Why 2022 Could Be a Goldilocks Year in the Labor Market
The labor market in 2022 could reprise the story of Goldilocks and the Three Bears: where 2020 was “too cold,” and 2021 was “too hot,” 2022 could be “just right.”
The economy began 2020 in a strong position, as a years-long recovery continued into the first months of the year. But the coronavirus pandemic shut down trade and travel, closed restaurants and schools, and forced hundreds of millions of workers to quarantine. The labor market fallout included 20 million extra layoffs, 200,000 extra business closures, and widespread hiring freezes.
Thankfully, the U.S. contraction was the shortest in history, lasting only two months from March to April, 2020. But despite a rapid recovery, fear and uncertainty lingered, driven by the coronavirus pandemic, even after the emergence of vaccines. The economy recovered about 70% of the lost over the following months. But by the end of the year, job growth had turned negative again amid surging Covid cases, and President Joe Biden was warning of a “very dark winter.”
The following year looked more hopeful. Not only did 2021 begin amid a rollout of vaccines, but it also brought a font of new federal spending, including unspent coronavirus relief funds from 2020 and various forms of stimulus to households. Retail spending, home construction, and new business starts surged past pre-pandemic trends. Equity markets reached new highs.
Employer demand for labor boomed. But very few of the workers who had been sidelined by the pandemic returned to the labor force, causing labor markets to become tighter than ever before. Even when Covid cases fell, schools reopened, and expanded unemployment benefits expired, workers were reluctant to return.
Employers’ efforts to compete for talent became a veritable cage match. To quote Federal Reserve Board’s December 2021 Beige Book:
“While wage increases were most notable for entry-level positions, contacts suggested that pay was increasing across the wage scale. Moreover, firms were reportedly enhancing other benefits, such as hiring and retention bonuses and flexible work arrangements to attract and retain workers.”
According to one Beige Book entry: “An airline reported offering flight attendants triple pay to work during peak periods over the coming holiday season.”
Running the economy hot had large benefits for job seekers and workers, especially disadvantaged groups. But supply chains could not keep up with unexpectedly high consumer demand. The result was the steepest rise in inflation in three decades, the classic sign of an overheated economy. By year end, the Federal Reserve was promising to double the speed with which it would taper asset purchases and eyeing three interest rate hikes in 2022.
Some observers worry that the Fed’s “hawkish pivot” could send the economy right back into a frost, especially with cases of the new Omicron variant of coronavirus spreading rapidly, and various forms of Covid relief expired. There is a risk it could cut the recovery short prematurely, with millions still missing from the labor force.
But we believe there is a good chance that the Fed will strike the right balance, taking some froth out of the market and causing inflation to moderate without job growth stalling.
If the Fed is able to strike the right balance, then in other matters, too, the country is likely to find the golden mean between two extremes. Workers will return to the labor force gradually, but not so fast as to push unemployment up, increase labor market friction, or erode their newfound leverage.
Finding the right balance from a policy perspective will increase the chances that people will take Covid seriously, but not panic. Lockdowns likely won’t need to be repeated on a wide scale, now that more targeted alternatives are available: N95 masks, vaccines and booster shots, rapid home tests (which will be mailed free of charge to people who want them in the new year), and two oral antivirals (which have just been authorized).
If we find the desirable middle ground, the likely result will be a year in which the U.S. controls Covid and inflation without drastic measures that could damage growth or limit our future potential. As supply chains recover, and workers ease back into the labor market, there is every reason to believe we can find ourselves in a milder and more sustainable economic climate.