the same day came the weekly new Jobless claims data, and on Friday came the government's own non-farm payrolls data, on employment and hourly wages. Markets seem to have taken the data as providing a “goldilocks scenario” of a jobs market that is neither too hot nor too cold, meaning that the economy is growing strongly, but not so strongly as to be overheating, and causing the Federal Reserve to raise its policy rates, or remove its monetary accommodation. The financial markets are concerned with that, because if interest rates rise, the current bubbles in asset prices will burst. A close look at the data, actually shows that the inflation being seen elsewhere, is becoming embedded, and that bottlenecks are arising within the labour market, with wage pressures mounting as a result, just as they are elsewhere.
The ADP Report indicated that the US had created nearly a million jobs over the month, as against expectations of around 680,000, and significantly above the 650,000 of the previous month. In normal times, even a rise of around 200,000 is thought to be a good month, with only around 90,000 new jobs per month, being required to absorb the normal increase in the workforce. However, these are clearly not normal times, because the consequence of the lockouts and lockdowns, imposed by governments, has been to trash economies, and throw millions of workers out of work, and on to the dole. Much of that will be temporary, but we will only know how much is more permanent when the furlough schemes that have been introduced, alongside other income replacement schemes, come to an end. The fact that much of it is temporary is shown by the fact that as the lockouts and lockdowns end, there has been these massive increases in employment. The US is expected to create another 7 million jobs during the Summer, as its economy fully reopens.
Another indication of that came with the Weekly Jobless Claims data, which showed that claims had fallen below 400,000 for the first time since the lockouts and lockdowns began more than a year ago. At 385,000 the number was slightly better than the estimate of 390,000. It is way above the 200,000 figure expected in more normal times, but again, these are not normal times, and the US economy is not yet fully open. What it does show, however, is that, as the economy reopens, consumers are going out to spend, and stores, many of whom have depleted their stocks, are having to quickly restock, and employ additional workers to deal with the increased demand, and that is feeding through to producers, be they US or foreign.
In modern economies, 80% of employment, and so of new value and surplus value production, is in service industry. So, it is not surprising to see that the biggest job gains were in the leisure and hospitality sector, where ADP reported 440,000 new jobs.
The BLS data on Friday, in this context was seen as “disappointing”, showing only 559,000 new jobs created during the month, as against the anticipated 675,000. The financial markets responded, as they do, by seeing bad news as good news, and disappointing news as hopeful news, as a weaker economy means more monetary stimulus, which is pumped directly into inflating bond prices, which feeds into the prices of other assets. Indeed, in the last week, we have seen the extent to which the Federal Reserve had been bolstering the corporate bond market itself by the purchase of Corporate Bonds and Exchange Traded Funds (ETF's) .
The BLS data was significantly better than the 250,000 new jobs added the previous month, when it had been expected that the performance from March would be repeated, with 1 million new jobs. But, looking at the reason for the lower than anticipated number of new jobs, in both months, it becomes clear that the reason is not a shortage of job openings, but frictions arising in the jobs market itself, of being able to recruit enough workers of the right kind, in the right place, and at the wages that employers want to pay. In part, this simply reflects what I predicted months ago, which is that the lockouts and lockdowns acted to accelerate changes in economies that were already taking place. For example, the switch from shopping in stores to shopping online was massively increased, and its unlikely that is going to now reverse. Some businesses responded to that, by beefing up their online presence and capability, as well as taking on more IT workers, not to mention more workers in centralised warehouses, and as delivery drivers. In the UK, TESCO took on 16,000 new staff as its online sales soared, including 3,000 additional drivers. This is just one example, of how the types of workers being taken on, and where they are taken on, differs from the workers that have been laid off. The same is bound also to be the case in the US.
The monthly BLS data, however, shows the other side of this. It showed that US wages rose by 0.5% month on month, as against estimates of just 0.2%. A month on month rise of 0.5%, if continued through the year, would give a rise in wages, over the next year, of more than 6%, well above the average for recent years, and way above the current headline rates of inflation, though likely to be lower than the actual level of inflation that workers are facing in the US.
The rise in wages indicates both sides of the problems firms face in hiring workers, as job vacancies rise sharply. Firstly, the problem they face is not the absolute level of employment – which is currently still more than 7 million below the level prior to the lockouts – but the pace of the turnaround. Secondly, they need to hire specific workers, in specific places, and because of the pace of the turnaround, they may not be able to get them all. That means firms compete for the workers available, bidding up wages. If firms have to bid up wages for any new workers they take on, they also have to pay those higher wages to their existing workers. The alternative is to use existing workers more extensively. New labour saving machines cannot be introduced in the short-term, but existing equipment can be used more intensively/extensively, by having workers work overtime, or by introducing new shifts. Either way, in conditions of apparent labour shortage, firms will have to pay workers premium rates to work the overtime etc.
But, in these conditions, the reason that employers cannot get workers, even where they are available, also becomes apparent. Right-wing pundits argue that the welfare benefits paid to unemployed workers encourage them to sit on the dole rather than take up employment. That is nonsense. Welfare benefits do not exceed the income from employment, other than in the case of the very worst paying employers, who, therefore, don't deserve to be able to employ workers on starvation wages. Especially in the US, where such benefits are more limited, and time restricted, that is even more the case. Every worker knows that the additional support introduced during the lockouts will be withdrawn, and so if you had the chance of a job, you would be more likely to take it than bank on getting that welfare support for ever more.
However, what is true is two other factors. Firstly, in conditions where workers can see that there are lots of job openings and labour shortages, they have no need to simply rush into the first job that is presented to them. Take on a job, and you are going to be tied to it for a period ahead, whereas, hold off for a few weeks, look around, and you may be presented with a much better opportunity. That is enhanced by the fact of the additional support that has been introduced, rather than the latter being the decisive factor. There are other similar factors such as the lack of child day care having been reintroduced yet, that act as limitations on workers rushing back into work. So, the jobs data also shows that what is called the “participation rate” has also continued to fall in the US. That is of the total workforce, the proportion of people actively seeking work has fallen. That, however, is not peculiar to the US.
The biggest reason that the participation rate has fallen, not just in the US, but in most, if not all, developed economies, is a rise in affluence for the baby boom generation. Baby boomers grew up in an era where most could obtain permanent, reasonably paid employment. They bought houses in the 1960's and 70's when they were only about a quarter of their current, inflation adjusted prices. That meant that they could largely avoid huge levels of debt, whilst acquiring the various accoutrements of modern living, such as a car and so on. Finally, they could accumulate some modest savings, and many, particularly government employees, but also those employed by large corporations, had access to company pension schemes, at a time when, with asset prices much lower, monthly contributions bought many, many more units in funds than the same contributions do today. The result was that many such baby boomers could decide to retire early. At the very least, in order for employers to get them to work for them, they would have to pay much higher wages. But, given that, even at these higher wages, employers wouldn't employ people unless they were going to make a profit from their labour, we shouldn't feel too sorry for them.
The financial markets also should not feel to confident that the jobs data means that inflationary pressures are not building in the economy. If anything, the slightly lower increases in employment are an indication of the opposite. They are an indication that labour shortages have given a boost to workers confidence, who now feel they have no need to jump at the first job opportunity that comes their way, and that they can pick and choose more, selecting the better offers, and the higher wages. There is extensive anecdotal evidence of that, of employers with 200 jobs on offer, but who find only a dozen people turning up for the interviews. The evidence of inflation in food prices, and of basic wage goods continues to flood in, again meaning that workers will require much higher wages to cover their increased costs of living. The Bloomberg commodity price index, which measures the prices of primary products such as copper, iron, tin and so on, is now back to the levels it reached as those prices soared after the start of the new long wave upswing in 1999, and before the new sources of supply caused prices to drop in 2014.
The idea that this inflationary pressure is merely transitory is increasingly hard for the authorities to justify, and as they continue to lump liquidity into circulation to enable firms to increase prices so as to recoup increased costs in their final prices, the more that inflationary spiral, itself caused by the excess liquidity will accelerate, and become embedded, as former Fed official Bill Dudley described recently.
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