So, what's likely to happen? The veterans, burnt by the dot com bust and the post 911 recession will argue that business will contract and layoffs will ensue. That's the prototypical recession profile. Everywhere you turn, this scenario is forecast or implied.

It goes something like this. The subprime fiasco has begun to shred the housing market. The combination of tightened credit constraints and a 35% downward correction in housing prices makes the market for big ticket items go into rapid decline. The economy stays flat until its credit is repaired.

Or, there may be a different scenario.

The people who used loose credit to finance the expansion of their lifestyles may have been unintentional evangelists of a new form of inflation. One way of thinking about the folks who "got in trouble" is that they were wrestling with an unmeasured form of inflation. Because there was no way to engineer the raises required to keep up, the second best source of income was real estate equity. Rather than "large living over spenders", perhaps these folks were just doing what they thought it took to stay even.

Although the press is beginning to demonize people who financed their lifestyles on second mortgages, the question is "what are they going to do without a funding mechanism?"

I think they'll be asking for raises and when they don't get them, they'll be changing jobs.

In other words, unlike other recent recessions, this next one will require more, not fewer recruiters. The first couple of years of wage inflation will remain hidden from measurement. They will be characterized by heightened levels of attrition as the top tiers of employees shift jobs in search of improved compensation. In fact, that seems to be happening now.

Even with a 35% downward correction in housing prices, most 20 something employees will not be able to afford a house without some sort of help. Typically, that comes as inflation. Although it will be painful to witness, an unnamed and unmanaged wage inflation will dominate the economic landscape.

As inflation eats a hole in the pocketbooks of pensioners, there will be an interesting dampening effect. The effective retirement age has to rise by a year for every 10% of inflation. Since more senior employees are less vulnerable to inflation (and career transitions are harder to manage), attrition will be skewed towards a younger demographic.

The next decade is liable to be full of really interesting opportunity for labor market development.

written by John Sumser © 2007 Two Color Hat, Inc. San Rafael, CA

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