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KKR Releases “Labor in Transition”

By: via Business Wire

New Macro Report Highlights How Current Labor Market Trends are Rewriting the Narrative on Inflation and Creating a New Regime for Capital Allocators

KKR, a leading global investment firm, today announced the release of Labor in Transition by Henry McVey, CIO of KKR’s Balance Sheet and Head of Global Macro and Asset Allocation (GMAA). In the latest Insights piece, McVey and his team examine how structural changes in today’s labor market are contributing to a higher resting rate for inflation, a backdrop they believe is creating a new regime for capital allocation.

“Even before the pandemic, our macro forecasts had been signaling that a structural shift in the U.S. employment market was taking place. Indeed, despite significant progress in key areas such as automation and digitalization in recent years, the United States still remains short of qualified workers to satisfy its growth demands. Now, under the cloud of COVID, a perfect storm has been brewing,” said Henry McVey.

According to McVey and the GMAA team, the following workforce trends are driving the resting rate of inflation higher on a structural basis:

  1. The U.S. labor market is the tightest it has been in 50 years. Long-term demographic trends and pandemic-related disruptions, including a wave of early retirements, a pause on immigration flows, new challenges around family care and difficulties reintegrating discouraged workers into the workforce have all come together to create a significant and persistent labor shortfall. We estimate that 2.1 million of the total 3.9 million erosion in the labor force since 2019 may be more structural and permanent in nature.
  2. The workforce participation rate, which over the last three months has averaged 62.0% versus 63.4% pre-pandemic, is unlikely to increase, we believe, as much as the Fed and employers are projecting.
  3. Low-wage workers are now seeing the fastest increase in wages and, with many incentivized to change jobs frequently and command significant pay increases when they do, employee retention will likely become more difficult.
  4. Despite the historic tightness of the labor market, U.S. workers actually did not receive a real wage increase in 2021 because of inflation. In fact, real wages fell 50 basis points in 2021. However, we do think that they will get one in coming years, particularly in the low income segments of the market.
  5. Many U.S. employers abruptly laid off employees early in the pandemic, which has made rehiring more difficult in many instances. By comparison, our work shows that Europe’s approach of furloughing employees has resulted in higher labor force participation rates than in the U.S.

These employment trends have firmed the team’s conviction in the magnitude and persistence of the inflationary impulses. As such, they are making the following changes:

  • Lifting their above consensus 2022 U.S. CPI forecast to 6.0% from 5.0%, and their out-year CPI resting rate to 2.5% from 2.25%. Overall, their forecasts continue to embed a structural shift higher relative to the 1.5% resting rate recorded during the mid-2010s.
  • Raising their U.S. 2022 10-year rate target to 2.25%, from 2.0%, to reflect their accelerated Fed expectations and moving their 2023 forecast to 2.75% from 2.5% to reflect higher sustained input costs, including wages.

Against this backdrop, the GMAA team highlights the following key takeaways for asset allocation:

  • Lean into assets that provide protection against inflation, including real estate and infrastructure and incorporate more opportunistic strategies.
  • Shorten duration in the fixed income market, as we still see most of the risk at the long end of the curve.
  • Tilt more towards value over growth in public equity markets.
  • Increase non-U.S. exposures, including Europe and Asia, more so than in the past.
  • Focus more on productivity and pricing power across all asset classes.

Links to access this report in full as well as an archive of Henry McVey's previous publications follow:

  • To read the latest Insights, click here.
  • To download a PDF version, click here.
  • For an archive of previous publications, please visit

About Henry McVey

Henry H. McVey joined KKR in 2011 and is Head of the Global Macro, Balance Sheet and Risk team. Mr. McVey also serves as Chief Investment Officer for the Firm’s Balance Sheet, oversees Firmwide Market Risk at KKR, and co-heads KKR’s Strategic Partnership Initiative. As part of these roles, he sits on the Firm’s Investment Management & Distribution Committee and the Risk & Operations Committee. Prior to joining KKR, Mr. McVey was a Managing Director, Lead Portfolio Manager and Head of Global Macro and Asset Allocation at Morgan Stanley Investment Management (MSIM). Learn more about Mr. McVey here.

About KKR

KKR is a leading global investment firm that offers alternative asset management as well as capital markets and insurance solutions. KKR aims to generate attractive investment returns by following a patient and disciplined investment approach, employing world-class people, and supporting growth in its portfolio companies and communities. KKR sponsors investment funds that invest in private equity, credit and real assets and has strategic partners that manage hedge funds. KKR’s insurance subsidiaries offer retirement, life and reinsurance products under the management of The Global Atlantic Financial Group. References to KKR’s investments may include the activities of its sponsored funds and insurance subsidiaries. For additional information about KKR & Co. Inc. (NYSE: KKR), please visit KKR’s website at and on Twitter @KKR_Co.

The views expressed in the report and summarized herein are the personal views of Henry McVey of KKR and do not necessarily reflect the views of KKR or the strategies and products that KKR offers or invests. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. This release is prepared solely for information purposes and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. This release contains projections or other forward-looking statements, which are based on beliefs, assumptions and expectations that may change as a result of many possible events or factors. If a change occurs, actual results may vary materially from those expressed in the forward-looking statements. All forward-looking statements speak only as of the date such statements are made, and neither KKR nor Mr. McVey assumes any duty to update such statements except as required by law.


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