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Labor force participation across all age groups dropped at the start of the COVID-19 pandemic and has yet to recover for workers aged 55 and over. Miguel Faria-e-Castro and Samuel Jordan-Wood of the St. Louis Federal Reserve Bank find that higher than average returns in the stock market, combined with increasing home values, may have driven many older workers to retire earlier than they otherwise would have. Using surveys on households’ financial situations from 2019 and estimates of the effect of wealth on labor force participation, the authors estimate that increasing asset prices led to about a third of the 3.3 million excess retirements between 2019 and 2022. The findings suggest that strong stock and housing markets immediately post-pandemic may have caused persistently low labor force participation in the years following.
Mary Amiti and Sebastian Heise of the Federal Reserve Bank of New York, Fatih Karahan of Amazon, and Ayşegül Şahin of the University of Texas at Austin consider three explanations for the recent increase in inflation: supply chain bottlenecks that increase the cost of intermediate goods like metals, rubber, and chemicals for domestic firms; supply chain bottlenecks that increase intermediate costs for foreign firms that export to the U.S.; and an increase in the wages Americans require to take a job—known as reservation wages. The authors find that supply-side shocks combined with rising reservation wages raised inflation by 2 percentage points in 2021 and 2022, and the combined effects of these factors were larger than if each of the shocks had hit separately. With combined shocks, firms cannot defray price inflation as effectively by substituting intermediate goods for labor (or vice versa). Furthermore, the direct competition between imported and domestic goods allows domestic firms to pass through price increases when the price of foreign goods rises, which amplifies inflation. The authors find that the effectiveness of monetary policy depends on whether inflation is supply or demand driven: if driven by demand, aggressive monetary policy can contain inflation without a recession later. But if the inflation is driven by disruptions in supply and increasing reservation wages, the authors predict that “aggressive policy can have a large negative effect on the labor market.”
Using administrative data from Washington State over the 2001-2014 period, Marta Lachowska of the W. E. Upjohn Institute for Employment Research and co-authors find a significant discrepancy between workers who prefer longer work hours and employers who offer only shorter hours. In particular, there is a 15% absolute deviation between the hours that workers prefer to work and the hours they actually work, with most workers wanting to work more hours. The mismatch is particularly pronounced for younger and less educated workers and workers in the retail and food and accommodation sectors. The authors estimate that, on average, workers would require a 12% increase in wages to feel as content with their current work hours as they would with their preferred, optimal hours. The results are consistent with workers being matched to employers according to their productivity level, explaining “why we see little sorting on hours and only high-productivity workers sort to longer-hour employers,” the authors say.
Chart courtesy of Goldman Sachs
“This moment that we’re in highlights how data-dependent we need to be. We need to be looking at credit conditions and a whole bunch of financial indicators in addition to our normal things that we look at on the real side of the economy. In our surveys and with business contacts and in looking at the credit conditions, we have yet to see that tightening really bite on the real side of the economy … I’m certainly getting vibes [in] the market and in the business contacts that the credit crunch, or at least the credit squeeze, is beginning,” says Austan Goolsbee, President of the Chicago Fed.
“[The] argument about the debt ceiling comes at the worst possible time where we’re trying to figure out what is a very strange business cycle coming out of the pandemic, weighing off against the tightening that’s coming from these bank failures, and uncertainty. And to add on to it, this uncertainty about whether the government is going to pay its bills just makes it extremely difficult to figure out what will be the conditions for economic growth and the job market … The job market has been extremely robust. At the same time, we’ve seen the job openings come down. The so-called vacancies to unemployment rate, which a lot of economists look at as a key indicator of wage demands and the strength of the labor market – you’ve seen that ratio coming down in a way that’s consistent with a soft landing. So, what we’re just trying to do here is fulfill the legal mandate of the Fed: maximize employment and stabilize prices. Inflation’s been higher than we want it, but let’s try to stabilize the prices without generating any unnecessary recession.”
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