Surveillance: Labor Market Outlook With Dudley

York Federal Reserve. And we're thrilled he could join us, and he writes presciently on labor this morning. Bill, I don't want to go into the details of President biden seventy two points on the power of corporations and the consolidation of corporations and the weakness of labor. You do address it this morning in your note, But I want to go back to an important article you wrote six years ago. What kind of jobs have been created? Bill Dudley?

How did we get here with declining labor share? It's not really clear exactly why the labor sharer has declined so much over the last uh a couple of decades. Presently, it's because corporations have more power. Uh, you know, any trust policy has been less aggressive, uh in dealing with any competitive practices. And I think labor is power from

a unionization perspective is also lesson. But you know, it's also a question of how tight is the labor markets through much of the last economic expansion during an excess supply of labor. We only got too close to full employment at the very end of the last economic expansion, then the pandemic it. So I think the key is going to be can the FED drive the economy to full employment? And if the economy is at full employment, then I would expect labor to do better and pick

up a bigger share of income. The primal scream of this document and the politic little energy that supports it so that supports President Biden, seems to be about in a blanket of technology over this generation. Do we underestimate the technological effects on our labor economy, on our American economy. I think there's no question that the digitalization of the US economy has had pretty powerful effects on the return

on capital and in the return on labor. Uh. You know, I think the ability that people to search now through the labor market and find people to employ is vastly different than it was. You know when you people used to help wanted advertising to attract the workers to employ them. Build us a belief that maybe labor has started to get a little bit more power as we work through this reopening. You've written today in your column, is the labor market too loose or is it tight? Is it

loose or tight? And but your answer is both. Can you bolt me through the thinking bill and your license pace. So it's it's loose in the sense if you look at the point of rate, the one point of rates still elevated to compared to where we were in February two thousand twenty, when the unemploy rate was three and a half percent. Right now it's five point nine percent. It's a loose when you look at the number of people who are actually employed. Were seven million jobs short

of where we were in February. If you look at it in terms of how many how many job openings there are a number of job openings is an all time record. We're all we have nine million time point two million of open jobs. Businesses have a lot of jobs.

To feel they can't find workers, you actually see here here about that anecdotically in the FED Reserves Bagebook report where they talk about how businesses literally can't find workers to hire to do they're working and some businesses actually are cutting back their hours of operation because they can't

find enough workers to keep their output up. So, Bill, when we talk about though, the power of workers here, when you go back decades prior, there was an argument to be made to here that it was a mobility of workers that also gave them a lot of power, and that with the consolidation of industries, with the decline of labor unions, UH, that sort of leverage is just not there the way it used to be. Is it possible to bring that back? Is it possible for that

to be done at the behest of government policy? I think it'll be difficult because mobility has declined. Willingness of people to move from one, you know, geographic location in the US to another is much lower today than it was twenty thirty years ago. And part of that's the aging of the population. Is people you know, are are older, they're they're more attached to where they've lived historically. So

I think I think it's really about the FED. It's really about the FED getting the economy to full employment. Is the FED can get the economy full employment, make the labor market truly tight, then workers will have to Businesses will have to pay up for workers, and workers will get up bigger share of the pie. But let's

talk about the FED just briefly. You've talked a lot about the risk the balance of risks around the Federal Reserve that once they do lift off, that trajectory won't be a shallow as the trajectory we saw in the previous Psycho I said that you were a pot of Do you still feel that way, yeah, because they basically he said that we're not gonna even begin to raise

short term race until three conditions are met. The economy has to be at their view of full employment, we have to they hit two percent inflation, and they have to be confidence that inflation is can go above to percent in the future. That's very very late to actually begin the tightening process in terms of lifting off in

terms of short term interest rates. Before they used to try to hit you know, they lifted off early with the idea of hitting two percent inflation, full employment, and a neutral federal fund rate all at the same time. We're not gonna do that this time. Important final point and Bill get to hear from you as always. That paces out on the Bloomberg terminal this morning and on Bloomberg dot com. Is the labor market loose or tight? The answer it's both by Bill Dudly, the former Federal's

serve Bank of New York president self. David Riley of Blue Bay Asset Management agrees. He says Grin and Barrett, it is a growth economy. David, what does the slowdown gloom crew get wrong? Well, I think they get wrong the extend off momentum that we have in the US,

and I think also the global economy right now. And you know, we still do have continuing substantial fiscal support, and I think that we're going to get more going forward as well coming out of Washington, and you know, we're getting things like the recovery funds will start to be dispersed towards the end of this year and into two within Europe, and of course with the vaccine rollout

um as as as well supporting reopening. So I'm pretty confident I've got a high conviction, even though the market is kind of challenging that conviction. In terms of how the bomb market is performing that you know, we do have strong growth for this year, we'll have above trend

for growth for next year. I think where the market can reasonably um or you know, those country views can can reasonably challenge to sort of yeah, but once we get past that, then we're going back into a sort of Steckler stagnation of you know, excess savings, low growth, low inflation, and the FED will never be able to get UH rates higher. It's going to end up getting trapped in a way that I think the ECB has done.

I'm not as pessimistic as as as that so um and I think right now the market is underprising um the Fed. So you know, I still think that bond shields are going to end meaningfully higher by the end of this year. But you know, yeah, I'm taking some pain and I'm having to gwyn and bear that right now. David, earlier on we caught it with Beamo, talked about the reaction function of this market, how a market response to incoming economic data. It made the point it's not what

you expect. Might be a little bit more counterintuitive in the future, the upside surprises on CPI will actually lead to lower yields of the long when tens thirties, and you're pushing back against that. Well, I think in the new term that is because the market has interpreted the last meeting of the FED as as this you know, hawkish pivot and basically decided that the FED is blinked

in terms of his average inflation targeting of regime. So if you get higher inflation in the near term, that is makes the FED more likely to to to to hire Gregs. But as I was saying before, people are sort of now debating this kind of secklist stagnation over the medium term, but I think they're wrong on that both. I think that, you know, as the data comes through, we will see higher and stickier um inflation as well

as stronger growth. But also actually that I don't think the FED has become meaningfully more hawkish, and so at some point I do actually expect the curve to steep and back again and to get back onto that more kind of reflationary um trade. Tom and I hate that when questions when will that happen? But David, I do think it's important when you think we'll have sufficient information to challenge the current consensus when do you think that will happen. I think we're going to be looking at

sort of September October time. I mean, you know, what's important is, in addition to the inflation numbers, is also, of course what's happening in terms of, um, the labor market. And although we had a pretty strong pay rolls headline number, the actual unemployment rate UM, you know, somewhat surprisingly ticked up. Now our own forecast suggests that unemployment is going to be approaching four percent by the end of this year.

Uh So, I think, you know, when we get to sort of October, we've had a number of payroll reports, including you know, the September payrolls, which will start to reflect some of the runoff in terms of the extent of unemployment insurance. UM. You know, kids returning to school, you know, Mom's getting more access to the labor market as well, so some of those sort of labor supply

constraints may start to dissiplate as well. So, David, so as we sort of try to assess this growth story, this growth scare, whatever we want to sort of call it here, can you maybe walk us through the diversions that we've seen lately between what's been going on with regards to sovereign debt and what's been going on with regards of corporate credit, because they seem to now be uncoppling maybe just a little bit. Yeah, I think it's

a good point that. I mean, one aspect of you know, what we've been seeing of late is that, well, you know, we've seen the volatility in the raids market. We've seen the equity markets starting to respond to that, and thinking, you know, the ball market is telling us that growth is slowing and potentially meaningful credit is actually held up

pretty well now. In part credit doesn't need sort of really strong growth and corporate earnings growth in order to be still a relatively attractive from a from a from a carry perspective. Um. But I do think we say the credit market right now it's sort of saying, well, you know, yeah, okay, maybe growth is you may maybe moderating, but that's you know, it's it's not waiving any kind of red or even amber flags. In my opinion, David, my observation is you're not focused. I mean, that's all

I can see now, John. This is just simple. Riley is focused and one thing and that's what England is going to do against Italy. Let's get to it. How do they do this? John Pharaoh and David Riley. Does England have to come out strong? It's the one question. Now when does England do it? Do they come out strong in the first half, John, or do they have to be patient and come out strong in the second. I think a lot of it comes down to one

player for England. David. I'm sure you agree. Raheem Sterling has just been a standout performer, player of the tournament for England. If he turns out there could be a bit of trouble for Italy. It's just been absolutely fantastic. Yeah, I actually think I actually think it's the overall the actual better team. But England do have home advantage, so I am hopeful that that will be enough to kind

of get us over the line. But yeah, I mean Racine Sterling running uh the Italian center backs I think could cause them some problems, particularly if they touch him. And of just which Italy turns up the one against Bounty, the one against Austria. I'm more interested in the thirty three unbeaten thirty plus games the City of London tom Monday morning. How does that work? David? What have you said to your team? Are you turning around to them and saying, look, I don't speech to be in early

on Monday morning after the big game. What are the expectations from the staff in the city. Uh, well, I've told them I won't don't expect me to be You told them that. What about them, David, They've got to be banging there. I don't forget. I'm a lot older,

so I've got to sleep great time. I do need my I don't need my sleep, so um yeah, I mean hopefully, um, you know we went there'll be a little bit of positivity and euphoria, maybe a sort of cheeky long sterling which should we should send the camera out to bank station just outside of bank Station tom on Monday morning. I'm tanning you tumballweeds all the way

through to lunchtime. It's called bunk, right, bunk. Yeah. What I noticed here is David Riley just you know, he was not focused until we brought this up, John, and he's just full on right now. I would agree David in his own David Riley, thank you, Chief Investment Strategist t K Monday morning, it's going to be dead. David blanche Flower a few decades ago definitely restructured our labor thinking with his book The Wage Curve, and what we all know is our wage curve as a society has

been shattered in the recent decades. He is at Dartmouth College. David David blanche Flower joins us UH this morning. Danny, I look at where we are in the first name that I came up with, and what I want to talk about more than anything is the primal scream nature of the seventy two point Executives Order. Who is screaming about consolidation in America? Well, I guess the way you would think of it now is that workers have been hurting, um.

Non workers have been hurting. They've been hit a serious pandemic um and it's had a big impact on the world. But this sits on the end of many decades of poor wage growth, and the balance of power between workers and firms has shifted quite considerably compared to where it was. So this is a sort of I read it, and I've read it very quickly in the last twenty minutes. This is the kind of primal scream to try and

redress the balance of power between workers and firms. Now, I think the country we just had its important market responses very little because the question is does it have any teeth? Is it merely wishful thinking? So when I read it that this is trying to think about UM some of the stories about big firms, about Google, about about on Facebook and song, but this is this is a scream and it start to think about that balance being being being changed. Whether it can do that, it

is unclear. What's so important to me, Professor, is the idea from you or liberals like Paul Krugman, or conservatives as well the late at lazer out at Stanford is the overwhelming theme of that document is technology is here, and we are using and adapting to technology every every day. Within the economics of monopsony, can we take the deadweight loss of technology and can basically can we put the

genie back in the bottle? Well, we'll probably not. UM. I mean, the teeth is the big story, but but I do think that in some sense that I'd like to think of it this way. UM firms have the ability to pay higher wages, they've seen no real need to do that, and they haven't shared. They haven't shared those wages and those in a sense, the profits that they've made. So this is a screen to try and do something about that. I mean, look at real wages.

I mean, I've written about it for thirty years. Still, even with the growth that we've seen, real wages today are still below what they were in the nineties seventies. So this is about trying to think about that coming out of the White House, coming out of cc rouse, who cares about these kinds of questions. The issue is can you can you change this part? There appeared to be sensible things there in terms of let's think about this occupation or licensing, let's think about ways in which

we can get prices down. But that in a in a sense an o'domini can just continues. And in a sense I read it is we would like for these things to happen. We would like to try and sort of stop the world from rolling. But there's little or nothing in it. I mean, there is going to be a White House competition, council um and and but that's true. But let's talk about that word and forgive me for

up because I think that word is so important. The knee jerk reaction from conservatives this morning, I think would be to say I'm from the government and I'm here to help. This is a problem. The government wants to set prices all those kind of things. But I hear competition and the lack of air off and Tom I think rightly mentioned the late great and and Cruder and some of the work he did on non compete clauses and the labor market. And this is about trying to

reintroduce competition where there hasn't been enough competition. Can you just sit there, that's your world, the labor something like non competes and the problem then that is caused. Well, this is about the balance of power. When the balance of power sits with firms. Firms can put put in occupational licenses and they differ by a state um and in the UK they can do these things called zero our contracts. That's what happens when the bargaining power shifts

strongly towards towards firms. If you can somehow or other redress that take the occupational licenses the way that increases the powers of workers, that's what this document is about. But it but the first thing you read it, John, is it doesn't have any teeth it doesn't have. How are we going to do this? Yeah, you can say, you know, it will be good idea to lower drug prices. It would be good idea to let people have have refunds.

And in some sense what we'll see and that's something I'd argue about a lot workers ability to bargain these things becomes greater as the economy moves towards full employment, and so we're seeing these adjustments going on. And then the last six or seven months we've see increasing power of workers trying to get trying trying to deal with the bottlenecks that we see. So I think this is sort of an opening salvo. Al Kruger's work is really important in that in that area, firms can impose rules

when when they're bargaining position is strong. We will see what happens. But I just think, you know, the this is an opening salvo, it seems to me. But the professor when we talk about some of the market forces that have sort of pushed a little bit more, given

the workers a little bit more bargaining power. Here the idea here that the administration now wants to nudge that further not necessarily a surprise but the idea when you start talking about some of these right to work issues and some of these licensing issues here, this is now a major shift. If he's able to get it through and able to sort of enforce these things, this would be a major shift in how in the US economy, in the US labor market. I think it would be.

And there are signs around the world that these that this shift is underway. Um. Two examples in the UK we've seen rising unionization rates and actually in the United States and the last data that we have union rates, union density rights, that's the proportion of workers union has actually risen. Why is that. It's because actually in the last years or so, non union jobs have actually declined. So I think there is some evidence in the last

couple of years that there is a move away. I mean, the right to work laws are our laws that can be imposed when there's plenty of workers around. So I think you're right, Um, the balance between workers and firm seems to be changing a bit. I mean, this is this is a really important and interesting document. It suggests that you know, we're going to see a push on the front of let's increase the power of workers. But whether you can impose that is another thing. Problem is, Danny,

that's the left wing interpretation of this. And I mentioned a little bit earlier the conservative criticism would be, we're trying to we're trying to reduce the friction of corporations at the same time, I don't want to introduce more friction on the labor side with unions. And you know that's a political point, of course. I know that's a

political point. Um that that that that that's true. I'm just suggesting that there are there are trends that are moving partly because that's what's happening out there in the world. I mean seeing those things happening. But yeah, John, I mean I don't think it's the it's the left wing view. I think it's that the reality is, the reality is where we are. How that's going to change will really depend upon how tight the labor market is. And we can both agree we need more competition. Danny, you and

I could talk forever. I'll give you a call later. We'll carry this on and a little bit more. Danny Flat of Doltma College Andrew Peckross resists of Johns Hopkins were thoroughly could join us this morning. The mystery for me is someone vaccinated. Professor, is the idea that if I choose to be unvaccinated, how sick is sick when I get the delta variant? What's the level of sick

we should expect. Well, the data is really rolling in now that um, the delta variant is causing disease primarily and unvaccinated populations, and the disease that it's showing seems to be a bit more severe than the disease we saw in similar age groups at the beginning of the pandemic. So if you're unvaccinated, the risk from delta variant is greater of infection, and there's also going to be a

slightly greater increase of severe disease from infection. So there's nothing good about being vaccinated when you think about the delta v area. Where are we on the vaccination process right now? I follow the statistics. I saw something age over twelve fully vaccinated fifty x per cent as well? Are you pleased with the rate of vaccination? Every vaccination is a good thing. I would love to see these vaccination rates get much higher than they were than they

are right now. Um, we've reached a stage where many of the people who are vaccinated. Now, obviously they're protected from infection, they're protected from severe disease. We haven't reached those levels that really give us a population based benefit from vaccination. Yet. That's that herd immunity thing that you

hear about all the time. It doesn't mean that the vaccine doesn't work against you individually with vaccination helps protect you, but at some level we get that added benefit that the virus is just so difficult to to circulate in the population because of vaccination that even the unvaccinated um get a benefit from that. We're not close to that level, and as a research scientist, that's what I really like

to set as a as a as a standard vaccination goal. Yeah, doctor, a lot of talk now about sort of what the next step is for those folks who have been fully vaccinated. Fiser, of course coming out yesterday and talking about the idea of a booster shot the CDC saying that well, maybe not quite yet here where do we stand. Well, all the data so far from the US looks like vaccination, particularly vaccination with the MR and A based vaccines, is

protecting against delta variant. So I like the fact that Fiser has gone forward with the clinical trial to show what a booster will do um. I think that's important data to have. I don't see it as an eminent thing in terms of a guidance for the US population, but this virus moves quickly. Variants are merging fast, and I think the fiser move is good in terms of preparing for the future. If we get a variant that's even more deadly than Delta, then a booster maybe an

important thing that to to consider. And having fiser Um completed the clinical trials for that, there's gonna be a good thing in terms of helping us be prepared for that. Professor, it's gonna hate for me, said, it's gonna catch you out. We go some breaking news we need to run to. Andrew Peco, stat John's Healthians, bloombeg skill of the public help.

This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance Podcast on Apple Podcast SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene and this is Bloomberg