Inflation and geopolitics could be viewed as the market’s biggest risks. Current worries about inflation harken back to the so-called “wage-push” inflation of the 1970s, while geopolitical risks are ever present in the markets. Brexit seems a manageable near-term concern, but the risk from a growing rivalry between the U.S. and China, both industrially and diplomatically, loom larger these days. Could the markets be wrong to worry about inflation and China? This Market Brief argues these fears might be overstated.


The worry the market has over the current historically low level of unemployment is driven by a fear the pool of job candidates has become so small that the primary way to acquire the next new employee is to hire one from another firm – and the main inducement is to offer a higher wage. This competition for workers eventually becomes so fierce that businesses are forced to raise prices to cover higher wages of new hires. Hence the name “wage-push” inflation can be understood as rising wages push inflation higher.

To assess whether or not the dynamics of the current labor market are conducive for wage-push inflation, other labor metrics are more illustrative than the unemployment rate. Rather than focus on the number of unemployed, this analysis instead focuses on the number of people employed. The Employment and Wage Inflation chart at the top left of page three depicts the Labor Force Participation Rate (LFPR) and the Employment to Population Ratio (EPR) beginning in 1948 through the present and compares them to the annual percentage change of Unit Labor Costs (ULC).

The LFPR measures the proportion of people who are working out of all those who are employed or seeking employment. If you are unemployed and not looking for work, you are not counted in the LFPR. The EPR is the number of employed adults in proportion to the entire adult population, whether or not they are seeking employment.

It can be seen on the Employment and Wage Inflation chart on page three that LFPR and EPR were fairly stable until the mid-1970s, and ULC rose and fell in line with EPR. The impact of women and younger baby boomers entering the workforce can be seen in both the LFPR and EPR rising during the 1970s and 1980s. This rising supply of workers may have offset growing labor demand and staved off wage inflation. Since the early 1980s, ULC has been more stable outside of recessions.

Also displayed on the chart is the impact of the recessions following the early 2000s “tech wreck” and 2008s sub-prime mortgage crisis. As the EPR fell during recent recessions, ULC also fell, but failed to accelerate as rapidly post-recession as it did in the past. A potential reason wages did not climb rapidly could be the greater supply of workers (LFPR) is higher today compared to the 1950s, 1960s, and most of the 1970s.

Read full March Market Review.

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