DANIEL LACALLE is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”
Daniel Lacalle
Inflation Hits the Job Recovery
There’s a clear threat to American workers from persistent high inflation
T
he u. s. decem ber jobs report shows that the labor market remains weak. The headline 3.9 percent unemployment rate looks positive, but job creation fell significantly below consensus, at 199,000 in December versus a consensus estimate of 450,000. The weak jobs figure should be viewed in the context of the largest stimulus plan in recent history. With massive monetary and fiscal support and a government deficit of $2.77 trillion, the second highest on record, job creation is falling significantly short of previous recoveries, and the employment situation is significantly worse than it was in 2019. The most alarming data point is that real wages are plummeting. Average hourly earnings have risen 4.7 percent in 2021, but inflation is 7 percent, sending real wages into negative territory and the worst reading since 2011. The number of persons not in the labor force who currently want a job didn’t change in December, at 5.7 million. This is still 717,000 higher than in February 2020. The number of long-term unemployed (those jobless for 27 weeks or more) remained at 2 million in December, or 887,000 higher than in February 2020. Long-term unemployed accounted for 31.7 percent of unemployed, according to the Bureau of Labor Statistics. The labor force participation rate remained at 61.9 percent in December and has been stagnant for almost 12 months. Labor participation remains 1.5 percentage points lower than in February 2020. Finally, the employment-to-population ratio is just 59.5 percent, or 1.7 percentage points below the
48 I N S I G H T January 21–27, 2022
The United States won’t have a strong jobs market unless it recovers the trend of rising real wages and increasing labor participation rate that existed in 2018–2019. February 2020 level. Meanwhile, businesses big and small are struggling to find workers to fill their job openings. The number of available jobs remains at record-high levels. Now put this in the context of a massive $3 trillion stimulus and the evidence is clear. There’s no bang for the buck from this unprecedented spending spree. All the jobs recovery has come from the reopening. The stimulus plan hasn’t accelerated job growth, it’s slowed it. As I wrote in a previous column, all we see in the U.S. economy is a direct consequence of the reopening. The economy sank due to the shutdown and is recovering due to the opening. The only thing that government and central bank actions have achieved in the mean-
time is to drive inflation and debt higher. More government spending and more debt are causing a weaker recovery and slower job creation. At the same time, excessive monetary stimulus is eroding real wages. A few months ago, I had a conversation with Judy Shelton, one of the top economists in the United States, and she mentioned that the recovery would be stronger without this stimulus plan—and she’s been proven right. No U.S. citizen should be happy about plummeting real wages and stagnant labor participation in the middle of a strong recovery and the second-largest deficit on record. The unprecedented number of resignations isn’t a positive. It’s evidence of a broken labor market where hundreds of thousands of Americans can’t afford to go to work because the costs outweigh their salary. This isn’t a signal of strong employment; it’s a signal of a genuinely concerning side effect of inflation. The United States isn’t even close to full employment. Erasing people from the unemployment lists isn’t full employment. There’s a clear threat to American workers from persistent high inflation and the higher taxes that the massive deficit includes—and the destruction of the middle class and fewer job opportunities in the future as small and medium enterprises, the largest employers in the United States, suffer rising input prices and weaker margins. The United States won’t have a strong jobs market unless it recovers the trend of rising real wages and increasing labor participation rate that existed in 2018–19. Everything else is just a poor and unproductive bounce.
