There are three key reasons why this recovery will be fairly jobless in the short run:

  • Aggregate demand is below the normal level because of increased propensity to save and the permanent rise in energy costs (Oil likely won’t return to pre-Katrina levels)
  • The workforce is above the normal level because of the recently-devastated retirement accounts of the boomers; they have to work a few more years to compensate for the lost retirement value
  • Companies are increasingly turning towards technology and automation as the way to increase margins and profits. Capital investment is long-lasting and should provide them with increased capacity (at any given labor employment level).

The increased capacity due to both a larger workforce and capital expenditures, combined with lower aggregate demand for the final products will lead to a near-term squeeze on employment and wages. For the inflation hawks, this means wage-pressure inflation still has a long way to go before becoming an issue.