Labor Costs and their Possible Inflationary Impacts

  The following is an Excerpt from ARGI's Monthly Capital Markets Update, July 2021

LABOR COSTS AND THEIR POSSIBLE INFLATIONARY IMPACTS      Short-term labor shortages exist due to the continued reticence to return to work from the pandemic, continued higher unemployment compensation payouts in many states, and a higher level of personal cash savings.

However, longer-term pressures that have elevated inflation concerns include: a surge in number of workers entering retirement; the decrease in immigration into the U.S. of new workers; high costs of child care; a lack of education and skills by a sufficient number of workers for many of the open jobs; and increases by states and localities in the minimum wage. While the number of employed has increased by nearly 3 million over the past five months, the U.S. still has 7 million fewer employed than existed in February 2020.

Forty-eight percent of small business owners reported unfilled job openings in May, well above the long-term average of 22%, according to a National Federal of Independent Business (NIFB) survey. With over 9 million job openings there is room to hire more workers, although mismatches between skills requirements and available trained labor exist in several industries.   Evidence of a possible wage-price spiral exists. Prolonged wage pressures lead to pricing pressure for goods and services. A National Federal of Independent Business (NIFB) survey found that 43% of small businesses indicated that they had raised selling prices in May, the highest share since 1981. CFO’s of some of the largest global companies viewed inflation as the largest external risk factor that their corporations face.   Certain members of the Federal Reserve Board (FRB) appear split about the inflation threat. The FRB’s stated projection for GDP growth in 2022 is 3.3% and 2.4% in 2023, however one board member projected a 7.0% GDP growth for 2021, a substantial increase from the FRB’s stated projection last December of 4.2%.   The official U.S. unemployment rate (“U-3 rate”) declined by 0.3% to 5.8% in May. Over the past four months, employers have added over 500,000 jobs per month. Bankrate’s Second-Quarter Economic Indicator survey indicates that economist’s project, on average, an unemployment rate of 4.49% in the next 12 months.   A decline in the labor force participation rate has occurred over the past year. The central problem for the decade of the 2020s is the large number of baby boomers retiring. The replacement generation of workers is smaller than the departing generation of baby boomers. As a result, labor shortages are expected to be more widespread over the next decade, affecting nearly every state and many industries and professions. Business strategies to counter labor shortages in the U.S. include increasing rates of retention, investing in more on-the-job training (or partnering with universities for such), seeking to hire more former military personnel, providing more flexible schedules to highly skilled employees, improvements in corporate culture, investing in technology to reduce some types of workers, and hoping that the U.S. increases its rate of immigration. Labor shortages will increase in most countries with developed economies. Of all of the more developed economies, only India is likely to have a substantial surplus of skilled laborers in 2030 and in the decade beyond.