‘We hope’ worker power gets worse

A Bank of America The executive said “we hope” American workers will lose their influence in the labor market in a recent private memo obtained by The Intercept. Making predictions for clients about the U.S. economy over the next few years, the memo also noted that changes in the percentage of Americans looking for work “should contribute to pushing up the unemployment rate.”

The memo, a June 17 “mid-year review,” was written by Ethan Harris, head of global economics research for the firm’s investment banking arm, Bank of America Securities. His specific aspiration: “By the end of next year, we expect the job-to-unemployed ratio to have fallen to the more normal highs of the last business cycle.”

The memo comes amid a push by the Federal Reserve to “chill” the economy, informed by much of the same logic – that high wages drive inflation. This year, the Fed raised interest rates for the first time since 2018. Historically, this has often caused recessions, and that’s exactly what appears to be happening now: The Commerce Department announced on Thursday that the product gross domestic had fallen for the second time. quarter in a row, indicating that a recession may have already begun.

What the note calls “the ratio of job vacancies to unemployed” is usually calculated the other way around, that is, the ratio of unemployed to job vacancies. The most widely used ratio offers a measure of the balance of power between workers and employers. The lower this number, the more options the unemployed have when looking for a job and the more opportunities employed people have to change jobs with better wages and conditions. According to the Bureau of Labor Statistics, this ratio was 0.5 in May, which means that there were then two job offers per unemployed person.

In 2009 – at the height of the economic calamity following the collapse of the housing bubble at the end of the George W. Bush administration – the ratio soared to 6.5, so there were more than six unemployed for each open job. . It then slowly declined over the following decade, reaching 0.8 in February 2020 before the Covid-19 lockdowns began.

This recent and unusual moment of worker leverage has made Bank of America quite anxious. The memo expresses distress at “a record labor market,” stating that “wage pressures are going to … be difficult to reverse. Although there have been one-off increases in some pockets of the labor market, the upward pressure extends to virtually all sectors, incomes and skill levels.

The memo recalls a previous memo from Bank of America in 2021, which it said warned of “very strong momentum in the labor market, suggesting the economy would not just hit but blow through the full employment. Fast forward to today, and these trends have been worse than expected.

The memo is a disturbing demonstration that economist Adam Smith was right when he described the politics of inflation in his famous 1776 book, “The Wealth of Nations.”

“High profits tend to raise the price of labor much more than high wages,” Smith explained. “Our merchants and our master manufacturers complain a lot about the harmful effects of high wages on the increase of prices. … They say nothing about the bad effects of high profits. They are silent about the perverse effects of their own gains. They only complain about those of others.

So, just as Smith would have predicted, Bank of America complains loudly about the bad effects of high wages on rising prices, but seems to be silent about the pernicious effects of high profits.

This is particularly remarkable given the role that corporate profits have played in the recent rise in inflation. After-tax corporate profits were 8.1% of the economy at the start of 2020, but have since climbed to 11.8% of GDP. In an economy the size of the United States, this equates to an increase of more than $700 billion in profits per year. These higher corporate profits have been the cause of more than 50% of recent price increases.

Instead, the memo focuses on the tantalizing prospect of the Federal Reserve raising interest rates, slowing the economy and bludgeoning workers.

The view of American workers would, in general, be exactly the opposite. For most of us, it’s great to have lots of jobs available, with employers competing for you. A tight labor market is wonderful. Wage pressures are strong. From this perspective, the key question at the moment would be how to reduce inflation while keeping employment and worker power high. Such a tactic would include comprehensive attempts to mitigate supply chain issues and reduce the pricing power of big business.

Most interesting of all is that in Bank of America’s enthusiasm for the Fed to attack workers, it gets the fundamental facts wrong: wage pressures have proven not to be, as its memo claims, “hard to reverse”.

“If you saw a continued acceleration in wage growth, that would be a problem,” Dean Baker, senior economist at the Center for Economic and Policy Research, a liberal think tank in Washington, D.C., told The Intercept in an e -mail. “That would almost certainly mean a wage-price spiral with ever-higher inflation. However, [nominal] wage growth has slowed sharply, from an annual rate of around 6.0% to just over 4.0% in recent months. … So, [Bank of America wants] the Fed to raise rates (and unemployment) to tackle a problem (accelerating wage growth) that does not exist in the world.

So the memo tells us what we suspected all along: the most powerful economic players in the United States – entities like Bank of America and its customers – don’t like workers having power. But it’s good to have it in their own words. Harris, the author, was unavailable for comment.

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