One of the many challenges facing the Federal Reserve is that the labor force participation rate is still lower than it was before the pandemic. The fewer workers in the jobs market, the more wages will be elevated, and the more that wages are elevated, the tougher it will be to bring down inflation.
And drilling further into the data, the participation rate for those between 25 and 54 years old actually has recovered, but the participation of those 55 years and older is still below pre-pandemic levels.
Dhaval Joshi, chief strategist of BCA Research's Counterpoint, points out that most industrialized countries aren't having this problem, and in fact, the participation of workers 50 and over has actually increased in Germany, France and Japan. So why is that American, and also British, older workers have left the workforce?
Joshi gives two reasons, or as he puts it, a carrot and a stick. First, the carrot -- as everyone remembers, the stock market began to skyrocket soon after the pandemic started, thanks to the unprecedented rescue efforts by both fiscal and monetary authorities. But Americans and Brits had far bigger exposure to this boost than the rest of the world. German and French households had lower exposure to financial assets, while Japanese households saw less of a boost because their bond yields were already at the lower bound.
Now for the stick. The U.S. and the U.K. had the highest rate of hospitalizations from COVID. And COVID of course disproportionately harms the older population.
This issue of older workers out of the jobs market won't be easily rectified, even as financial market gains have dissipated, and COVID has faded to the background, because the workers retired.
There are investment implications. The Fed, and the Bank of England, will have to be hawkish for longer. Joshi recommended going overweight French 10-year government bonds over their U.S. equivalent. He says the Fed will have to choke U.S. labor demand by hitting sales and profits, so stock markets will remain under pressure through the first half of 2023, "after which there will be a great buying opportunity," he says.
