Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How Long-Term Unemployment Is Rewriting the Inflation Story
Transcript
- Lucas: The May jobs report lands on Friday, and the consensus is for something like 180,000 new payrolls — a solid number, not stellar, but solid enough to keep the narrative that the labor market is 'still resilient' alive. Luna: But you're not buying that narrative, are you? Lucas: I'm not. Because underneath that headline number, there's a quieter, more troubling trend: long-term unemployment is surging. And I think that's the real inflation story right now. Luna: Define 'long-term' — is that the 27 weeks or more bucket? Lucas: Exactly. The Bureau of Labor Statistics defines it as 27 consecutive weeks or more of joblessness. And the share of unemployed workers in that bucket has been climbing steadily — it's now above 22 percent, up from around 17 percent a year ago. Luna: That's a huge jump. And it's happening even as the unemployment rate itself remains low, around 3.7 percent. Lucas: Right. And that's the key tension. The low unemployment rate makes the economy look healthy. But the composition of the unemployed is shifting toward people who are harder to re-employ — skills atrophy, gaps on the resume, loss of professional networks. Luna: And that changes the inflation math, I assume? Lucas: It does. Because these workers exert less upward pressure on wages. They're less able to bargain for higher pay when they do find a job, and that means the wage-price spiral that the Fed has been worried about is less likely to materialize. Luna: So you're saying the long-term unemployed are actually a disinflationary force? Lucas: Exactly. And that's one reason why core CPI is still running at 3.8 percent year-over-year, but the Fed's preferred gauge, core PCE, is at 2.8 percent. PCE puts more weight on goods and services where wages are a smaller component, but it also reflects the reality that labor cost pressures are easing. Luna: The ADP report on Wednesday showed private payrolls grew by 122,000 in May, which was stronger than expected. But does that data capture these long-term dynamics? Lucas: ADP doesn't break out by duration of unemployment. So a new hire who was jobless for two weeks counts the same as someone who was jobless for two years. But we know that the longer someone is out of work, the lower their re-employment wage tends to be — research from the Boston Fed suggests a wage penalty of around 20 percent after six months. Luna: Which feeds directly into the inflation outlook. Lower wage growth means less demand-pull inflation. Lucas: And it gives the Fed more room to cut rates. The Fed funds rate is currently at 3.62 percent, down from a peak of 5.5 percent in 2023, but the market is pricing in another quarter-point cut by September. If long-term unemployment keeps rising, that could accelerate the timeline. Luna: But there's a human cost here that the macro numbers gloss over. The hidden costs of long-term unemployment — mental health, skill erosion, lost social capital. Lucas: Absolutely. And those costs compound over time. The longer the labor market softens without a sharp recession, the more we see this quiet scarring effect. It's not a crisis in the headlines, but it's a steady drag on household financial health. Luna: Especially for older workers and workers in industries that are structurally declining — retail, some manufacturing, administrative support. Lucas: Which brings me to another data point that I think connects: the ten-year breakeven inflation rate is sitting at 2.36 percent, essentially flat. That's the bond market's expectation for average inflation over the next decade. It's not moving higher, even with the tariff headlines and the Iran situation. The bond market is saying inflation is under control, and part of that is the labor market's fading bargaining power. Luna: So if Friday's jobs report shows an uptick in the unemployment rate or a further increase in long-term duration, we could see a significant market reaction? Lucas: I think so. The S&P 500 is already down nearly 3 percent this week, and gold is off almost 3 percent too. The market is nervous about growth, not inflation. If the jobs data reinforces that the labor market is deteriorating in quality, I wouldn't be surprised to see another leg lower in yields and a rally in rate-sensitive sectors like tech. Luna: But the narrative we keep hearing from the Fed is 'wait and see.' They want more data before committing to cuts. Lucas: And that's the right posture. But 'more data' means exactly this — the composition of job growth, not just the headline. If long-term unemployment continues to climb, the Fed will have to acknowledge that the labor market is looser than the unemployment rate suggests. Luna: It's almost like we need a new metric — something that tracks the 'quality' of employment, not just the quantity. Lucas: The BLS does publish something called the U-6 unemployment rate, which includes discouraged workers and those working part-time for economic reasons. That rate is still elevated relative to the U-3 headline. But even that doesn't capture duration well. Luna: So what should a listener watch in Friday's report? What's the one number to look for? Lucas: Look at the average duration of unemployment. And specifically the share of unemployed who are long-term. If that number ticks above 23 percent, while the overall unemployment rate holds steady, that's a signal that the labor market is getting structurally softer. Luna: And that would be good news for inflation — but bad news for workers. Lucas: Exactly. It's a trade-off that the Fed is acutely aware of. They want inflation to come down, but they don't want to see a permanent scar on the labor force. Luna: This kind of detailed breakdown is exactly why I value this show. If you do too, and you want to help keep it ad-free and independent, you can support us at buy me a coffee dot com slash fexingo. Lucas: Really appreciate that, Luna. It's listener support that keeps us able to spend time on these nuances instead of just chasing headlines. And on that note — let's talk about what the long-term unemployment surge means for specific sectors. Luna: Let's do it. Which sectors are most exposed? Lucas: Retail and hospitality are obvious ones, but I'd flag manufacturing too. The ISM manufacturing PMI has been contracting for months, and factory layoffs tend to produce longer spells because the skills are more specialized. Luna: And those workers are less likely to find a job in services that pays a comparable wage. Lucas: Exactly. So you get this downward wage pressure that feeds into lower services inflation. That's the channel the Fed is hoping will bring core PCE down to 2 percent. Luna: But it's a painful path to get there. Lucas: It is. There's no painless disinflation. But understanding these mechanics gives you a better sense of where the economy is headed than just watching the monthly CPI print. Luna: Alright, we'll be watching Friday's report closely. Thanks, Lucas. Lucas: Thanks, Luna. Talk to everyone next time.