Labor Market Mystery: Why High-Wage Workers Are Suffering the Most
Yet all that could change quickly next year if the kind of recession economists are predicting arrives – and hard times for workers could come just as President Joe Biden launches an expected re-election campaign.
“Technology and financials are most impacted by rate hikes because they’ve been gorging themselves the most on low rates,” said David Kotok, chief investment officer at Cumberland Advisors. “But if you’re a carpenter or a retail worker right now, you can always quit your job whenever you want and instantly go somewhere else and get paid more. This will not continue to be true if we enter a real recession.
The numbers tell the story of the phenomenon of upper extremity pain and lower extremity gain.
US companies announced the layoff of 320,173 workers this year, a 6% increase from the first 11 months of 2021, according to data firm Challenger. Of that number, by far most came from the tech sector – 80,978, or more than a quarter.
Wealthy investors who rely on market gains also took a hit. All three major Wall Street indexes are down double digits on the year, with the tech-dominated Nasdaq the most at 34% as of Dec. 23. thousands of well-paid workers at their jobs.
But injury predictions for entry-level workers haven’t fully materialized — at least not yet. And there have been many such concerns.
“Do you know what is worse than high prices and a strong economy? These are high prices and millions of people out of work,” Warren said in August. In October, she led a letter with nine other lawmakers accusing Fed Chairman Jerome Powell of “apparent disregard for the livelihoods of millions of working Americans.”
Instead, the market for retail workers, laborers, cooks, cleaners and a wide range of other lower-paying jobs has remained strong despite officials even in the Biden administration saying expect a significant decline in employment growth.
Employers added a solid 263,000 jobs in November with only minor signs of slowing labor demand. Average hourly earnings are increasing at an annual rate of 5.1% and monthly earnings are now outpacing increases in the consumer price index.
These are good times for the lowest paid job seekers. But it’s also a potentially big problem for the economy since their wage gains could prompt the Fed to raise interest rates so much that it triggers a recession. That’s because such strong wage growth is fueling headline inflation as employers pass on higher labor costs to consumers.
The Fed’s Powell said the economy could not sustain such wage growth without fueling inflation and the country needed millions more people to enter the labor market. Even with wage increases, this is not happening, with the labor force participation rate stuck at 62.1%, below its pre-pandemic level.
“Despite very high wages and an incredibly tight labor market, we are not seeing participation increase, which is contrary to what we thought,” Powell said at a press conference in December, adding that the slowdown immigration in recent years has fueled the labor shortage problem.
“We need more people,” he said, while noting that some of the highest pay increases are now occurring in the lowest income brackets.
But if wage inflation doesn’t come down, Powell and the Fed are prepared to use rate hikes — both in size and duration — to depress business demand for labor. And in doing so, they could trigger a major recession and trigger the kind of job losses that would be brutal for workers and for Biden and Democrats in 2024.
“The speculative and bubble parts of the economy, like technology, which have benefited greatly from the Fed keeping long-term rates lower for longer than warranted, have already begun to weaken” said Richard Bernstein, founder of a financial advisory firm that bears his name. “But if we get a real recession, the demand for labor will probably drop significantly and you’ll see millions more workers affected.”
The White House – and some economists – say a recession remains avoidable as inflation slowly declines and the impact of previous rises takes hold. Administration officials note that previous recession predictions were wrong — the economy grew at a healthy 3.2% in the third quarter of the year, the government said Dec. 22. They also say that the policies adopted over the past two years on infrastructure and technological development will help avoid a serious recession.
Both the Fed and the White House received good news on the inflation front on December 23 with a key measure, the personal consumption expenditure index, plunging to a 5.5% increase in November from at the same period last year, against 6.1% in October.
“The appetite and action to invest in the United States is very high right now,” Brian Deese, director of the White House National Economic Council, told POLITICO. “And that reflects the relative strength of the United States and a reflection of a political environment that has provided long-term certainty for investing.”
But such a scenario, in which labor shortages ease and wage inflation cools quickly enough for the Fed to loosen its restrictive stance, is not the consensus view of economists.
On the contrary, prognosticators from Bank of America to JPMorgan Chase mostly predict at least a mild recession beginning sometime next year, driving the unemployment rate perhaps significantly higher than the current 3.7%.
Democratic economist and former Treasury Secretary Larry Summers – among the few to predict continued high inflation – sees unemployment soaring to 7% before the Fed is done killing inflation.
Such an increase would come at a dangerous time for both Democrats and workers. Low-income Americans are drastically reducing their savings while battling inflation. They put more spending on credit cards. And a divided Congress is unlikely to agree on recession-fighting relief spending. Increasing immigration seems politically impossible in the short term.
Meanwhile, the patchwork state-run unemployment benefit system is underfunded, which could make it difficult for policymakers to pour money into the pockets of laid-off workers.
“There’s no way we’re even close to being recession ready at this point,” said Rand Corp economist Kathryn Edwards. which focuses on labor market issues. “The unemployment benefits process is how we prevent downturns from becoming much bigger and more painful than they need to be. And it’s a mess and we haven’t done anything about it. We were in the wrong place when Covid hit in 2020 and we are in a terrible place now.