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Labor market: Wage-price spiral ‘halfway there in the U.S.,’ economist says

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Allianz Chief Economist Ludovic Subran joins Yahoo Finance Live to discuss the labor market as job openings rise to 10.9 million in December.

Video Transcript

KARINA MITCHELL: Bring in our next guest to discuss today's JOLTS report as well the risk businesses face in 2022. And to do that, let's bring in Ludovic Subran from Allianz. He's the chief economist there. I hope I said your name correctly, sir. Thank you so much for joining us. And really would love just to start off by getting your perspective on those JOLTS numbers that came in today. Still definitely a tight labor market. 10.9 million jobs are open. 4.3 million was the quits rate, down slightly to 2.9%.

LUDOVIC SUBRAN: Yeah, it's very interesting because the labor shortage shows no sign of slowing down as job openings ticked up in December. So it's very interesting that the job report continues to confirm that the problem is mostly supply driven, so labor supply. So you continue to have a labor participation issue in the US rather than just a wage conundrum or any type of other issue.

So-- so it says a lot because with the market correction that we saw earlier this year, I would have expected that some people that were maybe more on the edge when it came to their purchasing power and so, with the market correction, would have decided to go back to the job market-- not necessarily the elderly or not necessarily people that are further from the job market, but those who are just OK-ish and don't really want to go back to tough, blue-collar job. And you know, we don't see any type of respite at this point. So it really shows that the labor market is flashing hot signals in the US, yeah.

KARINA MITCHELL: And then I want to get your expectation for the jobs report that comes out on Friday. Some are predicting negative numbers. The average consensus is about 150,000 jobs added and that we will see the effects that Omicron has had. And I'm wondering, how does that tie into inflation? Do you think the Fed even pays attention to the numbers? Because they seem so focused on now tackling inflation. Fed Chair Jay Powell himself said he personally thinks we are at maximum employment right now. Do you agree with that assessment?

LUDOVIC SUBRAN: So-- so the jobs report-- we're also in the tune of 120,000, 130,000 jobs. You know, as you know, the last report was quite disappointing with 199,000. And to go back to your question, I think the Fed does care about the labor market. You know, the Fed has been even accused of being too woke for its own good by looking at the distributional effect of the labor market. That's really what some pundits reproached Chairman Powell with, and you know, that was a bit accent-- aggravated, I would say, or accentuated by-- by Janet Yellen's discussion about making sure that the labor market works for everybody, including people that are further from the labor market.

So-- so price stability is, of course, the utmost priority with inflation, you know, skyrocketing, but I do think it's very important to really understand the labor market because it is where the wage price spiral starts or doesn't start. So today, the price-- the wage-price spiral is halfway there in the US. So it's very important to understand employment rate but also labor market participation, this-- you know, where we get with the Great Resignation. How much are we talking about when we talk about shortage in the labor supply?

Unemployment rate is good. Wages are also going up. But to understand the future, you need to understand the composition of-- of the labor market and the potential mismatches that are temporary or that are much more structural. So I think they do care, and they should care. And-- and we will know more with the jobs report. But of course, it's a question of the following months, right? Because it will give us a bit of a tempo for the Fed tightening, together with the inflation data, of course.

KARINA MITCHELL: So as far as 10-- Fed tightening, do you see them being as hawkish and aggressive as some have made out, with the markets now pricing in five rate hikes? How many hikes do you see coming?

LUDOVIC SUBRAN: We only have three. So as you know, you know, we have only-- You know, the range is incredible. You know, it's the-- the narrative is-- is hard for the Fed to regain after having tried this "temporary" story, which didn't hold for long. So now you have people that go from three or two all the way to seven, eight, you know, rate hikes.

The reason why we are being on the dovish side is that we see, for example, more market corrections. And the Fed is somehow officiously in charge of [INAUDIBLE] volatility suppression. We believe that the type of correction we saw in January on the equity market is not something the Fed is very comfortable with. So the-- the more the correction we're going to see on the stock market, the less likely hikes will be, or the-- you know, the less frequent hikes will be.

So we keep with our three hikes also because we somehow think that monetary policy will not calm the supply-chain inflation. It will not calm the-- the other issues, supply-driven issues, that make the bulk of inflation in the US today. So it is a very-- it would be a very costly way to calm inflation with a very tight monetary policy. The last time that happened for the US was in the early 90s-- the early 80s, sorry, with Volcker. So that-- that came with a recession. So we-- we think they will still be very cautious. They're walking a very fine line. But we think they will keep a bit of hiking under their belt to make sure that-- that growth is strong in the US and we avoid a form of stagflation, which would be, unfortunately, ringing buy-- back Carter's time in the US, which was an economic depression, yeah.

KARINA MITCHELL: Ludovic, really quick, only about 30 seconds left, want to get your assessment of a recent survey from Allianz that shows economic risks that businesses face. So inflation and supply-chain issues were the biggest risk last year, but according to the report that came out, skilled workforce and, you know, macroeconomic conditions like inflation less of an issue for businesses this year. So is the pendulum swinging? Workers have all the momentum right now, but do we see that slowly swinging back to employers having the upper hand come this year?

LUDOVIC SUBRAN: In 30 seconds, yes, the pendulum is swinging back because I think, you know, we're getting a bit more forward visibility. And so businessmen and the chief risk officers that we surveyed in this-- in this report, they go back to the core of what makes the balance sheet, what makes the income statement. And it's indeed risk of cyber, business interruption, natural catastrophes, and they think that the economy is taken care of, but, you know, of course it doesn't mean that the risks to the downside have disappeared. But it certainly means that everybody is going back to doing business, and they want to leave the pandemic behind them.