The initial concern is that the drop in participation rates following the COVID-19 crisis will put pressure on the labor market, resulting in higher wages, inflation, and interest rates. However, it is important to remember that the current goal of central banks is to increase employment rates. When the participation rate lowers, they respond with a more expansionary, rather than a more restrictive, monetary policy, according to Natixis analysts.
“The following is the current source of concern: The participation rate in the US has dropped dramatically since the COVID-19 crisis; people who have lost their jobs have not returned to the labor market. This has put pressure on the labor market, making it difficult for businesses to hire. And then there’s the possibility of a wage acceleration, which isn’t obvious right now but might lead to a long-term rise in core inflation and interest rates. The risk of a public and private debt crisis, a sharp drop in stock and real estate prices, and a drop in investment would then be evident.”
“The Federal Reserve pursued overheating from 2016 to 2019: the goal is to maintain an expansionary monetary policy, with interest rates significantly lower than growth even though unemployment is already low): the goal is then to raise the participation rate (which was the case between 2016 and 2019) by encouraging businesses to hire low-skilled workers and by encouraging people to work longer hours. The goal of the overheated strategy is to raise the participation rate, which declines naturally after recessions due to job and skill losses. And from 2016 to 2019, that policy was effective.”/n
