The so-called Great Resignation is having a wide-ranging impact on our economy and the stock market. To retain and recruit employees, companies are having to pay higher wages. Having more money in their pocket fuels consumer demand for goods and services, which in turn has fueled inflation. The stock market has been impacted by high inflation and will be impacted by the higher interest rates which are, no doubt, on the horizon. Here is a breakdown of what’s happening. A financial advisor can help you make sense of a changing market. Find one using SmartAsset’s free financial advisor matching service.
The Great Resignation Explained
Since the beginning of the pandemic in early 2020, a staggering number of Americans have left their jobs, either because they were laid off or because they took the initiative to leave themselves. At the beginning of the pandemic, workers were laid off as businesses had to close due to lockdowns. As time passed, increasing numbers of workers have quit their jobs.
Older workers, if they were nearing retirement, retired earlier than planned. COVID19 hit older individuals hard and the ones who were still working didn’t want to get sick. The solution was to limit their exposure and stay home.
The immigrant portion of the workforce started to shrink. With two years of mostly closed borders, the highly educated immigrants that make up an important part of our workforce vanished. The immigrants that worked as domestics went with them.
Even unionized workers got in on the wave of walking off the job. Copper miners, for example, must work in close proximity. They have been on strike not only in the U.S. but in other countries. That’s true for any profession where workers had to work closely together or closely with the public. Between April and September 2021, 24 million people quit their jobs, a record.
Even when expanded unemployment benefits and federal stimulus payments ended, workers still didn’t go back to work even though companies have been trying desperately to lure them back with higher wages.
Impact of Labor Shortage on the U.S. Economy
A prolonged labor shortage causes companies to seek employees by offering them higher wages. Truck drivers are offered a significant increase in wages due to the nationwide shortage contributing to the supply chain problems. Fast-food and retail workers are in noticeably short supply and employers are increasing their hourly wages rapidly to try to both retain them and hire new workers. There are many more examples. As wages climb due to the job shortage, inflation climbs. There are about 11 million jobs open as of the end of 2021. According to the Bureau of Labor Statistics, hourly workers’ salaries have increased by 4.8% over the past year and wages are still increasing.
When workers have more money in their pockets, they purchase more goods and services. When demand is high, companies can charge more for their products. With the current high demand, the Consumer Price Index (CPI) is up as many companies exercise their pricing power. The price of goods and services has increased by 6.8% over the past year. About 63% of small businesses say they have raised their prices.
How Does the Labor Shortage Affect the Stock Market?
Labor and raw materials are both inputs to the production process. When labor and raw materials both cost companies more, that cuts into corporate profits unless the cost of their products and services go up to match the rate of inflation. When inflation happens quickly and the rate of inflation goes up rapidly, it takes some time for large corporations to respond with price increases.
Since corporate profits are affected, so are the stock prices of those corporations. Stock prices are a function of new information obtained by investors and unexpected or sudden inflation is thought to be new information about future prices. Inflation causes volatility in the stock prices of corporations because the future becomes less certain. Stock prices may move up or down suddenly and often in an inflationary economy. Those movements make for changing returns in the form of capital gains and dividends. Risk is increased and investors are less certain about what new investments to make or current investments to hold. Rising inflation usually leads to higher interest rates designed to curb the flow of money in the economy and cool off inflation.
The Bottom Line
The Great Resignation is impacting the stock market due to its effect on inflation. The Federal Reserve is anticipating interest rate increases to combat high inflation this year. Usually, when interest rates rise, investors find safer investments than stocks, including value stocks, fixed income investments and even money market accounts and CDs.
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