finance

What the ‘big quit’ tells us about inflation


Why do we bother working? Why have we chosen to work for our current employer? For most of us, these two questions are relatively simple to answer and distinct. Yet in the debate over “the big quit” or “the great resignation”, as the phenomenon has become known, they are often conflated, muddling the message for inflation and economic policy.

We work because it pays the bills, or we enjoy it, or because a job provides a better path in life than realistic alternatives. Our choice of employer is a completely different question. While many people have personal reasons for staying in a given job, it will ultimately relate to the relative conditions of the work on offer, crucially including our pay.

The same distinction is true when people resign from their jobs. Voluntarily quitting for a better offer has little in common with the decision to stop work altogether.

When people have a better offer and tell their bosses, “you can take this job and shove it”, it is a strong signal of a tight labour market, one that will put pressure on companies to pay more in the months ahead with probable inflationary consequences. In a paper for the Peterson Institute this week, Jason Furman and Wilson Powell, show that in the US, the quit rate has previously given the best signal of coming wage increases. It is at an all-time high. The Federal Reserve should take note.

Line chart of Index 2019 Q4=100 showing Voluntary quits have hit record levels in both the US and the UK this autumn

The UK has sketchier data on quits, but in the third quarter of this year, Brits were telling their employers to shove it at record domestic levels. These were even stronger compared with the past than those in the US. This is a sure sign that inflationary pressures are unlikely to abate as fast as the Bank of England would like and monetary policy should cool things a little.

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

Italy has long languished with labour participation rates under 50 per cent; France and Spain are also weak at encouraging a large proportion of society into work. There is little to suggest that macroeconomic policy is too tight here and instead everything points towards a need to encourage more activity as one aspect in improving labour market participation. This would improve both supply and demand in these economies without obvious inflationary consequences.

Line chart of Participation in the labour market, aged 15+ (%) showing Covid-19 has had a smaller impact on labour force participation than long-term trends in some countries

For large economies that have levels of labour force participation over 60 per cent — the US, UK and Germany — the changes during the Covid-19 period are themselves dwarfed by longer-term trends. Rising participation in Germany has come from making employment more attractive to women. The same trend in the UK has been driven by a flexible labour market and punishing levels of social security for those out of work. In the US, by contrast, falling participation levels over the past decade have been caused by a lack of suitable childcare for people with caring responsibilities and a growth of sickness and disability, particularly among men.

The one slight exception to the rule that longer-term trends in participation dominate the picture comes from the US. The pandemic has seen even more people decide that the labour market is not for them, mostly resulting in a surge of retirements. While this probably has little inflationary signal, it certainly does not indicate significant labour market slack and weak inflationary pressure.

The great resignation is an amalgam of two separate stories: inflationary job switching and probably neutral trends in labour force participation. If you want a guide to future inflation, ignore labour force participation and look at the quits. It is not a pretty picture.

chris.giles@ft.com



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