From a new NBER working paper by Steven J. Davis:
A dramatic improvement in the US labor market has produced a sharp drop in inflation in 2022-23 without raising the unemployment rate. First, the concerns caused by the pandemic and the intentions of social distancing caused a big drag on labor force participation that started to reverse in the first quarter of 2022, and maybe earlier. As the reform took place, it increased labor availability and slowed wage growth. Second, the pandemic-induced shift to work from home (WFH) has increased the number of employment services in many jobs and for many workers. These developments have reduced the pressures on wage growth in the transition to new equity and wage packages that see higher levels of remote work and its benefits for workers. Business managers’ assessment suggests that the transition to WFH reduced average wage growth by 2 percent from spring 2021 to spring 2023. The direct assessment found that the average real wage growth from 2021 Q1 to 2024 Q1 in the US economy was at least 3.5 to 4.4 pts below the path suggested by the pre-pandemic information. This large shortfall in real wage growth fits well with the disinflation explanation for 2022-23 offered here.
Yes, this is an attempt to answer the question “why didn’t we have a recession?”
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