A Bank of America executive stated that “we hope” working Americans will lose leverage in the labor market in a recent private memo obtained by The Intercept. Making predictions for clients about the U.S. economy over the next several years, the memo also noted that changes in the percentage of Americans seeking jobs “should help push up the unemployment rate.”
The memo, a “Mid-year review” from June 17, was written by Ethan Harris, the head of global economics research for the corporation’s investment banking arm, Bank of America Securities. Its specific aspiration: “By the end of next year, we hope the ratio of job openings to unemployed is down to the more normal highs of the last business cycle.”
The memo comes amid a push by the Federal Reserve to “cool down” the economy, informed by much of the same rationale — that high wages are driving inflation. This year, the Fed has increased interest rates for the first time since 2018. Historically, this has often caused recessions, and that is exactly what appears to be happening now: The Commerce Department reported Thursday that the gross domestic product has fallen for the second quarter in a row, indicating that a recession may have already begun.
Parts of the mid-year review, in particular its emphasis on a looming recession, received press coverage at the time of the memo’s release to clients. This is the first publication of the document.
What the memo calls “the ratio of job openings to unemployed” is generally calculated the other way around — i.e., the ratio of unemployed people to job openings. The more widely used ratio offers one measurement of the balance of power between workers and employers. The lower this number, the more options unemployed people have when searching for work and the greater opportunities employed people have to switch to jobs with better pay and conditions. According to the Bureau of Labor Statistics, this ratio stood at 0.5 as of May, meaning that there were then two job openings per unemployed person.
In 2009 — at the worst moments of the economic calamity that followed the collapse of the housing bubble during the end of the George W. Bush administration — the ratio climbed as high as 6.5, so there were more than six unemployed workers for each open job. It then slowly declined over the next decade, reaching 0.8 in February 2020 before Covid-19 lockdowns began.
This recent, unusual moment of worker leverage made Bank of America quite anxious. The memo expresses distress about “a record tight labor market,” stating that “wage pressures are … going to be hard to reverse. While there may have been some one-off increases in some pockets of the labor market, the upward pressure extends to virtually every industry, income and skill level.”
The memo recalls a previous Bank of America memo in 2021, which it says warned of “very strong momentum in the labor market, suggesting the economy would not just hit but blow through full employment. Fast forward to today, and these trends have been worse than expected.”
The memo is an uncanny demonstration that the economist Adam Smith was right when he described the politics of inflation in his famed 1776 work, “The Wealth of Nations.”
“High profits tend much more to raise the price of work than high wages,” Smith argued. “Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price. … They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”
Thus, exactly as Smith would have predicted, Bank of America complains loudly about the bad effects of high wages in raising prices, but appears to be silent about the pernicious effects of high profits.
This is especially remarkable given the role that corporate profits have played in the recent increase in inflation. After-tax corporate profits stood at 8.1 percent of the economy at the beginning of 2020 but have since shot up to as high as 11.8 percent of the GDP. In an economy the size of the U.S., that equals an increase of more than $700 billion in profits per year. These higher corporate profits have been the cause of over 50 percent of recent price increases.
Instead, the memo is focused on the enticing prospect of the Federal Reserve raising interest rates, slowing the economy, and bludgeoning workers back into line.
The perspective of working Americans would, generally, be exactly the opposite. For most of us, it’s fantastic to have lots of jobs available, with employers competing for you. A tight labor market is wonderful. Wage pressures are great. From this viewpoint, the key issue right now would be how to lower inflation while keeping employment and worker power high. Such a tack would include full-bore attempts to lessen supply chain issues and reduce the pricing power of big corporations.
Most interesting of all is that in Bank of America’s enthusiasm for the Fed going on the attack against working people, it gets the basic facts wrong: Wage pressures have turned out not to be, as its memo claims, “hard to reverse.”
“If you did see continually accelerating wage-growth, it would be a problem,” Dean Baker, senior economist at the Center for Economic and Policy Research, a liberal Washington, D.C., think tank, told The Intercept in an email. “That would almost certainly mean a wage-price spiral with ever higher inflation. However, [nominal] wage growth has slowed sharply from around a 6.0 percent annual rate to just over 4.0 percent in recent months. … So, [Bank of America wants] the Fed to raise rates (and unemployment) to attack a problem (accelerating wage growth) that doesn’t exist in the world.”
The memo therefore tells us what we suspected all along: The most powerful economic actors in the U.S. — entities like Bank of America and its clients — do not like working people to have power. But it’s nice to have it in their own words. Harris, the author, was not available for comment.
Update: July 29, 2022, 4:20 p.m. ET
This article has been updated to reflect that portions of the memo had been written about previously.