by Brad Houle, CFA
Principal
Head of Fixed Income
Labor Day marks the end of summer and is dedicated to honoring the American labor movement. The first Labor Day celebration occurred on September 5, 1882, in New York City and was organized by the Central Labor Union. Approximately 10,000 workers marched in a parade to demonstrate solidarity among labor organizations. This event was part of a broader movement advocating for labor rights, including calls for shorter workdays and improved working conditions, which were often dire at the time.
Today, the unemployment rate stands at 4.3%, which is extraordinary given that the percentage of jobless peaked at 13% in June 2020 and that the Federal Reserve has increased interest rates 11 times over 16 months to get inflation under control. Typically, when the Federal Reserve is this aggressive, unemployment spikes, but the labor market distortions caused by COVID-19 have lent the job market some resilience. An aging population, out of work for a prolonged period during the pandemic, chose to retire early, causing an extreme shortage of workers. Following the initial shutdown, there were twice as many jobs available as there were workers to fill them. With the Federal Reserve increasing interest rates, rather than putting people out of work as would historically happen, it caused a decline in the number of unfilled jobs. Wage gains, which at the height of the labor shortage were 10% year-over-year and a contributor to inflation, have since slowed to a more sustainable rate of approximately 4% year-over-year.
In addition to the impact of the pandemic, the size of the labor market has been declining due to demographic changes. This can be seen in the labor participation rate, which is the percentage of the working-age population (aged 16 to 65) in the labor market. Although there has been a recent increase in the participation rate due to higher wages attracting people back to work, the long-term decline is unmistakable.
Source: Bloomberg
From the 1970s to the 1980s, there was a large shift as women increasingly entered the workforce and the prevalence of two-income households increased. Since the peak in the year 2000, the labor force participation rates have declined as baby boomers have started to retire. Today's concern is a declining workforce that needs to support programs such as Social Security. In 1970, there were 3.7 working people per retired person contributing to Social Security. By 2030, it is estimated that it will decrease to two-to-one. This ratio is hard math to meet the obligations of the program. This dynamic will require difficult choices in the future from our elected officials. The solutions are simple: raise taxes and delay when participants can receive benefits. The only problem with these simple solutions is that they do not result in re-election.
Takeaways for the Week
The American labor market is resilient and flexible post-COVID-19
Long-term demographic changes will be a challenge for programs like Social Security