Tell me what you all think of the following explanation (US focused). TLRD: unemployment data isn't capturing gig economy workers that are giving up on their gigs (cyber-taxi, Air BNB, dropshipping, etc.); those workers are re-entering the normal workforce (driven by cost of capital and increased low end wages) and we see this in jobs data.
First some background:
The Fed has raised rates from basically 0% to ~5.5% in the last few years. Inflation peaked at 8% or 9% percent and is now down to 3% to 4%. There are probably some more rate hikes to get closer to 2%, there is also ongoing QT. Surprisingly though, jobs reports continue to be positive and unemployment is low and wage growth (especially on the low end) has been fairly good.
Classical economics says that if you raise interest rates you will raise the unemployment rate and then inflation will decrease as struggling people spend less. That has largely happened except that the unemployment and wage growth data still shows a tight labor market.
My explanation: In the late 2010s and during COVID many people started working in gig economies. These jobs are mostly some form of owner operator centered around a physical asset (UBER/LYFT driver, Air BNB host, etc.) though not always (dropshipping for example).
Because of the physical asset these jobs/businesses are easier to get into if interest rates are low as they were in that time period. For things like dropshipping there is a time investment to get it going (I think) and that time functionally costs money.
COVID also forced a lot of people out of their normal jobs and gave them really good unemployment (that they also might not cancel immediately upon doing a side gig). Thus they had lots of time to look at these alternate forms of employment.
Lots of these companies were also willing to burn VC money to obtain market share making the prospect even sweeter.
However, 2022 (or so) rolls around and higher interest rates basically hit all of the positives mentioned above. Cost of capital becomes higher, companies like UBER focus more on profit than market share. Unemployment stuff goes back to normal. Oversaturation in the gig economy market also takes a toll (see Air BNB host issues). Finally, lower wage jobs open up as COVID subsides.
So, you get people re-entering the normal workforce, creating positive job reports. No one from the gig economy goes on unemployment so the unemployment numbers don't get hit. These people might be earning less (or have a lower total capital inflow-outflow) so inflation comes down too.
Just to go over some numbers to see if this could have a real affect: The total US labor force is ~170 m. Uber alone has 3.5 m drivers though that is down from 5 m at one point. There are some 4 m Air BNB hosts. Granted, these are world wide numbers but these platforms are much more popular in the US and non-existent in China. I think that it is more than fair to say that systemic fluctuations in the gig economy could show up in nation wide data, if not be a driving force. There are more Uber drivers than Walmart employees.
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