The Fed’s Obsession with Labor Maybe Missing the Mark

Dec 22, 2022 | Macro Insights, No Bull Economics


3Q22 comments from many public restaurant companies indicate that labor costs are clearly moderating and that labor shortages are largely a thing of the past (except for pizza delivery drivers).

Key Points from Powell’s Recent Comments:

  • The largest component of the PCE inflation index (55% of the total) is non-housing related core services which is primarily driven by labor costs. The Fed reports that it has yet to observe much softening in a very strong labor market which is marked by high job & wage growth and elevated job vacancies.
  • The labor market remains extremely tight, with the unemployment rate near a 50-year low, job vacancies still very high, and wage growth elevated. Job gains have been robust, with employment rising by an average of 272,000 jobs per month over the last 3 months.
  • The Fed reports that companies outside of the tech sector are reluctant to lay-off staff, reflecting concerns that they will not be able to rehire later. We would add that companies maybe reluctant to cut staff because they are not financially strained and because it is much more cost effective to retain existing employees than to incur huge training costs after knee-jerk layoffs at the first sight of an economic downturn.
  • Powell suggested that there are channels through which the labor market can come back into balance with relatively modest increases in unemployment and it may have to do with lowering the huge overhang of vacancies. Perhaps, if employers limit job postings employees would be less likely to job hop in search of higher pay. However, this sounds like collusion to us and would require the unlikely cooperation of most employers to be effective.
  • In any case, a 3.5MM structural labor shortage is pushing-up wage rate inflation which is best measured by the average hourly earnings number (see below) according to Powell.
  • The Fed has been surprised that higher wages have not increased the labor participation rate which declined post-covid because of early retirements, lower immigration & excess deaths of ~500,000.
  • The government seems to be dialing-back its push for higher minimum wages (including a huge drive to get everyone to $15+/hr). Also, it seems incomprehensible to suggest a lack of immigration given the well-known surge across the Southern border. Further, there was no mention of ramping baby boomer retirements which cannot help with this labor shortage.
  • We note that 3Q22 comments from many public restaurant companies indicate that labor costs are clearly moderating and that labor shortages are largely a thing of the past (except for pizza delivery drivers).      
  • In any case, we suggest that food cost inflation represents a much larger economic & societal threat than elevated but moderating wage rates.
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