We could be facing a recession where most workers get a little poorer rather than several million people losing their jobs.
Companies begin to lay off workers when their labor costs are too high relative to their revenues. It is generally more culturally acceptable to downsize rather than have everyone take a pay cut. Sometimes labor agreements or minimum wage laws make pay cuts impossible, leaving layoffs as the only alternative.
But our current high inflation makes the situation more fluid. Even if a business sells fewer widgets, revenue may increase due to the pricing environment. For example, unit sales may have fallen 2%, but revenue increased 8% because the company raised prices 10%. In this scenario, the company could tell its employees that no one would get a raise – essentially a pay cut in inflation-adjusted terms – and end up with declining labor expenses as a percentage. income without letting anyone go.
Thus, rather than seeing rising unemployment as an inevitable consequence of a recession, companies could realize the same cost reductions through a large reduction in the wage bill, adjusted for inflation. The chart below shows the year-over-year growth in the total level of wage and salary payments, as shown in the monthly personal income report adjusted for overall consumer price inflation. In every recession dating back to the 1960s, total inflation-adjusted wages have fallen by at least 1.5%.
And while that metric is still up 1.1% year-over-year, it’s incredibly subdued when employment numbers are up 4.3% year-over-year — the fastest pace of job growth in more than three decades outside of the pandemic. Interestingly, in the months following February – during which we got several Consumer Price Index readings – inflation-adjusted wage and salary payments fell by 1 .6% even though the United States created 1.5 million jobs.
I continue to think the economy is strong and resilient, and I’m still skeptical of the necessity or likelihood of a near-term recession, primarily due to the level of job growth and demand for labor in the economy as a whole. So certainly, this discovery makes me think.
Four months is not enough to draw a definitive conclusion. Much of the hot inflation data we’ve seen since February has come from rising energy prices, which are now reversing, one-off increases in airfares as consumers returned to the skies after two years of avoiding travel, and the 2021 rent spike that ultimately sank into CPI data. But if the trend continues, it looks like we’ll end up portraying the 2022 labor market in negative terms.
This dynamic is very different from other recent economic downturns. During the eight months that the US economy went through a recession in 2001, employment fell by 1.2%, or 1.6 million jobs. But because inflation was so much lower at the time – headline CPI rose 1.6% in 2001 – the paychecks of most workers who kept their jobs were unaffected by the slowdown taking inflation into account.
Today, the US economy is creating hundreds of thousands of jobs every month, while at the same time, tens of millions of workers have seen their wages decline every month on an inflation-adjusted basis. This is why most Americans are unhappy with the economy even though we are creating lots of jobs.
Social media finance influencer Kyla Scanlon coined the term “vibecession” to describe this economy where millions of jobs have been added, house prices have skyrocketed, consumers are flooding airports and resorts, but everyone feels gloomy. Playing on the term “jobless recovery” that was used to describe the aftermath of the 2001 and 2008 downturns, the “jobs recession” is now popping up on Twitter.
Both reflect the need to find a new way to assess the current labor market adjustment, which seems disconnected from data on job growth and unemployment.
More other writers at Bloomberg Opinion:
Are we in a recession? Don’t Ask Wikipedia: Stephen L. Carter
Do you have a labor shortage? Make your job easier: Kathryn Edwards
It is far too risky to assume that the background is in: John Authors
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is the founder of Peachtree Creek Investments and may have an interest in the areas he writes about.
More stories like this are available at bloomberg.com/opinion