Risk of a major policy-induced slowdown in 2023 increases as the Fed becomes more confident on hikes
Continued labor market tightness in the US will force businesses to pay up to attract talent in 2022. Strong wage pressures can be mitigated by offering other incentives, such as one-time bonuses, flexible scheduling, and remote work.
Tight labor markets could mislead the Federal Reserve into hiking too aggressively, causing a slowdown. Plan for the possibility of a mild recession or slowdown in late 2022 or 2023 by, for example, pivoting to consumer and B2B segments focused on income-inelastic essentials.
Wage growth and employment levels have rapidly recovered to tight pre-pandemic highs, driven by strong demand. However, the share of people in the labor force remains well below pre-pandemic levels. The largest decline in labor force participation since February 2020 is among those with some college education but no bachelor’s degree. There are 1.8 million lost workers ages 20–34 within this education category, and a further 1 million lost for other ages.
Elderly blue-collar workers are also missing, down 14.8%. These workers are more likely to have been at risk from COVID-19 and lockdowns, likely making them retire earlier. The 3.1% fall in overall participation for those ages 65+ can also be attributed to the boom in stocks and house prices, prompting large drops in unretirements. With stocks falling and real estate cooling in recent months, we expect some rebound here.
Still, overall, falling participation is likely part of a longer-term pattern. Participation has trended down since 2000, particularly among men—the result of demographic aging, lost mid-skilled opportunities, and growing health issues. Pandemic visa backlogs, causing the lowest net immigration in decades, are also a factor.
We see tighter—not looser—hiring conditions ahead. Fading COVID-19 restrictions and slowing capital gains are already pulling elderly workers back from retirement, but this effect will be small compared to other factors limiting labor supply. There are some upsides. Real wages are falling, as overall, firms are able to pass on cost increases faster than workers can get pay raises. This makes workers a better value for money, provided you aren’t struggling to pass on input costs.
The Fed is hoping to take some of the froth out of new hiring and wage growth without endangering current jobs, but this is difficult, and risks causing job losses toward 2023, as global events also weigh on demand. The Fed currently views elevated job openings and quits as unsustainable. However, we see these indicators as misleading. Job openings have decoupled from real hiring intent, as the internet makes it easier to advertise job postings. Quits are elevated, but this is consistent with the job switching opportunities seen in rapid recoveries. Excess focus on these measures, as well as signals that the Fed cares more about inflation than jobs, makes a rate hike–induced slowdown in 2023 likely. Yet, in the meantime, hot labor markets are not going away.
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