The “labor hoarding” theory TKer subscribers have been reading about for months is getting some traction.

From Fed Vice Chair Lael Brainard’s speech on Monday (via The New York Times): “…businesses that faced significant challenges finding and retaining qualified workers following the pandemic may be more inclined than in past cycles to retain rather than lay off their workers as demand weakens.”

The Times’ Jeanna Smialek and Sydney Ember have written a cool feature on the theory. (Check it out here.)

Despite a rapidly cooling economy amid high inflation and rising interest rates, layoff activity has been unusually low. (Read more about this here, here, here, and here.)

Labor hoarding helps to explain why employers may be reluctant to let go of workers despite the pressure on profits. Here’s how I explained it in a July 6 newsletter to TKer’s paid subscribers.

So what explains the current reluctance to shed workers?

Maybe recent experience has something to do with it.

Much of the ongoing economic recovery has come with persistent labor shortages. Employers haven’t been able to hire fast enough to keep up with the booming demand for their goods and services.

At least some of the employers seeing business slow right now remember how hard it was to recruit talent over the past two years and would rather just hang on to employees, even if it comes with carrying costs.

…

By the way, laying people off isn’t necessarily cheap. Many employers continue to pay salaries and provide benefits for weeks or months after laying off employees. And hiring isn’t cheap, either. Employers have to spend a lot of time and resources to recruit and train new employees.

In the long run, it may be cheaper to just hang on to employees during this lean period.

There have been a handful of economists kicking this idea around for the past few months. (Read more here.)

The big takeaway here is that even as the Federal Reserve inflicts “pain” on the economy in its effort to bring down inflation, layoff activity and the unemployment rate could to stay low for a while.

Bolstering this theory is the fact that there continue to be millions more job openings than unemployed people, a dynamic that represents a massive tailwind in the economy.

This is not to say the labor market won’t cool. If things go according to the Fed’s plan, job opportunities should evaporate, and workers will lose their leverage to ask for higher pay. It’s not a great situation, but it’s what the central bank is aiming for as it attempts to get inflation under control.

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