"A Secular Shift": What The Black Death Tells Us About The Labor Market

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by Tyler Durden
Saturday, Nov 06, 2021 - 10:30 PM

As wages rise sharply in the US, the labor supply response has disappointing. While unemployment is falling, labor force participation as well as hours worked are stagnating.

As Deutsche Bank strategist Robin Winkler writes, there are many reasons as to why people might be unable to respond to rising wages, such as obstacles to returning to work. Another possible explanation is that people are looking through the ‘money illusion’: they understand that wages are barely rising in real terms.

But there could be a more fundamental, if less intuitive, dynamic at work. According to Winkler, people's preferences might have shifted from consumption to leisure. History suggests that the pandemic could have a lot to do with this.

The Black Death resulted in more leisure, for the survivors

It is not a deep law of economics that wages and hours worked move in tandem. In fact, according to Deutsche Bank, for most of human history people maximized leisure rather than income and consumption. Rising wages tended to coincide with people working less, not more. To wit, the most extreme example occurred in the aftermath of the Black Death, when real wages rose rapidly on account of a deep labor shortage.

Much of this shortage of course resulted from the death toll of the pandemic. Importantly, however, even those workers who survived reduced their labor supply. Average hours worked collapsed in the 14th century as the following chart from DB shows.

This was a major - if logical - factor in driving real wages higher, as well as in driving real rates lower. Indeed this has been the typical pattern following pandemics in the last millennium.

Unlike modern economists, this pattern did not seem particularly paradoxical to people in the Middle Ages. Again, for centuries people maximized leisure rather than income. The reason is that where people opted for higher incomes, they struggled to spend it. Consumption goods were perennially in short supply throughout the Middle Ages, and services were close to non-existent for the broader population. It was only really in Northern Europe between 1600 and 1800, the period better known as the Industrious Revolution, that the relationship between wages and hours worked turned positive, before turning negative again in the late 1800s.

When Adam Smith founded modern economics in 1776, it just so happened that the relationship had been positive for a few decades, leading him to consider this relationship as more natural than it had been for centuries.

What to make of this data? Well, as Winkler tongue-in-cheek puts it, "fortunately, the Middle Ages are far away" although at the rate things are going in Washington, maybe not that far. Yet a more structural change Covid might have nudged people’s preferences toward a mind-set that was the norm for many centuries: prioritizing leisure over income at the margin.

As the DB strategist concludes, "at best, this mindset will dissipate as excess savings are used up. At worst, there could have been a secular shift. If so, the pandemic's negative impact on labor supply could have deeper roots than many policy-makers assume."