What the ‘big quit’ tells us about inflation

Why do we bother working? Why did we choose to work for our current employer? For most of us, these two questions are relatively simple to answer and distinct. However, in the debate about “Give up big” or the “great resignation,” as the phenomenon is known, they are often combined, mixing messages about inflation and economic policy.

We work because it pays the bills, or we like it, or because a job offers a better path in life than practical alternatives. Our selection of employers is a completely different question. Although many people have personal reasons for continuing to do a certain job, that will ultimately relate to the relative conditions of the job offered, which mainly includes our wages.

The same distinction holds true when people resign from their jobs. Voluntarily quitting to receive a better offer has very little in common with the decision to stop working altogether.

When people have a better offer and tell their boss “you can take this job and push it,” that is a strong signal of a tightening labor market, one that will cause pressure on companies to pay more in the coming months with the possibility of consequential inflation. In a piece of paper for the Peterson Institute this week, Jason Furman and Wilson Powell, show that in the US, the former quit rate has given the best signal of an upcoming pay rise. It’s at an all-time high. The Federal Reserve should take note.

Line chart of Index 2019 Q4 = 100 showing Dropout hit record levels in both US and UK this fall

The UK has more sketchy data on job vacancies, but in the third quarter of this year Britons told their employers to push it at a domestic record. These are even stronger than they were in the past than in the US. This is a sure sign that inflationary pressures are unlikely to ease as quickly as the Bank of England would like and monetary policy will cool things down a bit.

If quit rates tell a clear story in both the US and UK, the message from the number of people entering the labor market is much more subtle. Most importantly, there are huge differences between countries.

Italy has long languished with a labor participation rate below 50%; France and Spain are also weak in encouraging a large part of society to work. There is little to suggest that macroeconomic policy is too tight here, and rather everything points towards the need to encourage more activity as an aspect of improving participation in the economy. labor market. This should improve both supply and demand in these economies without obvious inflationary consequences.

Labor market participation line graph, age 15+ (%) shows that Covid-19 has had a smaller impact on labor force participation than the long-term trend in some countries

For the major economies with labor force participation above 60% – the US, UK and Germany – changes in the Covid-19 era are in themselves constrained by long-term trends. Increased participation in Germany has come from making employment more attractive to women. Similar trends in the UK are also fueled by a flexible labor market and punitive social security levels for those out of work. In contrast, in the US, the decline in participation over the past decade is due to a lack of appropriate child care for those with care responsibilities and an increase in illness and disability, especially among men.

One small exception to the rule that the long-term participation trends that dominate the picture come from the US. The pandemic has even seen many people decide that the job market is not for them, mainly resulting in the rise of retirees. While this may have little inflationary implications, it certainly does not indicate a significant slack in the labor market and weak inflationary pressures.

The big resignation is a combination of two separate stories: job-switching inflation and possibly a neutral trend in labor force participation. If you want a guide to future inflation, ignore labor force participation and consider layoffs. It’s not a pretty picture.

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