We’ve seen things in this economy that don’t make sense. For example, here in Colorado we’ve been in grocery store lines for “self-checkout” that range across more than 40 people and extend for more than 20 minutes. Odd experiences like this are apparently all rooted in a lack of labor.
These days we’re all collecting anecdotes of understaffed businesses, declining service levels and inflating labor costs. In fact, when we look at a time series of US Consumer Price Indices and US Unit Labor Costs they match up almost identically.1 We’re now hearing economists commonly refer to the dreaded “wage-price spiral” risk that can embed inflation.2 So the question lingers, what happened to labor?
Somewhat surprisingly the answer zeroes in on the age demographic above 55 years old. The chart below captures the Labor Participation Rate among the labor force ages 25 to 54 and those above age 55.
During the pandemic period of February 2020 to June 2021 we saw an increase in net retirements of 3.6 million people – the most significant impact on older worker participation. This was 2.1 million more retirees than the prior trend would have predicted.3
Contrary to conventional wisdom this had almost nothing to do with more people leaving jobs to enter retirement. Instead, the spike in net retirements was caused by the unprecedented drop in retirees re-entering the work force. Pre-pandemic, we saw about 1.8% of retirees re-enter the work force in any year – currently that rate is about 1.2%. That gap equates to roughly one million formerly retired workers that have not re-entered the workforce over the last two years.3
We believe that trend is likely to change through the rest of 2022 and beyond as former retirees head back to work. The negative pressure that inflation and lower asset prices assert on post-retirement wealth is already eating into record savings rates and causing many people to reevaluate work. The impulse of new job seekers could be a significant positive disruptor to the wage-price spiral and persistent labor shortages. We still expect commodity and housing prices to be sticky, but we at least see some resolution toward stabilizing and improving unit labor costs and the effect that can have on lessening cost pressures.
Important Disclosures & Definitions
1 Bureau of Labor Statistics, Consumer Price Index – April 2022 News Release, April 2022
2 Wage-Price Spiral: a feedback loop between wages and prices which can drive higher inflation in a persistent manner. Once the economy enters the spiral, workers bid up nominal wages more than prices, prompting firms to raise prices further.
3 Federal Reserve Bank of Kansas City Economic Bulletin, “What Has Driven the Recent Increase in Retirements?”, August 11, 2021