aamerican summerKnown for its baseball games, roasted marshmallows and county fairs, the city has acquired a new tradition. Pools lack lifeguards, camps need counselors, restaurants lack waiters. These shortfalls are important not only for the companies involved, but also for others. More than a year since the establishment of the Fed fighting inflation, the current state of the American labor market assumes extraordinary importance. Its health is Fight Winning or losing.
Initially, much of the labor shortage was due to the COVID-19 pandemic, as people were less inclined to go out and get jobs. Now, as recent data releases have made clear, the economy itself is the source of tension. Consider a wide range of measures. All this points to a slight softening in the labor market over the past year. But all is still, to an astonishing degree, resilient By historical standards.
There are 1.6 jobs for every unemployed person in the US, a rate that has fallen slightly since mid-2022 but is well above pre-pandemic standards. Since February 2020, before the coronavirus hit America, the economy has added nearly 4 million jobs, with employment above the long-term trendline. Not many workers seem to be left on the sidelines. About 84% of prime workers (ages 25 to 54) are now in the workforce, the highest number since 2002 and just one percentage point below the all-time high. .
On the workers’ side, this vibrancy is welcome. Wages in service sectors, such as construction, which require less education, are growing particularly fast. That, in turn, helps reduce some of the income inequalities that plague America. Less affluent segments of the population tend to benefit disproportionately from tighter labor markets. The unemployment rate for black Americans hit a record low of 4.7% in April.
If labor shortages spill over into prices, will these gains survive? Hourly wages rose at an annual pace of 4.4% in June, matching inflation about twice the Federal Reserve’s 2% target. Alternative measures suggest that upward pressure could be even greater. Wages have risen about 6% annually this year, according to a follow-up survey by the Fed’s Atlanta branch.
The continued strength in the labor market has made it almost certain that the Fed will resume rate hikes at its meeting in late July, after holding off on raising rates in June. The market currently puts a 92% chance of a one-quarter point rate hike. Just a month ago it was considered a coin toss. When several financial institutions, including Silicon Valley Bank, collapsed in March, many feared the financial turmoil would spill over into the economy. But Fed Dallas manager Laurie Logan argued in a speech on July 6 that tougher policies were needed because the employment situation was stronger than expected. “Layoffs are still low,” she says. “There are no signs of a sharp deterioration in labor market conditions.”
Optimists are hopeful that the labor market will hold up as it has been, and that while it will cool, a surge in unemployment can be avoided. They show some indicators. For example, there were about 9.8 million job openings in May, down 1.6 million from the previous year. In an ideal scenario, employers would cancel ads for help, but not force salaries on workers. Such a fall in demand for talent could, in theory, lead to a modest slowdown in wage growth without reversing the gains of the past few years. To some extent, that is what is happening. Although still rapid, hourly wage growth is 1 percent lower than he was a year ago.
The pessimistic counterargument is that the economy will take time to cool down and the economy will not move in neat phases. The Fed has been aggressively raising interest rates over the past year, but some of the effects are yet to be felt. At the same time, as long as the labor market remains tight and inflation remains high, central banks have little choice but to tighten further. Not much has broken so far. But the stress builds up. ■
https://www.economist.com/finance-and-economics/2023/07/09/does-america-need-more-unemployment Does America need more unemployed people?