As we begin the new year, we wanted to highlight five topics, beyond the impact of COVID-19 and related uncertainties, that we believe business leaders and policymakers will be grappling with in 2022. Throughout the year, we will focus our efforts to provide solutions-focused analysis on these topics as well as a host of others.
Despite strong demand for workers and rising wages, the U.S. labor force is still 3.5 million people smaller than it was prior to the COVID-19 pandemic. Meanwhile, there are 11 million job openings – 3.5 million higher than record set in late 2018. While the number of people quitting jobs has increased (as Chart 1 below illustrates), that trend doesn’t account for all the job openings. How much of this job shortfall reflects caretaking needs and COVID-19 concerns which, as they hopefully lessen, will bring people back into the workforce? Or is there a permanent shift in people’s work choices?
Inflation hit its highest level in almost 40 years, with overall prices up 6.8% from a year ago. To date, the majority of pickup is the result of an increase in goods prices (red line in Chart 2), which are being bolstered by COVID-driven demand and supply shortages. The risk is that service inflation starts to accelerate as service prices depend more on labor costs. Will businesses be able to offset higher wages with stronger worker productivity, or are we at risk of a vicious wage-price spiral where workers and businesses start to expect larger price increases or fatter wages? Keep an eye out for shifts in unit labor costs (Chart 3) – the difference between compensation and productivity – and inflation expectations (Chart 4).
With the Fed now expected to raise short-term interest rates in 2022, the cost of borrowing money from banks and capital markets is likely to increase. The median Federal Open Market Committee member has currently penciled in three rate hikes in 2022. Whether that comes to fruition and impacts longer-term interest rates and capital market prices depends on the answer to the two previous questions. How far are we from full employment? Will workers come off the sidelines, lessening wage increases and supply shortages? Is the inflation we are seeing temporary or permanent? Watch two-year treasuries (Chart 5) to see how expectations for the Fed are changing.
Crypto is now an institutional asset with a growing number of funds investing in crypto and related infrastructure, such as miners and trading platforms, as well as futures trading on the CME. At of the end of the third quarter in 2021, crypto assets under management reached $60 billion worldwide. That number is likely substantially higher today as the SEC only allowed major-market trading of a crypto ETF last October. But the purpose of crypto is as a medium of exchange – a store of value which can be used to pay for haircuts or car insurance. Will businesses start to accept crypto in a widespread manner? Will crypto ownership become diffuse enough to make it a unit of account, where businesses set prices in crypto? Will mainstream payment systems support those crypto transactions? Will central banks issue government-backed crypto currencies, lessening the value of private-backed crypto?
Stakeholder capitalism is the idea that businesses would improve societal outcomes by focusing on a mandate broader than that which benefits shareholders alone. While this seems like a great idea in principle, it is challenging to implement in practice, especially when the interests of different stakeholders come into conflict and negate win-win solutions. During 2022, Kenan Institute will explore the varied facets of stakeholder capitalism through a series of Kenan Insights, webinars, events and other activities as scholars and business leaders come together to discuss the opportunities and tradeoffs of this complex topic.
Stay tuned for more on these and many other business and policy related topics.