The past three years have been challenging due to the pandemic and its impact on both public health and the economy. Despite efforts to return to a sense of normalcy, there have been setbacks, such as the decline in productivity within the United States. This decline has been unprecedented, with five consecutive quarters of year-over-year declines in productivity. Gregory Daco, the chief economist at EY-Parthenon, believes that the drop in productivity can be attributed to a variety of factors, including the effects of remote work and high inflation. However, Daco also emphasizes that the churn of labor over the past 18 months has played a significant role in the decline of productivity.
Daco believes that a rebound in productivity is essential to solving the current economic issues and reducing inflationary pressures. While remote work has been a topic of debate, Daco believes that the idea of flexible work should allow individuals to be more productive. However, it ultimately comes down to trust, and whether or not employers believe that their employees are working productively. As the labor market cools and employment growth diminishes, Daco believes that the bargaining power will shift back to the employer, highlighting the importance of increasing productivity.
According to Daco, a hybrid work arrangement is likely to remain, but in-office work will be favored over remote work. He predicts that there will be a shift towards three to four days in the office, rather than one or two if the labor market slows. However, it won't be an all-or-nothing scenario. This shift will have significant implications for the Federal Reserve and monetary policy, with Daco noting that high inflationary pressures will likely lead to a more hawkish approach from the Fed. The current banking crisis serves as a reminder of the dangers of a hawkish Fed to the economy. Daco believes that productivity is the missing piece of the puzzle, as it can help alleviate inflationary pressures. Without an increase in productivity, Daco predicts that the Fed will continue to act more hawkish than dovish.