Is The Worker Shortage Transitory?

For the past several months, there have been two "T" words that have captivated the financial markets.

The first, of course, is the "Taper," which now looks like it may be starting as early as next month. Following its September monetary policy meeting, the Federal Reserve—using its usual weasel words—didn't exactly say it was ready to taper, but basically confirmed that it would begin soon, saying that "a moderation in the pace of asset purchases may soon be warranted." So we can probably expect the Fed to provide more definite information following its next meeting in early November, and that may include a start date of later that month.

The second "T" word is "Transitory," as in the "inflation is transitory" mantra Fed chair Jerome Powell has been repeating for most of 2021. However, recently he's backed off a little on that stance, telling Congress last month that while he believes inflation will eventually return to the Fed's 2% target rate, "these effects have been larger and longer-lasting than anticipated." In other words, maybe inflation isn't as transitory as he says, therefore the need to taper.

Now, after two crummy monthly job reports in a row, it may be fair to ask if the shortage of workers holding back the economy isn't transitory either.

Last week the Labor Department announced that the economy added just 194,000 jobs in September, less than half the consensus Street estimate and well below even the most pessimistic forecast of 250,000. That follows the previous month's equally disappointing report, which showed only 366,000 new jobs, plussed up from the original report of 235,000 but still pretty low. By contrast, over one million jobs were added in July and 962,000 in June.

Anyone who's had to wait longer than normal at a restaurant or been unable to buy their favorite cereal at the supermarket is no doubt familiar with the shortage of workers. Hence, the fact that employers are adding fewer people—instead of hiring in droves—probably strikes you as odd. It's particularly odd when you consider the enormous number of people who are dropping off the unemployment rolls lately as their Covid-19 bonus benefits expire.

According to last Thursday's unemployment claims report, the number of people filing continuing claims for benefits dropped to a little more than four million in mid-September from about 12 million just two weeks earlier. With rent and mortgage subsidies also expiring, you would think that millions of people would now be desperate to return to the workforce. And yet that doesn't seem to be happening, at least not yet.

Maybe it's simply too early to see a change in payrolls. Perhaps in a couple of months, more and more people will return and be absorbed into the workforce and show up in the numbers, and all will be well again. But we should also consider the possibility that the economy won't add as many workers as it needs to reduce the supply shortages and inconveniences plaguing many industries, from restaurants and hotels to trucking and semiconductors. Let's face it: For one reason or another, there just aren't enough people interested in working.

One reason, of course, is simple demographics. With Baby Boomers retiring in droves, the number of people replacing them is falling short of what is necessary. That has been inflated by Covid-19, which encouraged many people to retire early for their own safety.

But let's also not minimize the effect that policies championed by the Biden Administration and the progressives in Congress are having on people's desire to work. While government benefits rarely exceed the income you can get from even a low-paying job, the gap between the two is narrowing enough to the point where more and more people are asking themselves: What's the point of working? That's a scary thought, yet it seems to be an easy answer for more and more people. As the September jobs report showed, only 61.6% of presumably eligible workers, the labor participation rate, which would exclude retirees, are, in fact, working, meaning nearly 40% of the potential workforce is otherwise engaged.

"Democrats have made quitting an easier economic option," the Wall Street Journal editorial page explained. "There are many federal financial payments that don't require work, including a $300 monthly allowance per child, food stamps, and rental assistance. The White House and Fed have deployed the Keynesian policy mix of government spending and easy monetary policy to boost demand. Meanwhile, they've squeezed the supply side with incentives not to work."

It was the late Nobel laureate economist Milton Friedman who said famously, "When you start paying people to be poor, you wind up with an awful lot of poor people." Finally, we appear to be seeing that economic theory put into action.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.