Sometimes economic data can lead to conclusions that don’t make sense, and the recent employment data is an example of how various information can be viewed differently - it just depends on who interprets it. The financial press can create "noise" that can lead to investor confusion (or fear). For example, recent employment data shows that more people than expected landed jobs in January. On the surface, that seems like positive news, but not everybody will see it that way.
At the end of December, approximately 11.01 million jobs were available¹, and approximately 5.7 million people were considered unemployed. Simple math would tell us that even if everybody looking for work were to find a job eventually, there would still be over 5 million jobs available.
Of course, not everybody searching for work possess the skills and experience to qualify for the available job openings. Still, it’s safe to assume that many unemployed people will find jobs. So, in January, a reported 511,000¹ people found jobs, which comprises approximately 9% of all available jobs. That should be a good thing, right? We need to visit economic theory to understand why some view this adversely. But remember, economics is not a static, non-changing force. The definition of economics I subscribe to is how we organize our society to produce and deliver the things people need and want.
How can the rise in wages or the number of employed people be viewed as negative? Well, it goes something like this:
The lower the rate of unemployment, the greater the demand for workers. The January 2023 unemployment report showed a 3.4% unemployment rate¹, the lowest in 50 years. Applying the economic concept of supply and demand, employers will have to pay higher wages to the labor force to meet the increased demand. Now with additional money, the workforce will begin to buy more stuff, putting more pressure on the prices of the stuff. Then the workers will realize the higher prices are decreasing their purchasing power and demand even higher wages to keep up with the higher prices. We then have another unproven economic concept of a “wage/price spiral.” The Federal Reserve, in response, will then engage in monetary policy and begin raising interest rates to stop or slow down rising inflation, but the rising rates will have an adverse impact on our economy, which will plunge into a recession.
The validation of any theory relies on evidence to support it. In this case, little or no evidence supports the idea that lower employment will lead to significant price increases. In addition, here are a few other points that make the application of traditional economic theory possibly inappropriate at this time:
- Perhaps in the past, workers had a greater influence on demanding higher wages, but the assumption that they have the power or clout to continue to ask for higher wages each time the unemployment rate falls or a higher demand for employees exists is borderline laughable. Professional athletes backed by powerful unions may have the luxury of demanding higher wages when winning becomes a top priority for wealthy owners, but most folks, especially in the private sector, do not have equal economic bargaining clout. The percentage of private sector employees belonging to a union has decreased from approximately 33% in 1960 to 6% today.
- The assumption that rising wages will cause rising inflation and a subsequent recession directly linked to higher prices for the things we want and need also needs to be questioned. Americans have the following debt levels:
Credit Card Debt $1.22 trillion²
Student Loan Debt $1.78 trillion²
Household income rose 4% in 2022, but average living expenses rose 8% in 2022. January 2023 didn’t start too well as wage increases were .1% from December 2022, but inflation remains dangerously high. Therefore, the “real” growth in 2022 (income increase less inflation) was negative 4%. Credit card usage is rising due to the gaps between income and expenses. The average savings rate for Americans dropped to 3.4% in December 2022 from 7.5% in December 2021². I’m skeptical that moderate wage increases will cause rising prices since it is more likely that additional income will be used to pay off debt or increase savings. What caused the current inflation has more to do with the supply chain obstacles and gracious government stimulus in the form of PPP grants than with Americans finding work and higher wages.
Only the investors who fall into the “speculator” category are more concerned with the positive employment data, as long-term investors will view the data as a phase of the business cycle that will not derail them from disciplined investing to help them reach their financial goals.
Please review our website and contact me if you have questions or would like to schedule a no-charge initial consultation.
Sometimes economic data can lead to conclusions that don’t make sense, and the recent employment data is an example of how various information can be viewed differently - it just depends on who is making the interpretations. The financial press can create "noise" that can lead to investor confusion (or fear). For example, recent employment data shows that more people than expected landed jobs in January. On the surface, that seems like positive news, but not everybody will see it that way.
At the end of December, approximately 11.01 million jobs were available¹, and approximately 5.7 million people were considered unemployed. Simple math would tell us that even if everybody looking for work were to find a job eventually, there would still be over 5 million jobs available.
Of course, not everybody searching for work possess the skills and experience to qualify for the available job openings. Still, it’s safe to assume that many unemployed people will find jobs. So, in January, a reported 511,000¹ people found jobs, which comprises approximately 9% of all available jobs. That should be a good thing, right? To understand why some may view this adversely, we need to visit economic theory. But remember, economics is not a static, non-changing force. The definition of economics I subscribe to is the way we organize our society to produce and deliver the things that people need and want.
How can the rise in wages or the number of employed people be viewed as negative? Well, it goes something like this:
The lower the rate of unemployment, the greater the demand for workers. The January 2023 unemployment report showed a 3.4% unemployment rate¹, the lowest in 50 years. Applying the economic concept of supply and demand, employers will have to pay higher wages to the labor force to meet the increased demand. The workforce, now with additional money, will begin to buy more stuff, putting more pressure on the prices of the stuff. Then the workers will realize the higher prices are decreasing their purchasing power and demand even higher wages to keep up with the higher prices. We then have another unproven economic concept of a “wage/price spiral.” The Federal Reserve, in response, will then engage in monetary policy and begin raising interest rates to stop or slow down rising inflation, but the rising rates will have an adverse impact on our economy, which will plunge into a recession.
The validation of any theory relies on evidence to support it. In this case, there is little or no evidence to support the idea that lower employment will lead to significant price increases. In addition, here are a few other points that make the application of traditional economic theory possibly inappropriate at this time:
- Perhaps in the past, workers had a greater influence on demanding higher wages, but the assumption that they have the power or clout to continue to ask for higher wages each time the unemployment rate falls or a higher demand for employees exists is borderline laughable. Professional athletes backed by powerful unions may have the luxury of demanding higher wages when winning becomes a top priority for wealthy owners, but most folks, especially in the private sector, do not have equal economic bargaining clout. The percentage of private sector employees belonging to a union has decreased from approximately 33% in 1960 to 6% today.
- The assumption that rising wages will cause rising inflation and a subsequent recession directly linked to higher prices for the things we want and need also needs to be questioned. Americans have the following debt levels:
Credit Card Debt $1.22 trillion²
Student Loan Debt $1.78 trillion²Household income rose 4% in 2022, but average living expenses rose 8% in 2022. January 2023 didn’t start too well as wage increases were .1% from December 2022, but inflation remains dangerously high. Therefore, the “real” growth in 2022 (income increase less inflation) was negative 4%. Credit card usage is rising due to the gaps between income and expenses. The average savings rate for Americans dropped to 3.4% in December 2022 from 7.5% in December 2021². I’m skeptical that moderate wage increases will cause rising prices since it is more likely that additional income will be used to pay off debt or increase savings. What caused the current inflation has more to do with the supply chain obstacles and gracious government stimulus in the form of PPP grants than with Americans finding work and higher wages.
Only the investors who fall into the “speculator” category are more concerned with the positive employment data, as long-term investors will view the data as a phase of the business cycle that will not derail them from disciplined investing to help them reach their financial goals.
Please review our website and contact me if you have questions or would like to schedule a no-charge initial consultation.
Thank you,
Anthony Carr, CPA, CFP®, MBA
¹ Source: Bureau of Labor Statistics
² Source: The Federal Reserve