A diminished US workforce could lead Fed to keep rates high

Dec 11, 2022, 7:18 PM | Updated: Dec 12, 2022, 9:21 am
FILE - An employee works in the X3 X4 assembly hall at the BMW Spartanburg plant in Greer, S.C. Wed...

FILE - An employee works in the X3 X4 assembly hall at the BMW Spartanburg plant in Greer, S.C. Wednesday, Oct. 19, 2022. A wave of retirements, a drop in legal immigration, and hundreds of thousands of COVID-19 deaths have left the U.S. with a smaller workforce than when the pandemic began two and half years ago, a change that could bolster wage growth and inflation and force the Federal Reserve to keep interest rates higher for longer. (AP Photo/Sean Rayford, File)

(AP Photo/Sean Rayford, File)

              FILE - Starting wages are advertised on a sign in the window of a Taco Bell in Sacramento, Calif., Monday, May 9, 2022. A wave of retirements, a drop in legal immigration, and hundreds of thousands of COVID-19 deaths have left the U.S. with a smaller workforce than when the pandemic began two and half years ago, a change that could bolster wage growth and inflation and force the Federal Reserve to keep interest rates higher for longer. (AP Photo/Rich Pedroncelli)
            
              FILE - People dance in the Lake Sumter Landing Market Square, Thursday, Aug. 12, 2021, in The Villages, Fla. A wave of retirements, a drop in legal immigration, and hundreds of thousands of COVID-19 deaths have left the U.S. with a smaller workforce than when the pandemic began two and half years ago, a change that could bolster wage growth and inflation and force the Federal Reserve to keep interest rates higher for longer. (AP Photo/Phelan M. Ebenhack, File)
            
              FILE - An employee works in the X3 X4 assembly hall at the BMW Spartanburg plant in Greer, S.C. Wednesday, Oct. 19, 2022. A wave of retirements, a drop in legal immigration, and hundreds of thousands of COVID-19 deaths have left the U.S. with a smaller workforce than when the pandemic began two and half years ago, a change that could bolster wage growth and inflation and force the Federal Reserve to keep interest rates higher for longer. (AP Photo/Sean Rayford, File)

WASHINGTON (AP) — Still eager to hire, America’s employers are posting more job openings than they did before the pandemic struck 2½ years ago. Problem is, there aren’t enough applicants. The nation’s labor force is smaller than when the pandemic struck.

The reasons vary — an unexpected wave of retirements, a drop in legal immigration, the loss of workers to COVID-19 deaths and illnesses. The result, though, is that employers are having to compete for a smaller pool of workers and to offer steadily higher pay to attract them. It’s a trend that could fuel wage growth and high inflation well into 2023.

In a recent speech, Federal Reserve Chair Jerome Powell pointed to the shortfall of workers and the resulting rise in average pay as the primary remaining driver of the price spikes that continue to grip the economy.

Though inflation pressures have eased slightly from four-decade highs — average gasoline prices are now below where they were a year ago — costs are still rising fast in much of the economy’s vast service sector. As a result, the Fed is expected Wednesday to raise its benchmark short-term rate for a seventh time this year, though by a smaller amount than it has recently.

The central bank has boosted its key rate by a substantial three-quarters of a point four straight times, to a range of 3.75% to 4%, the highest level in 15 years. Powell has signaled that the Fed will likely raise its benchmark rate by a half-point this week, and many economists expect quarter-point rate hikes after that.

Cumulatively, those rate increases may be helping slow inflation. But they have also sharply increased borrowing costs for consumers and businesses — on mortgages, auto loans and credit cards, among other loans. Many economists have warned that the resulting decline in borrowing and spending will likely cause a recession in 2023.

Yet with price increases still uncomfortably high, Powell and other Fed officials have underscored that they expect to keep rates at their peak for an extended period, possibly through next year. On Wednesday, members of the Fed’s rate-setting committee will update their projections for interest rates and other economic barometers for 2023 and beyond.

The higher wages that many employers are having to offer don’t always lead to higher inflation. If companies invest in more efficient machines or technology, workers can become more productive: They can increase their output per hour. Under that scenario, businesses could raise pay without having to raise prices.

But productivity has been especially weak in the past year. And Powell has noted that higher pay will likely feed too-high inflation in the service sector — everything from restaurants and hotels to retail stores, medical care and entertainment. The employers in these industries are labor-intensive, and they tend to pass their higher labor costs on to their customers through higher prices.

Higher wages also typically spur Americans to keep spending, a trend that can perpetuate a cycle that keeps prices high.

“This labor shortage that we have,” the Fed chair said, “it doesn’t look like it’s going away anytime soon. It’s been very disappointing and a little bit surprising.”

The leading cause of the worker shortfall, according to research by the Fed, is a surge in retirements. In his recent speech, Powell noted that there are now about 3.5 million fewer people who either have a job or are looking for one compared with pre-pandemic trends. Of the 3.5 million, about 2 million consist of “excess” retirements — an increase in retirements far more than would have been expected based on pre-existing trends. Roughly 400,000 other working-age people have died of COVID-19. And legal immigration has fallen by about 1 million.

For Diane Soini, it was the experience of working from home and then having to endure a dismal return to the workplace that led her to retire after working 11 years as a computer programmer with the University of California, Santa Barbara. Before the pandemic, Soini had enjoyed going into work. She felt respected by colleagues. She had asked for, and received, her own office.

“And the pandemic came along and took it all away,” said Soini, 57, who lives in Santa Barbara.

She disliked communicating over Zoom and felt disconnected from her co-workers. Once she returned to the office, she often found it mainly empty. Motion-sensitive lights would turn off, and she’d have to walk around to turn them back on. Women’s bathrooms in her building, Soini said, were often locked.

“I just thought, this is horrible, I hate this,” she said.

Soini retired in July. Soon after, she hiked 800 miles of the Continental Divide trail along the Montana and Idaho borders. Next spring, she plans to hike the Arizona National Scenic Trail from the border with Mexico to Utah.

Soini and her partner are financially secure, she said. She puts the likelihood of her ever returning to work at maybe one-third. She quit a volunteer job she had taken once it began to seem like work.

Besides fueling inflation, a smaller workforce is causing other consequences. Some businesses, particularly retailers and restaurants, have had to cut back their hours of operation, losing revenue and frustrating customers.

Jeffrey Moriarty, who manages a family-owned 42-year-old jewelry company called Moriarty’s Gem Art in Crown Point, Indiana, said his company had to close its jewelry repair business late last year, a service it had provided for 30 years, because it couldn’t replace its longtime employee. Though the repair service accounted for only about 15% of Moriarty’s revenue, it allowed the business to distinguish itself from rivals in the area.

“It’s hard enough finding workers, but a bench jeweler is a dying breed,” said Moriarty, referring to an artisan who does stone setting and engraving. “You just can’t bring someone in with no experience.”

How the Fed will manage a robust labor market, with its effect on inflation, could prove perilous. Powell and other Fed officials have said they hope their rate hikes will slow consumer spending and job growth. Businesses would then remove many of their job openings, easing the demand for labor. With less competition for workers, wages could begin to grow more slowly.

Powell has even named a wage target: He regards annual pay growth at a rate of about 3.5% as compatible with 2% inflation. Right now, average pay is growing about 5%-6% a year.

Three months ago, the Fed’s policymakers estimated that the unemployment rate would rise to 4.4% next year, from 3.7% now. On Wednesday, the policymakers may forecast a higher unemployment rate by the end of 2023. If so, that would suggest that they foresee more layoffs and likely a recession.

“What will it take to get wage growth to slow to the extent that inflationary pressures go away?” asked Matt Klein, an economics commentator who writes The Overshoot newsletter. “We don’t really know the answer.”

___

AP Business Writer Anne D’Innocenzio contributed to this report from New York.

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

This undated photo provided by the Grants Pass Police Department shows Benjamin Obadiah Foster. Fos...
Rio Yamat and Andrew Selsky, Associated Press

Oregon kidnap suspect previously released the day he arrived at prison

A man at the center of an intense police search in Oregon after a violent kidnapping last week was released from custody in October 2021 by Nevada prison officials on the same day he was transferred to the state's custody to serve a kidnapping sentence, authorities said Monday.
12 hours ago
FILE - Military personnel watch as Air Force One, with President Donald Trump aboard, prepares to d...
Associated Press

Boeing bids farewell to an icon, delivers last 747 jumbo jet

SEATTLE (AP) — Boeing bids farewell to an icon on Tuesday: It’s delivering its final 747 jumbo jet. Since its first flight in 1969, the giant yet graceful 747 has served as a cargo plane, a commercial aircraft capable of carrying nearly 500 passengers, a transport for NASA’s space shuttles, and the Air Force One […]
12 hours ago
seattle police...
Associated Press

Name of Seattle officer in crash that killed woman released

Police have released the name of a Seattle police officer who was responding to a medical call when his patrol SUV hit and killed a 23-year-old Jaahnavi Kandula last week in a city crosswalk.
12 hours ago
Associated Press

DC arrests city employee over shooting death of 13-year-old

WASHINGTON (AP) — Police arrested a D.C. city employee Tuesday over the fatal shooting of a 13-year old that has roiled community passions. Jason Lewis, a longtime Parks and Recreation Department employee, turned himself in Tuesday morning to face charges of second-degree murder while armed. Lewis shot Karon Blake on Jan. 7, around 4 a.m., […]
2 days ago
Omaha, Neb., police officers gather outside a Target store in Omaha on Tuesday, Jan. 31, 2023. They...
Associated Press

Omaha police fatally shoot armed man in Target store

OMAHA, Neb. (AP) — Omaha police say they fatally shot a man who entered a Target store with an AR-15-style rifle on Tuesday and “plenty of ammunition.” Police Chief Todd Schmaderer said officers searched for victims, including customers and workers “because there were some people hiding in there.” No injured people were immediately found. Schmaderer […]
2 days ago
President Joe Biden speaks at the construction site of the Hudson Tunnel Project, Tuesday, Jan. 31,...
Associated Press

AP source: FBI searched Biden’s former office in November

WASHINGTON (AP) — The FBI searched President Joe Biden’s former office at the Penn Biden Center in Washington in November, according to a person familiar with the matter, weeks after his personal lawyers first found classified records there from his time as vice president. The discovery of the documents at the office blocks away from […]
2 days ago

Sponsored Articles

safety from crime...

As crime increases, our safety measures must too

It's easy to be accused of fearmongering regarding crime, but Seattle residents might have good reason to be concerned for their safety.
Comcast Ready for Business Fund...
Ilona Lohrey | President and CEO, GSBA

GSBA is closing the disparity gap with Ready for Business Fund

GSBA, Comcast, and other partners are working to address disparities in access to financial resources with the Ready for Business fund.
SHIBA WA...

Medicare open enrollment is here and SHIBA can help!

The SHIBA program – part of the Office of the Insurance Commissioner – is ready to help with your Medicare open enrollment decisions.
Lake Washington Windows...

Choosing Best Windows for Your Home

Lake Washington Windows and Doors is a local window dealer offering the exclusive Leak Armor installation.
Anacortes Christmas Tree...

Come one, come all! Food, Drink, and Coastal Christmas – Anacortes has it all!

Come celebrate Anacortes’ 11th annual Bier on the Pier! Bier on the Pier takes place on October 7th and 8th and features local ciders, food trucks and live music - not to mention the beautiful views of the Guemes Channel and backdrop of downtown Anacortes.
Swedish Cyberknife Treatment...

The revolutionary treatment of Swedish CyberKnife provides better quality of life for majority of patients

There are a wide variety of treatments options available for men with prostate cancer. One of the most technologically advanced treatment options in the Pacific Northwest is Stereotactic Body Radiation Therapy using the CyberKnife platform at Swedish Medical Center.
A diminished US workforce could lead Fed to keep rates high