- Employment is still far below pre-pandemic levels, but it’s now pretty clear that I was right. There really is a labor shortage.
- The labor market is weak in the sense that total employment is low, and tight in the sense that it’s hard to find workers and wages are rising fast.
- It’s also worth noting that the payroll figures will likely be adjusted upward.
Last year, I began talking about labor shortages. Lots of commenters suggested that it was just employers griping because they didn't want to raise wages. They pointed to the fact that total employment remained far below pre-pandemic levels.
Employment is still far below pre-pandemic levels, but it's now pretty clear that I was right. There really is a labor shortage. The labor market is "weak" in the sense that total employment is low, and "tight" in the sense that it's hard to find workers and wages are rising fast. Unemployment is only 3.9%.
The latest employment report is a disappointment, but the job market is actually somewhat stronger than this number would suggest. Consider the following:
While the payroll survey shows gains of only about 450,000 over the past two months, the (less accurate) household survey shows gains of over 1.7 million. That's a phenomenal number, as household employment has gone from a deficit of 4.6 million to a deficit of 2.9 million in just two months.
But why pay any attention to the less accurate household survey? Because even though it is less accurate, it provides some information, at the margin. Thus, it picks up gains in self-employment, which might matter during a period where people like working at home to avoid Covid.
It's also worth noting that the payroll figures will likely be adjusted upward. How do I know this? Because the payroll numbers were revised upward in each of the past 8 months. The odds of that happening randomly are 1 in 256. Let's revisit my prediction in two months to see if I'm right:
Wage growth again came in higher than expected, and the unemployment rate fell by more than expected. Inflation is way above target, and NGDP is growing at a rate that is not consistent with the Fed's inflation target. Even worse, NGDP growth in 2022 is likely to be excessive. TIPS spreads are excessive at both 5- and 10-year time frames. We need tighter money. Under FAIT, the Fed should be shooting for below 2% inflation.
There's a lot of confusion about full employment. We are at "full employment" (as defined by economists) given the headwinds of Covid. And yet, it's equally possible that by July the full employment level will be three million higher than today. But that would not mean that we are not at full employment today. Full employment is not a fixed number, it moves around due to "real" factors, such as Covid.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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