[From the Archive] What's really going on in the labor markets
Supply is catching up to demand
Random Walk is off for Shavuot today and tomorrow, so we’re releasing a still-relevant post from the archives.
This post originally aired ~1 year ago, May 6, 2024:
labor market data was bad in the good way (wut?)
really, nothing has changed and everything is expected, iykyk
immigration matters, a lot . . . but it may be reaching a saturation point
👉👉👉Reminder to sign up for the Weekly Recap only, if daily emails is too much. Find me on twitter, for more fun. What’s really going on with the labor market
Fresh jobs data came out on Friday and investors were sad/happy.
Sad, because there were ~60K fewer jobs than expected:
. . . and happy, because ‘bad news is good news’ and a slowing job market means rate cuts are back on the table.
To Random Walk, it’s all sort of stupid.
Why?
Well (a) the job numbers get revised all the time; but (b), and more importantly, nothing really has changed (and rate cuts have nothing to do with it).
The job market is doing exactly what a “gap closing, but not growing” job market would be expected to do. Eventually, without some other source of growth, it reaches a saturation point.
What does that mean?
Read on.
Tight, not strong (reprise)
The most important thing to know is that the job market was never “hot” to begin with.
The job market was tight because national aging, a colossal failure to babymake, and a “pull forward” of retirement (especially for no-college workers) created a “worker shortage.” Throw in an unprecedented demand subsidy, and it created all kinds of chaos.
But behind all the sound and the fury, the key observation is that while the total number of “jobs to be done” stayed roughly the same, the number of people available to do them, has been fewer than expected.
The data is pretty clear on this:
The result has been very low unemployment, and rapidly increasing wages for low-end service workers—because that’s what happens when the workers you do have are very much in demand.1
It has also led to increased prices for services (and/or inferior services) because that’s what happens when wages for service workers go up.2
Open border to the rescue
Now, the thing that has helped alleviate the worker shortage is the unprecedented flood of illegal (and legal) immigrants.
A steady increase in working age migrants has shrunk the “worker shortage,”—indeed, the entirety of net-new jobs has gone to “foreign born” workers—which has not only brought wage-growth to heel (relatively),3 but has also added a few million new shoppers to keep consumer spending strong (especially for cheap stuff).
I’ve said it before, and I’ll say it again: it’s growth via acquihire, all the way down.
Random Walk has been beating this drum for longer than most, likely because it’s politically inopportune for everyone (and that’s a RW specialty), but it’s increasingly hard to deny that the deflationary open-border, filled a retirement-sized, secular-aging hole in the labor market.4
The open border has kept an economic reckoning at bay. Or, at least, it’s helped a lot.
Oh look, it’s more healthcare jobs:
Uncle Sam’s immigrant nursing brigade is perhaps better than no brigade at all, but it’s important to be clear-eyed about what’s going on here.
Migrants are reaching the saturation point
Most people have confused low unemployment, rising wages, and increased spending with a “strong” economy.5 But not Random Walk. Random Walk can tell the difference between patching a hole, building anew.
All that’s happening is that the supply of workers is gradually catching up to demand.
If demand for workers continues to remain flat (and/or Healthcare Domestic Product (and here) remains the only game in town), then you would expect to see job growth gradually slow. 6
More specifically, when the green line converges with the blue line, job growth will slow (via BCA Research):
. . . and if/when the green line passes the blue line (or the gap goes negative), unemployment will start to rise.
That blue line better start rising soon (and maybe lower rates would help do the trick), but the real secret to growth is literal growth, and from a people standpoint, we neglected to make reinforcements. Point is that while it’s definitely possible, it won’t be easy: we need to get industrious, or else the Great Stagnation is upon us.
Anyways, wouldn’t you know it, unemployment is rising (ever so slightly) specifically within one subset of workers (via Guy Berger):
Unemployment among Foreign Born workers is rising gradually, while it stays very flat for everyone else.
From the Random Walkian point of view, that’s exactly what you’d expect to see.
Demand for labor is reaching its saturation point, and if “foreign born” workers were filling that hole, they are now running out of runway.
Again, it’s that blue line that needs to start growing.
Previously, on Random Walk
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It’s also why ‘white collar’ and higher-wage work, by contrast, has been relatively flat—because a worker-shortage is no tailwind for the managerial class. A strong economy might be, but we don’t really have that. There’s some evidence that perhaps a turnaround is around the corner, but I’m not persuaded. Don’t look now, but unemployment is rising ever-so-slightly for advanced degrees:
White Collar “Finance Bros” aren’t going to love the rotation to the National Nursing Home.
At least in the short run.
It’s too soon to spike the football yet, especially because demand for healthcare service workers is going to continue to outpace supply, but for now, wages growth (even for the lowest-income cohorts) is getting closer to pre-pandemic levels:
With the obvious caveat that it’s never just one thing, and the story is always a bit more complicated than any one-line explanation.
In case you were wondering, yes, the latest GDP print was driven by healthcare-related consumption:
Would like to see an update of these charts
Where did those 6m natives go? I wonder how many were lost to early retirement, opioids, going from being house to unhoused, solopreneurship, internet/influencer based work, living off the fat of the land and etc. Has anyone attempted to quantify this?