The U.S. Federal Reserve Bank has been battling inflation for well over a year. A key variable in their efforts has been to slow the economy enough to reduce employment. The opposite is happening, thanks to the Baby Boomers.
Historically, the Fed has used interest rates successfully to manipulate employment. Their use harkens back to a theory John Maynard Keynes espoused in his 1936 treatise, "The General Theory of Employment, Interest, and Money." Keynes argued that there exists an inverse relationship between unemployment and inflation and that governments should manipulate fiscal and economic policy to ensure a balance between the two. So far, it is not working too well in 2023.
The April 2023 payroll report was only the latest in a series of strong employment gains that flies in the face of the Fed's efforts. The U.S. is experiencing one of the strongest labor markets in decades, if not ever. The economy has added 666,000 jobs over the last three months, while the Fed continues to raise interest rates. The headline unemployment rate fell to 3.4 percent, its lowest level in 50 years. Wages are also growing again, up 0.5 percent, after declining steadily since November 2022. What is going on?
The short answer is that there are simply not enough workers to go around. The labor force participation rate among prime-age workers, those aged 25-53, is at 83.3 percent. That is higher than it was pre-COVID. The prime-age women's labor force participation rate hit 77 percent as well. I believe that demographics has thrown a monkey wrench into Keynes' theory.
Baby Boomers have always been a force to reckon with for both good and bad. The percentage of Americans aged 55 and over has doubled over the last twenty years and continues to grow. The fact is that more and more Americans are getting too old to work.
This trend is nothing new and has been in place for several years. COVID-19 and the subsequent Pandemic simply accelerated the pace of retirements. Moody's Investment Services estimates that 70 percent of the decline in the labor force since the end of 2019 was due to aging workers, like me. That comes to about 1.4 million Americans who have retired. In addition, declining fertility rates and increasing life expectancy are also contributing to this labor shortfall and we are not alone. G20 countries are all experiencing a decline in working-age populations. Korea, Germany, and the U.S. are expected to see the sharpest declines over the next 10 years.
How this will impact individual sectors of the economy varies. Industries that depend on knowledge and experience (human capital) will be hit hard. This brain drain will impact productivity for years as it did when boomers first entered the workforce in the 1970s and 1980s.
In industries where demographics create demand, such as an aging population for health care services, labor shortages could continue for many years. On the lower end of the pay scale, the scarcity of workers should accelerate the adoption of automation. That is already beginning to occur in the fast food and banking services areas. Finally, Artificial Intelligence (AI) over the next five years, is predicted to reduce the need for labor in some job areas.
However, not all is gloom and doom. Black Americans are benefiting from the imbalance in labor as their unemployment rate has fallen below 5 percent for the first time in history. The pre-pandemic all-time low was 5.3 percent in August 2019. Women have also benefited, although long-standing pay gaps and occupational segregation remain.
All-in-all, we Baby Boomers are still causing havoc--even in retirement. However, a simple solution to this labor shortage (and inflation) can be solved with a stroke of the pen. If we need more field workers, waiters, waitresses, babysitters, nurses, doctors, internet technicians, plumbers, electricians, technicians, bricklayers, etc., they are available and dying to enter this country. All Washington needs to do is jettison their immigration policies, but I wouldn't hold my breath.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at firstname.lastname@example.org.
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