Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why The Low Firing Rate Paradox Is Distorting Wages
Transcript
- Lucas: Look at the initial jobless claims data from mid-October: one hundred ninety-four thousand. That is dangerously close to the lowest levels we have seen since the nineteen sixties. It tells us one specific thing about the labor market right now — people are staying put. Luna: And they aren't just staying put; they are refusing to leave, which means firing rates must be at historic lows too. Lucas: Exactly. We spent the last few episodes talking about the demographic cliff and tariff shocks, but there is a quieter, more mechanical distortion happening here. When companies stop firing, wages get bid up not because of productivity, but because of scarcity. And that is a problem for the Federal Reserve. Luna: So if no one is getting fired, the pressure shifts entirely to hiring, making every new employee exponentially more expensive. Lucas: Right. And before we dive deeper into the mechanics of why this is pricing out small businesses, I want to mention something quick. 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's literally what funds making this many of these daily conversations possible. No ads, just the show running because you care about the details. Luna: It makes sense that supporting independent analysis keeps us honest when the mainstream narrative gets muddy. Lucas: Thanks. Now, back to the data. The average hourly earnings for private workers hit thirty-seven dollars and eighty cents in September. That looks like healthy income growth on the surface, but look closer at the JOLTS data. Job openings dropped to seven million and seventy-nine thousand from July. Fewer jobs available, same number of people fighting for them, plus nobody is leaving their current roles. Luna: That creates a bottleneck where employees hold all the leverage, forcing employers to offer raises just to keep the status quo. Lucas: Precisely. This is what economists call a 'low fire' paradox. In a normal cycle, low unemployment is balanced by higher turnover, which keeps wages stable. But when firing stops, the only way to adjust labor costs is through aggressive hiring premiums. It’s inefficient capital allocation at a macro level. Luna: Does this mean companies are just absorbing higher costs, or are they passing them to consumers? Lucas: They are trying to absorb it, but the margin squeeze is real. Look at the Core PCE price index, which is at one hundred thirty point five in August. If wages rise five percent but output doesn’t, inflation doesn’t go down. It stays sticky. The Fed wants inflation to fall, but this labor rigidity is acting like an anchor. Luna: So the Fed can't cut rates aggressively because they're afraid these wage pressures will reignite prices. Lucas: Correct. And consider the ten-year Treasury yield, which is sitting at five point zero five percent. The market is pricing in a 'higher for longer' environment not because of fiscal deficits, but because of this labor supply friction. Investors know that as long as firing remains this low, cost structures won't normalize. Luna: It’s interesting that the World Bank recently said capital availability isn't the issue, but borrowing costs are. That ties directly to this labor cost problem. Lucas: Yes. Capital is cheap if your business model works, but if your biggest expense line item is bloated due to artificial labor scarcity, debt service becomes harder. We see this in the retail sector especially. Small chains can't compete with big box stores that have already optimized their workforce during the downturn. They are trapped. Luna: So the low firing rate protects incumbent workers but starves new entrants and smaller competitors. Lucas: That’s the unintended consequence. You get a two-tier economy. Tier one: protected incumbents earning premium wages. Tier two: stagnant wages for new hires who can't get foot-in-the-door opportunities because companies aren't refreshing their staff. It reduces mobility and innovation. Luna: I wonder if this is why the S&P 500 is up so much lately. Investors are betting on the survivors who can withstand these high labor costs. Lucas: Maybe. The S&P 500 is up one percent over the last five days, but that’s driven by tech and mega-caps that have the scale to automate around these labor pains. Small caps, represented by the Russell 2000, are also up one point three percent, but their margins are much thinner. One bad quarter of wage growth could hurt them disproportionately. Luna: So the market rally might be masking the underlying fragility of the mid-market economy. Lucas: I think so. Let’s look at the unemployment rate. It ticked up slightly to four point two percent in September. That sounds fine, but it’s actually a sign of hesitation. Employers aren't laying people off, but they aren't hiring either. The velocity of the market has slowed to a crawl. Luna: Velocity is key. If money and labor aren't moving, the economy feels stable but is actually stagnating. Lucas: Stagnation with inflation. That is the worst-case scenario for policymakers. The Fed Funds effective rate is three point seven five percent, and they are expected to hike again soon. Why? Because this labor rigidity means demand isn't cooling naturally. It has to be cooled by force. Luna: Force meaning raising rates until it hurts enough that companies finally start letting people go. Lucas: Exactly. The 'soft landing' narrative relies on wages growing slowly. But if firing stops, wages jump. So the Fed has to push harder to break that psychological barrier of job security. It’s a brutal mechanism to restore balance. Luna: Do you think companies will try to use AI to bypass this labor crunch instead? Lucas: They are, but AI is a long-term fix. In the short term, they are just paying more. The investment in automation takes years to pay off. Meanwhile, the payroll bills are due next month. This is why we see so much M&A activity—companies buying other firms to consolidate headcount and reduce redundancy. Luna: Consolidation as a defense against labor costs. That makes sense. Lucas: It does. And it leads to less competition, which ultimately hurts consumers. But right now, the immediate focus is on the October meeting. With inflation data coming in hot, the Fed has little room to maneuver. They are watching those jobless claims like hawks. Luna: If claims drop below one hundred ninety thousand, do you think they accelerate the hikes? Lucas: I wouldn't rule it out. If the labor market shows that tight, it confirms the low-fire thesis. The market might react negatively to that news, even though stocks are currently rallying. Volatility is coming. Luna: So the rally is fragile, built on hope rather than structural improvement. Lucas: Fragile indeed. The VIX is still relatively low, but that often precedes a sharp move. We are standing on a precipice of policy decisions that will determine whether this low-fire era ends in a soft adjustment or a hard correction. Luna: And if it’s a hard correction, the damage will be done by the very rigidity that kept wages high in the first place. Lucas: That’s the irony. Protectionism in the labor market leads to instability in the financial market. It’s a complex feedback loop that few investors are fully pricing in yet. Luna: Most people are just looking at their paychecks and feeling good, missing the broader structural trap. Lucas: Right. But as we look toward November, watch the CPI release. If core services inflation remains above three percent, the Fed’s hands are tied. They cannot ease until that labor pressure breaks. Luna: So the next move depends on whether workers decide to stay or go, and that decision is being held hostage by corporate caution. Lucas: Precisely. Until companies feel safe firing, they will pay too much. Until they pay too much, inflation won't die. And until inflation dies, rates stay high. It’s a closed loop. Luna: A difficult one to escape without someone getting hurt along the way. Lucas: Usually the most vulnerable. But understanding this dynamic gives you an edge. You’re not just watching headlines; you’re seeing the mechanics of the engine. Stay tuned for the next data dump.