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Record number of US businesses are reporting jobs are hard to fill

  • Small businesses employ more than 40% of American workers.

  • In June, 46% of small businesses said that vacancies are "hard to fill", not far from the record reading of 48% in May.

  • Given the tight historical relationship between the number of businesses reporting jobs are hard to fill and the unemployment rate, 46% would suggest an unemployment rate somewhere between 0% and 1% (see chart above), in other words an extremely tight labor market.

  • Yet, the actual unemployment rate is 5.9% and 7 million people who lost their jobs during the pandemic have not gotten them back.

  • Which of these two numbers should we believe? Wall Street is clearly banking on the unemployment rate. The market consensus is that, come September, when the expanded federal unemployment insurance expires and children go back to school, slackers and mothers will rejoin the labor force and there will be no more labor shortage.

  • September is still two months away and a lot can happen between now and then. Meanwhile, businesses that are operating at their capacity may decide to deal with increased demand by raising prices. Indeed, 40% of small businesses reported raising average selling prices in May, the highest level since April 1981.

  • HYSTERESIS is the idea that the state of a system is dependent on its history. In economics, hysteresis refers to the persistent effects of a temporary shock. For example, it has been posited that a period of high unemployment rate could raise the Natural Rate of Unemployment (NAIRU).

  • This hypothesis will be tested in the coming months. What if COVID has permanently changed the skill sets required by employers for their workers? What if COVID has caused people used to living with less and making them less motivated to get back to the grind? All these could raise NAIRU and the level of real interest rates needed to keep inflation under control.

  • The Fed does not seem to be factoring the possibility that NAIRU might have gone up. If it turns out they are wrong, it would bring forward the next recession by many months.

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