Nobody works anymore. Seriously. 

     As a result of the pandemic, the labor force (% of Americans that are fit to work) took a big hit; a large reason for this was early retirement. The Fed recently published research showing that the retired share of the U.S. population was nearly 1½ percentage points above its pre-pandemic level, and additionally this accounted for nearly all of the decrease in the labor force. TL;DR for those of us who are not finance bros: nearly 2 million extra people retired during the pandemic fallout and don't plan on going back to work. ** **

Despite this, mass retirements don't tell the whole story. New research postulates that a majority of the loss in total labor output is due to voluntary hour reduction from high-wage earners that are already working extra hours. Controlling for possible health implications from COVID, the pandemic encouraged hard workers to pursue the mystical “work-life balance”. The phenomenon they label “Quiet Quitting” combined with the Great Resignation paints a full picture of the labor shortage, and reminds us Americans that we are in fact workaholics. On the bright side, for those of us who stuck around, the rate of wage growth has increased for the first time in decades. 

The way that Americans work has fundamentally changed forever.

     Although everything on paper looks good, massive layoffs from Fortune 500 companies are scary. Google laid off 12,000 people this past month, and a whole host of other tech layoffs have made front pages. Aggressive layoffs across industry tell a contradictory story to what generalized economic data has reported. Do not fret though, these people find other jobs at a record fast pace, and there is significant job growth across most sectors.

Now may also be a good time to remind ourselves how hardworking Americans are. Out of all OECD countries, the US is consistently above the 75th percentile in hours worked. Maybe it’s a positive thing that Americans now work less. 

The economic reality for most Americans is actually not worse if not better than financial conditions right before the pandemic. This strange reality is reflected in strong consumer behavior, record high savings, and strong lines of consumer credit. GDP per capita adjusted for PPP tells the same story. The bigger picture here is more complex – inflationary environments disproportionately harm lower-income populations, and higher interest rates make homes more expensive but wage growth and a tight labor market largely offsets the impact of such. 

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     The tight labor market reflects certain persisting market ambiguities. Americans got a lot of free money throughout the pandemic, after one of the strongest equity rallies in history. This led to record high personal savings, which American consumers are still spending. Credit is expanding across the board as retail credit profiles look better than ever (though this may be changing). 

Interestingly enough, the output gap created by this phenomena can lead to short term inflation (as more dollars chase less goods). In the mid to long run the impact of such will be de minimis – as savings dry up and force people to return to the labor force, increasing the supply of labor and decreasing aggregate demand. There are already looming signs of savings decreasing and risks arising in consumer credit profiles.

Moving forward it will be important to follow how the Federal Reserve revises how they use unemployment market conditions in their policy decisions. While explicitly part of the dual mandate, the Feds relationship has materially changed. The poor relationship between inflation and unemployment over the last few decades has weakened the Phillips curve, new ideas around the natural rate of unemployment (which the Fed has been pretty poor at defining/calculating), and the current labor market have broken faith in traditional labor metrics with historical predictive power. 

Recent history has forced the Federal Reserve to step outside their lane of competency and regulate/consider parts of finance not part of their traditional scope. Banking regulations, mitigating their own impact on asset bubbles and more make their jobs a bit harder but ultimately the Fed will have to come up with a new rubric for assessing the health of the “real economy”. 

The Fed has re-established its legitimacy.