The Disillusion of the Grindstone
Much has been written, by us and others, about the long-term labor shortage in the US. We know that our demographic reality is that the baby boomers have retired or are retiring, and not enough young people are coming into the labor force, at least not with adequate vigor, to fill the hole left behind. But, new work coming from the St. Louis Fed economists Dain Lee, Jinhyeok Park, and Yongseok Shin suggests that while demographics are part of the problem, a behavioral paradigm shift could be an even bigger problem. The researchers concluded that, “More than half of the decline in aggregate hours worked occurred through the intensive margin: Those who worked, reduced their hours.” They found that the most productive workers in our society, those who work the most hours and earn incomes in the highest deciles chose to work fewer hours following the pandemic. The implications of this paradigm shift could have a significant impact on US productivity, potential GDP and long-term inflation.
To be clear, this is a secular, not a cyclical concern. In the near-term, the economy is gradually slowing as the lags of monetary policy are finally showing up. That will create, at least some, slack in the labor market. But longer-term, we have a demographically driven labor supply problem that is exacerbated by this phenomenon of people choosing to work less than they had prior to the pandemic. We have already seen a rise at the long end of the yield curve that is driven, at least in part, by higher inflation expectations and this study should add to those concerns. Whenever we discuss inflation, it comes down to supply and demand. In terms of labor inflation, the stickiest inflation, we have a supply problem and this new work illustrates we should perhaps expect more of a supply problem than already feared.
So how does all of this manifest itself in the economy? If sustained, it means that our potential GDP growth will be lower if our workforce growth is hampered by declining hours worked. Lower potential GDP means that we will see more inflation occur at lower rates of growth.
Below are some selected quotes from the paper:
“It is clear that those who work very long hours cut back on their hours between 2019 and 2022, evidenced by the significant hours reduction at the 90th percentiles but not at the median. In 2019, one had to work for at least 2,860 hours (55 hours per week) to rank in the top 10 percent of workers working longest hours. In 2022, one needed to work “only” 2,704 hours (52 hours per week) to win this dubious honor…Male workers in the ninth and the top deciles of the 2022 earnings distribution worked 51 and 79 fewer hours than those in the respective earnings decile in 2019. In summary, male workers with long hours and high earnings reduced their annual hours worked between 2019 and 2022 the most.”
“We conjecture that shifts in preference toward better work-life balance, manifested by the quiet quitting phenomenon, is an important factor. The pandemic may have motivated people to reevaluate their life priorities and also gotten them accustomed to more flexible work arrangements (e.g., work from home), leading them to choose to work fewer hours, especially if they could afford it”
“The US stands out among advanced economies in terms of annual hours worked per worker. According to the OECD, the average US worker worked 1,791 hours in 2021. This amount is significantly higher than the corresponding number from other advanced economies: Canada (1,685), Japan (1,607), the UK (1,497), France (1,490), and Germany (1,349), for example.13 In this context, if anything, there is room for hours worked per worker to further decline in the US.”
“The lower participation rate is, to a large extent, a continuation of a trend that existed since the Great Recession, especially the lower participation of younger male cohorts without a bachelor’s degree. The reduction in hours among workers is a new phenomenon induced by the pandemic, but available evidence suggests that it will likely stay with us. Indeed, as of May 2023, the participation rate has returned to the pre-pandemic level, but the hours worked per worker still shows no sign of recovery.”
The great John Kenneth Galbraith once said, “The only function of economic forecasting is to make astrology look respectable”. One reason why forecasts are so hard is that while history rhymes, it doesn’t actually repeat. While human nature doesn’t change, societies evolve, and paradigm shifts occur that can significantly impact behavior broadly. The pandemic will leave lasting impacts on behavior and one important one could very well be that many Americans who held financial accomplishment above all else, may be rethinking the wisdom of doing so.
Tim Pierotti is WealthVest’s Chief Investment Officer.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
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