Opinion – Solange Srour: The new normal in the labor market and inflation

Almost two years after the outbreak of the pandemic, millions of people remain outside the labor market in several countries. Whether to avoid contracting the disease, whether because of the still slow return of schools, or perhaps because of a large number of early retirements, the fact is that the drop in labor force participation is a threat to the global recovery.

At first, it was expected that this phenomenon would be transitory. Now, it is feared that the issue will go deeper, creating a dilemma for central banks. In view of the still highly stimulated global demand, the risk is growing that the acceleration in prices could be transmitted to wages, exerting greater pressure on the already high inflation.

In the US, more than 4 million workers have left the workforce since the start of the pandemic, and the participation rate is still 1.7 percentage points below the level seen in early 2020. Generous unemployment benefits expired in September without generating noticeable change in workforce participation. On the other hand, the savings rate remains extremely high and continues to be one of the explanations why workers prefer not to look for a job.

Similar pressures are visible in the UK, where it is estimated that there are now nearly 1 million fewer people in the workforce than there would have been if pre-pandemic trends had continued. There, the shortage of labor is being exacerbated by the brexit, which has affected the flow of workers from the European Union.

There are several countries that have shown a more accentuated trend towards early retirements. In contrast to previous recessions, there are fewer older people who feel forced into retirement because of a lack of employment options and more who have seen rising asset prices expand their wealth and thus feel comfortable retiring. even of working age.

Another very common phenomenon in advanced economies is the strong increase in the number of workers who are leaving their jobs in search of better opportunities. The so-called “great resignation” is intense in Germany: more than a third of all companies are reporting shortages of skilled workers, according to a survey by the Ifo Institute. It is a phenomenon that contributes to the rise of wages in several countries.

In Africa and Latin America, labor force participation was affected by the withdrawal of women from the labor market during the pandemic. The factor that most harmed them was the long period of school closing. As in many of these countries women work predominantly in the informal market (mainly in the service sector), many did not have the help of policies aimed at maintaining employment and were even harmed by slow vaccination.

Studies (eg, “Gendered Laws and Women in the Workforce”) suggest that reintegrating women into the workforce takes significant time. The return of a small number of women to the market is likely to put pressure on the wages of less-skilled workers when growth picks up in these regions.

In Brazil, specifically, data recently revised by the IBGE show a stronger recovery of the workforce. Contrary to the global discussion, the labor market does not tend to be a short-term inflationary force. However, our country could suffer a lot if inflation abroad proves more persistent.

For the first time in decades, the scenario in which the acceleration of inflation is transferred to wages and ends up generating higher interest rates and lower economic growth is beginning to gain strength. Here, a stronger reduction in the ample international liquidity increases the negative impacts caused on economic activity by the high fiscal uncertainty.

The “new normal” of global employment may be inflationary. On the one hand, central banks must do their utmost to prevent high inflation from perpetuating via wage increases. On the other hand, the priority of governments should be the search for productivity gains. Only when wages rise in step with the increase in productivity does society’s well-being increase without generating inflation.