U.S. employees are feeling confident enough to push for better pay and conditions, despite the high level of unemployment after the pandemic, a sign the balance of power is shifting in the job market.
The result should be a strong and sustained expansion in consumer spending and business activity over the next year, which will be welcomed by policymakers at the central bank and in the White House.
However, it will also fuel faster inflation and probably force the Federal Reserve to scale back its bond buying programme and raise interest rates earlier than top policymakers have indicated so far.
The total number of non-farm employees is still down by more than 7.5 million compared with February 2020, the last month before the first wave of the pandemic hit the economy.
But in April, the proportion of employees who quit their jobs voluntarily rose to the highest rate for more than two decades, according to separations data compiled by the U.S. Bureau of Labor Statistics (BLS).
The seasonally-adjusted quit rate rose to 2.7%, up from 2.3% in the same month two years ago, before the pandemic, and the highest since this time series started in 2001 (https://tmsnrt.rs/3wwWbGE).
In response, employee compensation has started to rise faster as businesses and other private-sector organisations try to hold on to experienced workers by raising wages, salaries and other benefits.
For private employees, total compensation costs have risen by 2.9% over the last year and at a compound annual rate of 2.8% over the last two years, according to a separate survey by the BLS.
Compensation is rising at the fastest rate since the strong economy of 2018 and before that the pre-financial crisis economy of 2008 (https://tmsnrt.rs/3iFsoY7).
Strategy for both the Federal Reserve and the White House is dominated by the need to avoid a repeat of the unusually low quit rates and weak compensation growth between 2010 and 2016.
More labour market turnover and faster compensation growth will therefore be welcomed by policymakers anxious to repeat the subdued business cycle expansion after the last recession and the ensuing populist revolt.
Quit rates are critical to compensation growth. In general, most employees achieve larger wage gains when moving from one organisation to another rather than when they stay within the same organisation.
More turnover should therefore compel employers to raise pay faster, with benefits for households in the lower half of the income distribution, which depend more heavily on income from wages and salaries.
Both the central bank and White House want to run the economy relatively hot to maximise employment opportunities, job switching, and therefore wage and income gains for lower-income households.
“Economic ‘heat’ does not necessarily equate with overheating,” the White House Council of Economic Advisers noted in April, in a lengthy statement designed to forestall fears about a temporary rise in inflation.
Accelerating compensation growth is likely to generate faster inflation by increasing consumer incomes and spending power, as well as raising business costs, encouraging firms to restore margins through price increases.
The Federal Reserve and the White House have been relatively sanguine about this scenario; both have said that somewhat faster inflation is a policy objective, after the below-target rates earlier in the decade.
Compensation increases running at 2.8% per year should be fast enough to accommodate inflation rates of 2.50-2.75% per year, probably in line with the Fed’s undeclared target.
The problem will come if compensation increases continue to accelerate, sustain a faster rate of inflation and perhaps even push it higher.
THE LAST CYCLE
The Fed and the White House are focused on avoiding a repeat of the problems following the recession of 2008/09, but the current recovery looks nothing like the previous one.
Like the proverbial generals fighting the last war, central bank officials may have absorbed lessons from the last economic cycle just as the nature of the problem has changed.
The Fed’s commitment to continue buying bonds and holding interest rates near zero throughout 2022 into 2023 is an insurance policy against an anticipated weak and inconsistent economic upswing.
So far, however, the expansion is proving strong, as households have boosted spending on merchandise, and the end of pandemic control measures is unleashing pent-up demand in the service sector.
The Fed therefore has a time-consistency problem. If fiscal and monetary stimulus succeed in generating a strong recovery, heat will turn to overheating, and stimulus will have to be withdrawn or reversed earlier than officials have indicated.
If stimulus has to be continued through to 2023, as the Fed says it expects, that would be a sign the fiscal and monetary measures have not been effective, and the economy remains stuck in a low gear.
The combination of a strong recovery in the United States with income gains among lower income households and lots of fiscal and monetary stimulus should keep demand for merchandise high.
Faster growth in merchandise consumption will keep global supply chains and freight transportation systems stretched through the remainder of this year and 2022.
Prices for a broad range of energy and non-energy commodities are already rising rapidly and are likely to continue escalating as the global economic cycle matures.
The longer the Fed maintains maximum stimulus now to insure against any loss of momentum in the early stages of the recovery, the greater the risk of overheating as the cycle progresses.
More policy support now could translate into a more abrupt and disruptive turnaround later, a point made by several of the Fed’s most prominent critics, including former U.S. Treasury Secretary Lawrence Summers.
In the meantime, the combination of unprecedented fiscal and monetary stimulus in the United States and Europe is creating near-ideal conditions for a big rise in commodity consumption and prices in the short term.