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Labor Shortage Fuels Inflation | News, Sports, Jobs


The workers’ crisis is perhaps the main driver of the US economy’s near-double-digit inflation rate.

That’s the opinion of Chartered Financial Analyst David Valentiner, director of interest rate management at First National Bank, who believes that the shortage of employees is the main condition of inflation, but not the only force that underlies it.

He spoke last week at the Youngstown/Warren Regional Chamber’s Annual Economic Forecast Breakfast.

The number of dollars in the economy, supply chain issues and rising commodity prices are also playing their part. But despite a nearly 50-year unemployment rate of 3.7%, the number of people in the labor market is barely returning to pre-pandemic figures, while the economy continues to run at a high rate.

There are 153 million American workers now, he said. In comparison, they were 152.5 million in February 2019.

He admits that the economy has seen some declines, “but in reality the economy has been growing for two years; the workforce didn’t,” Valentiner said. “That’s the situation we find ourselves in right now.”

BOOMERS

One of the causes is that the generation of baby boomers – workers who have traditionally stayed in the labor market longer than other generations – are retiring at an unprecedented rate.

In 2019, 1.5 million baby boomers retired.

“For the past two years, they have been retiring at double the rate. We weren’t sure in 2020 if it was kind of a one-year thing. The downside was no, it actually makes the two years,” Valentiner said.

“So what that means, if you go from 1.5 (million) to over 3 (million), is that in the last two years alone we’ve lost over

3 million workers who normally would not have left the workforce,” Valentiner said. “And these are not newbies, these are your most experienced workers, people who have worked for decades and have a level of experience and knowledge that is very difficult to replace.”

And given their age, there’s a good chance those workers are unlikely to return, he said.

“If you have a 30-year-old man leaving the workforce, chances are you’ll get him back,” Valentiner said. “You have a 62-year-old man leaving the workforce, it’s much harder to get him back.”

The number of prime-age workers – 25 to 54 – has returned to roughly pre-pandemic levels. Workers 55 and older fell and didn’t come back, and “it becomes even more stark if you look at the 65-plus,” Valentiner said.

“What COVID has done has accelerated the baby boomer generation’s exit from the workforce from what it was before,” he said.

Family dynamics and birth rates also play a role in the shrinking labor force. People are waiting longer to marry and have children, which is “changing the demographics and workforce in the country”.

For example, about 46% of people aged 25 to 37 are married. Previous generations, Valentiner said, are much higher. In addition, last year about 25% of people aged 25 to 34 lived at home. Compared to the previous generation, this number was around 9%.

Also, birth rates in the developed world are below the 2.1 children per family needed to maintain a stable population, excluding immigration, Valentiner said. He cited South Korea as the most glaring example with 0.08 children per family.

OTHER FACTORS

Other factors are affecting the US economy. One is the amount of money in the economy, mostly from government stimulus measures during the pandemic. At first, consumers invested that money in savings or paid off credit card debt, but that trend has changed.

The savings rate is below the historical average, but Valentiner said consumers are still spending on credit.

“The consumer is always spending; which is causing some of this inflation, but they have spent their savings and now charged the credit card an accelerated amount. Looking at this, we don’t know when it will stop, but we think… the consumer is starting to get a little bit exploited in what they can spend in the future,” Valentiner said.

Rising commodity prices are a “significant addition”, he said. Across the United States, consumers over the summer have seen fuel prices rise and in Ohio and other parts of the Northeast, a shortage of diesel fuel is expected to hurt people who use fuel oil to heat their home.

Commodity prices also impact trading partners overseas, he said, which in turn impacts the United States. For example, Germany is one of the largest trading partners of the United States on the import side. When the cost of importing goods rises because exporters like Germany face their own energy problems, American consumers feel that pain.

“The challenge from a globalization perspective is that when they have an energy crisis, when they have an increase in energy, we import some of that inflation here through the cost of goods. We’ve been lucky this year because the US dollar is strong, but when you think about what’s happening in other parts of the world with energy, we’re now exporting energy to Europe and we we continue to import goods from them, often at a higher cost due to rising energy prices,” he said. “So energy prices around the world affect us, not just our energy prices locally.”

Supply chain issues also gave rise to inflation.

“Part of the problem, not only have we printed a huge amount of money and put it in the hands of consumers, we’ve also changed the way you can spend it,” Valentiner said. “We said you can’t go to a restaurant, you can’t spend it on services like before. We have seen a shift of about 20% from services to goods. Many of these goods we imported from Asia. This overloaded our shipping capacity.

This problem, however, is finally starting to loosen up and more and more goods are beginning to flow into the United States.

Albert J. Sumell, professor of economics at Youngstown State University, said these four factors “certainly play a role” in high inflation. He said most studies he has read suggest that inflation is driven by supply, not demand.

For example, he used groceries, where increases are felt by most consumers. People with more money will not buy more eggs, he said, just because they have more money. What causes a price increase is the inputs, the cost of producing the eggs or some other item has gone up and is passed on to the consumer.

“A lot of it is supply-driven, which includes workers,” he said. “What is the share of labor versus other input costs or labor versus fuel or gas, it’s hard for me to say, and I think it also depends on the industry in terms of dependency on industry on labor.”

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