Page 8 - ISO April 2023
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        Opportunity cost: For those who were able to work remotely,
        returning to an in-person job can be costly, especially for families
        with young children, older parents, or those in other circum-  We expect the Fed’s stance to remain hawkish
        stances where a worker’s presence at home would be beneficial.   for longer, rather than return to a more
        In fact, sometimes the higher cost of services such as childcare   accommodative stance.
        and  eldercare  wipes out the benefit  of  having  a  dual-income
        household. Additionally, many families enjoyed the flexibility of   New research has been published since the start of the COVID-19
        working from home, and many are having a hard time giving it up.   pandemic addressing the potential changes that occurred in the
        According to the Federal Reserve Bank of St. Louis, “the propor-  US labour force. One of these papers, published in 2021 by econo-
        tion of the population that reports being out of the labour force   mists at the Federal Reserve Bank of San Francisco and titled “The
        because of home care/family care” has increased considerably   Divergent Signals about Labour Market Slack,” argued that “The
        and has remained high after the end of the pandemic. 4
                                                            COVID-19 pandemic has disrupted the US labour market, causing
                                                            unprecedented deviations from the normal historical relationships
        WHAT IS THE IMPORTANCE OF THE LABOUR FORCE          among a wide range of labour market variables. Indicators related
                                                            to the manufacturing and small business sectors as well as to
        A study by economists at the Federal Reserve Bank of Chicago in   overall labour turnover suggest that there is less slack in the labour
        2014 concluded that “the results from our models suggest that   market than is reflected in the unemployment rate. By contrast,

        there may indeed be greater slack in the labour market than is   measures of labour force participation and the duration and rea-
        signalled  by  the  unemployment  rate.”   The  importance  of  this   sons  for  unemployment  all  show  more  slack  than  the
        finding at the time was that “the existence of such extra slack
        might imply that it would be appropriate for monetary policy to   unemployment rate.”
        remain highly accommodative for longer than would otherwise   Another research paper concentrated on the effects of the Great
        be the case.” In fact, the view that there was a larger labour slack   Resignation on labour market slack and inflation, concluding that
        during the pre-COVID-19 pandemic period kept the Fed highly   “by applying for jobs in a different firm, employed workers can
        dovish even in the face of very low rates of unemployment, as this   spur wage competition between the current employer and pro-
        greater slack in the labour market reduced the possibility of expe-  spective employers. As a result, labour becomes more expensive
        riencing increases in wages and salaries that would have   to retain or to hire, effectively corresponding to a tighter labour
        jeopardised the pursuit of the Fed’s inflation target of 2.0%.   market from the perspective of employers.” 6

        Today, the question of whether there is more or less slack in the   Meanwhile, economists at the Dallas Federal Reserve wrote a
        US labour market is one of the most consequential questions for   research paper that also pointed to a tighter labour market than
        monetary policy going forward, as it will determine how high and   before the COVID-19 pandemic, saying that “Many employers
        for how long the Fed is expected to remain hawkish/dovish on the
        inflation front.                                    throughout our district report that they are struggling to rehire
                                    Two Percent—Over a Longer Term
                            Inflation has overshot the Fed’s 2% target for two years and it will need to remain
            8%                lower for a sustained period of time in order for long-term inflation (2-year
                                         average) to also decline to appropriate levels.




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                                                  CPI      CPI (2-Year Average)        Source: FactSet, as of 19/3/2023

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