Today, state expansion is the government’s desire to exert more and more influence in all major areas of social processes, especially in the economy. Such statism is mainly presented under the guise of the need to take even greater care of its citizens, as we have seen most clearly during the recent Covid pandemic. However, we must not forget that everything has to be paid for, and also “free” money: the state gives a cent, but in the end it will always take a dollar, as Henry Hazlitt said.
We can see how fair all of this is today when we look at the red-hot job market in relation to the deteriorating state of the economy as a whole. We will also soon see the corresponding negative consequences of this split, no matter what the guys in government and the Fed say. And this next distortion of the market and economy as a result of state expansionism, with a high probability, will lead to extremely negative consequences.
So employment is increasing. The total number of paid jobs rose by 315,000 in August, up from 5.8 million in the last 12 months. Total employment is now 240,000 above pre-pandemic February 2020 levels.
A labor shortage with a strong demand for labor leads to higher wages. Accordingly, employers compete for labor by raising wages to meet their needs. It is clear that against this background the number of job seekers is falling – the demand from employers and attractive wages are quickly selecting the available workers. The number of unemployed people looking for work is now around the 215,000 mark, a multi-year low. And this against the background of a technical recession, i.e. a decline in GDP for two consecutive quarters, and an extremely high inflation rate, which is also pushing for multi-year highs.
The reasons for this divergence between the labor market and all other economic factors lie in several aspects.
First of all, the labor market – employment and unemployment – are lagging indicators, as work and its financing have low elasticity. This means that employers need to be confident that conditions have changed and that they need to scale back production, thereby reducing labor costs. You’ll have to wait and see to be sure what’s happening in the economy is long-term. They cannot afford rapid adjustments and changes – their transaction costs for production are too high, especially in terms of labor – and they often hire and fire employees. For example, the employees who were laid off had special skills, which means that the new employees must be trained in these skills. In addition, employers have to pay for workers who have been laid off and later hired – in the first case a substantial severance pay, in the second case recruiters.
Another very important factor in the divergence between the state of the labor market and the rest of the economy is the gap between productivity and employment.
First, productivity is falling due to the new paradigm of remote work – the worker is not as focused as he or she could be at work in a competitive corporate environment. Previous measurement results, at the height of the pandemic, when the efficiency of employees working from home increased compared to the normal office environment, were due to fears of insecurity, layoffs and the actual increase in competition at the time. Now it turns out that working from home has reduced efficiency for almost two years, while the habits of unfocused work and regular distraction from the work process have remained.
Second, the shortage of workers in the labor market leads to less motivation for efficiency among employees who realize that the ball is now in their hands.
Third, excessive government social spending reduces the motivation to work in general, which also reduces competition and hence efficiency and quality throughout the chain, from worker to product.
For example, in the second quarter of 2022, labor productivity fell by 4.1 percent annually, and compared to the second quarter of 2021, the decline was 2.4 percent, the largest since the late 1940s of the 20th century. This comes as production fell by 2.1% and hours worked increased by 2.7%, meaning employers need to employ more workers to maintain the same output.
What does this distortion lead to? That production inflation rises not least because of the labor factor, because labor costs rise for the same production volume. And these costs are not only related to the number of employees, but also to the higher labor costs. For example, labor costs — the United Labor Cost — rose 12.7% in the second quarter, which, as we can see, was well above inflation.
We all understand what high manufacturing inflation does: it reduces margins and profits, drives cost cuts and production cuts, and ultimately leads to layoffs. And layoffs are the inevitable drop in consumer demand. Welcome to the recession.
Left Keynesian state expansion – tax tightening and monetary easing, regulation, expanding the government’s redistributive mandate inevitably leads to state dominance that distorts all market processes and leads to abnormal and increasing volatility in economic – and thus social – cycles.
Of course, companies will pursue their own interests and adapt to the environment and circumstances by acting as rationally as possible. In particular, the reduction in labor force and its replacement with technological components in production are probably the only positive externalities in such a situation. However, it should be understood that the development and introduction of technology into the production process in conditions of constant technological acceleration is an expensive and not fast thing.
Thus, the negative impact of today’s unusually hot labor market, with accelerating inflation, is in fact an inevitable recession and high unemployment for the foreseeable future. And all the talk of a soft landing thanks to strong retail sales and the best job market in modern history is either nonsense or manipulation in the interests of politics.
The second seems more likely, to say the least.