Labor costs are driving up inflation. But will inflation also bring more people back into the workforce?
The annual inflation rate slowed to 8.3% in April from 8.5% in the previous month, helped by falling petrol prices, but consumers are still facing costs in rapid increase. The March reading was the highest since 1981.
The unemployment rate remained stable last month at 3.6%, staying close to the 54-year low, while hourly wages rose in April, pushing the Reserve’s target. Federal to moderate inflation and move the US economy away from a possible recession.
And while the hourly pay rise over the past 12 months, which rose 5.5% as employers increased the game to attract more job candidates, was the biggest gain since the beginning of the eighties, it was still well below the annual rate of inflation.
““These increased costs can help us get more people back into the workforce.””
Everything from rent to food is getting more and more expensive. “These increased costs can help us get more people into the workforce,” said Ron Hetrick, a senior economist at Emsi Burning Glass, a labor market analytics firm.
“They’re going to enter a job market looking forward to having them,” Hetrick added. “With our historically low unemployment rate, our greatest hope for resolving our labor crisis depends on getting people back into the workforce.”
Earlier this week, Minneapolis Federal Reserve Chairman Neel Kashkari said he “doesn’t really buy the Great Resignation,” the nickname used for the alleged mass exodus from the workplace.
Instead, people are moving “from the toughest jobs to the most attractive jobs,” Kashkari said, saying caring for children and driving long-haul trucks are jobs that are harder to fill.
Nearly 57 million people left their jobs, sometimes more than one job, between January 2021 and February 2022, 25% more compared to a similar period before the pandemic, but almost 89 million people were hired in the last 14 months.
““It’s worrying if wages don’t keep up with inflation for a longer period of time, but I think inflation will return to normal.””
Not everyone agrees that the U.S. workforce is disengaged, and some say the relationship between inflation and the desire to work is complicated. “I understand why a lot of people think people are sitting at home in the bank,” said Ben Wigert, director of research and strategy for Gallup’s workplace management practice.
“They go to restaurants where half the seats are closed due to staffing issues,” he told MarketWatch. “They see signs of ‘now hiring’ everywhere, and the media is constantly publishing articles about dropout rate records.”
“Right now, pay is the number one reason people decide to accept a job or leave it, and the importance of pay to get a job has increased substantially,” Wigert said. His research shows that people are getting better paid jobs with 25% more money.
Rising rates can make people find better paid jobs, he added. “For people struggling to make ends meet, it is certainly possible that inflation could push the unemployed into the labor market or make the employed take another job.”
Elise Gould, a senior economist at the Institute for Economic Policy, a progressive think tank, sees a return to work as a natural result of a return to a more normal business hours after the worst days of the pandemic.
“More people are coming back and there are more opportunities for them,” he told MarketWatch. “The supply of labor is likely to increase over the next year, and that will continue. We are seeing increases in participation and that will continue.”
““Typically, economists would say that inflation does not have a strong effect on long-term unemployment because wages adjust to long-term inflation.””
“It’s worrying if wages don’t keep up with inflation for a longer period of time, but I think inflation will return to normal,” he added. “Month-to-month volatility will not continue to rise.”
In addition, Gould said, a stronger job market will help lift those struggling to find work. “If you go from not having a job to having a job, you’re in a much better position even if average wages aren’t up to date with inflation.”
Wigert agreed. “Typically, economists would say that inflation does not have a strong effect on long-term unemployment because wages adjust to long-term inflation,” he said. “In this case, wages started to rise before the cost of consumer costs, so from my perspective, in many ways, the labor market is already adjusting to higher costs, if not contributing to the inflation “.
“If rising costs cause companies to cut hiring rates and reduce job offers, this would harden the labor market and could slow down dropout rates and wage increases,” Wigert added. “Right now, we live in a job market.”