Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Hidden Tax Of Low Firing Rates
Transcript
- Lucas: Look at the numbers coming out of the Labor Department this week, because they are actively fighting each other. Initial jobless claims dropped to one hundred ninety-four thousand, which is near the lowest level since the nineteen sixties, yet the unemployment rate ticked up to four point two percent. It creates this weird cognitive dissonance where the safety net looks impenetrable, but the actual employment picture is fraying. Luna: Right, it feels like we are measuring the wrong thing. If people aren't getting fired, how do they find new jobs that actually match their skills? Lucas: Exactly. That is the core of what I call the low-fire rate paradox. Companies are holding onto employees they would have let go five years ago, not because those workers are performing well, but because the cost of separation has become structurally prohibitive. We are seeing a retention culture driven by fear of liability and severance exposure rather than genuine operational necessity. Luna: So you are saying the low claims number is actually a bad sign for productivity, not a good one? Lucas: It is a sign of stagnation. When you look at the average hourly earnings for private sector workers, they are up to thirty-seven dollars and eighty cents. But if you strip out the top performers who are still moving around, the median worker is sitting in a role they likely should have vacated months ago. This drag on real GDP growth, which has slowed to two point two percent annualized, is partly because capital is being deployed to maintain status quo labor rather than innovate. Luna: And that explains why the Fed is stuck. They see sticky wages but can't tell if it is demand-driven or just supply-side inefficiency. Lucas: Precisely. The Federal Reserve funds rate is currently sitting at three point seven five percent, and the interest on reserve balances is at three point nine zero percent. The central bank is trying to cool an economy that is artificially insulated from its own tightening measures. By refusing to fire, corporations are effectively subsidizing their own wage bills with retained capital, keeping inflation pressure alive even as headline CPI shows only modest increases. Luna: Wait, let me pause there. You are suggesting that corporate risk aversion is acting as a hidden monetary stimulus? Lucas: I am saying it is a structural brake on the cooling process. Let's talk about the mechanics of this. In the past, a poor performer was let go, and that person either retrained or took a lower-wage job, clearing space for higher-productivity hires. Now, with legal costs for wrongful termination suits soaring and internal HR policies becoming hyper-cautious, the default action is retention. The employee stays, the company pays them to wait for a better market, and productivity flatlines. Luna: That sounds incredibly frustrating for anyone trying to break into the market though. If no one leaves, where are the entry-level roles? Lucas: That is the brutal part of the equation. Job openings, according to JOLTS data, have fallen to seven thousand seventy-nine thousand. The churn is dying. For mid-career professionals, this means your salary growth is capped because you cannot leverage a job switch to get a twenty percent raise. You are stuck in the current role, watching your effective hourly value erode against inflation, while the company keeps you on payroll to avoid the headache of replacement. Luna: So the 'quiet quitting' narrative was just the calm before the storm of active retention mandates? Lucas: Or rather, the quiet retention mandate. Companies are engaging in what economists sometimes call 'sheltering.' During the pandemic, we saw this clearly. Now, it is becoming a permanent feature of the balance sheet. Look at the housing market warnings flashing right now. High mortgage rates combined with this stagnant labor mobility mean fewer people are relocating for work. The geographic immobility reinforces the local labor hoarding. Luna: I want to bring in the consumer side here. If wages are sticking, does that not keep spending up? Lucas: It keeps nominal spending up, but it distorts the quality of that spending. We are seeing car buyers demanding lower prices and better tech simultaneously. Automakers are struggling to deliver both because their input costs, including labor, are rigid. They cannot cut prices without cutting margins, and they cannot cut margins without risking solvency in a high-interest environment. So they compromise, offering worse vehicles at higher prices, which feeds back into that Core CPI we are watching. Luna: This feels like a structural rot rather than a cyclical dip. Are companies realizing this is unsustainable? Lucas: Some are starting to. We are seeing a rise in 'voluntary separation' packages. Instead of firing, companies offer generous payouts to encourage early retirement or lateral moves. It is a way to surgically reduce headcount without triggering the legal and cultural backlash of layoffs. But it is a small leak in a bursting dam. The overall volume of separations remains historically low. Luna: Before we go deeper into the Fed's reaction function, I want to take a quick minute to talk about how we keep this show running. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. — and that revenue literally funds the research and production behind these daily conversations. No ads, just pure macro analysis supported by you. Lucas: It makes a huge difference in our ability to dig into these niche dynamics without chasing clicks. Back to the data. If the Fed sees this wage rigidity, do they interpret it as persistent inflation risk? Luna: Yes, and that is why the bond yields are reacting. The ten-year Treasury yield is hovering near four point ninety-nine percent. Investors are pricing in a longer period of restrictive policy because they know the labor market won't self-correct quickly. Lucas: Correct. The market is betting that the Fed will hold rates steady or even hike slightly if Q three earnings show margin compression due to these sticky labor costs. Remember, the PCE price index is at one hundred thirty-one point six, and core PCE is at one hundred thirty point five. These are above the two percent target, but the velocity of change is slowing, which confuses the algorithmic traders. Luna: But humans can see the trap. If you don't fire, you don't grow. It's evolutionary biology applied to corporate finance. Lucas: It is exactly that. Nature abhors a vacuum, and so do inefficient organizations. By filling every role with someone who is merely adequate rather than exceptional, you dilute the average output per dollar spent. This is why the S&P five hundred is struggling to break out despite decent earnings. The efficiency gains are gone. We are just managing decline with better HR policies. Luna: Does this mean the upcoming midterms are going to be heavily influenced by this economic frustration? Lucas: Absolutely. Polling shows approval ratings on the economy hitting all-time lows. Voters feel the squeeze of stagnant wages relative to asset prices, but they also feel the anxiety of being stuck in jobs they hate. It is a political nightmare scenario. The administration is caught between wanting to stimulate hiring and needing to control inflation, but the labor market structure prevents both. Luna: So the solution isn't fiscal policy or monetary policy, it's cultural or legal reform regarding employment standards? Lucas: Potentially. If we made it easier and cheaper for companies to exit underperforming relationships, the labor market would become more dynamic. Wages might normalize, productivity could surge as talent reallocates to high-growth sectors, and inflation would cool naturally. But politically, that is a non-starter. Everyone wants job security, but few want to pay the price for it in terms of market efficiency. Luna: It's the tragedy of the commons. Individual companies hoard labor, but the collective economy suffers from low mobility. Lucas: Spot on. And until that dynamic shifts, we are going to see this weird hybrid of low unemployment and high dissatisfaction. The UK inflation jumping to three point five percent is a warning shot here. They faced similar labor rigidities and saw wage demands spiral. We are watching the same script play out in the US, just with a lag. Luna: What should investors be looking for as a signal that this cycle is breaking? Lucas: Watch the quit rate. When the quit rate starts to fall below one point five percent, it means people are too scared to move, confirming the lock-in effect. Then, watch for a spike in involuntary separations. That will be the crack in the dam. Until then, expect the Fed to remain hawkish and the markets to trade in a tight range. Luna: A tight range for everything except the anxiety levels of the middle management class. Lucas: Probably the most accurate valuation metric we have today. We will see where this goes next quarter.