GETTING JOBS MARKET BACK INTO BALANCE
Jeffrey Roach, PhD, Chief Economist, LPL Financial
Federal Reserve Chairman Jay Powell reiterated his warning that getting inflation under control will require some pain. Powell is likely making these warnings based on the arcane, clunky relationship between inflation and unemployment. The key to getting the market back into balance is a bigger labor force, and the economy is starting to experience a larger labor force as individuals come off the sidelines and rejoin the job market.
“PAINFUL” rise in unemployment?
Members of the Federal Open Market Committee (FOMC) recently issued warnings that the path to lower inflation will be painful. The crux of that view is based on the arcane, clunky Phillips Curve, which illustrates the relationship between inflation and unemployment. Like many concepts in global markets, the Phillips Curve went through many iterations and has plenty of versions. Nonetheless, the FOMC believes that the basic Phillips Curve concept is paramount for this current environment; i.e., the economy cannot get back to a long-run 2% inflation rate unless unemployment rises. And a future rise in unemployment could be significant and pain-provoking, especially for lower income households.
Is current inflation driven by a tight labor market?
The global economy is complex, and a simplification of reality always introduces distortions, so perhaps we should zoom out a bit. The world experienced multiple industrial revolutions, from mechanical to electrical to digital, and some talk about a fourth industrial revolution. Wherever the world is in its revolutionary phase, most agree that inflationary contributors change over time. And sometimes that change can happen quickly. We believe current inflation is a result of large fiscal stimulus during the COVID-19 shutdowns and nagging supply bottlenecks, further aggravated by a host of potential workers who are still on the sidelines.
The latest jobs report gave some glimmer of hope. Over a third of those unemployed and looking for work were previously not in the labor force as shown in Figure 1. As more individuals reenter the workforce, the labor market could loosen organically, especially as individuals currently not in the labor force move directly into a job.