The US job market may be nearing tipping point, survey shows

Written by Howard Schneider

Jackson hole due to rising unemployment but rather a drop in the number of workers. Businesses opening jobs posted during peak labor shortages during the pandemic.

But the economy may be nearing the point where a continued decline in job opportunities will translate into a rapid increase in unemployment, arguing for the Fed to begin cutting interest rates to protect the labor market, according to research news presented on Friday. at the Kansas City Fed’s annual economic meeting in Jackson Hole, Wyoming.

“Policymakers face two risks: delaying policy easing too much, which could lead to ‘hard landing’ with high unemployment… or cutting rates prematurely, leaving the economy vulnerable ” the rise of inflation, economists Pierpaolo Benigno of the University of Bern and Gauti. B. Eggertsson of Brown University wrote in their research paper. Based on their new analysis of the labor market, “our latest analysis suggests that the former risk outweighs the latter.”

Fed officials appear to have reached the same conclusion, with a reduction in the US central bank’s policy rate expected to begin at the next meeting in Sept. 17-18 and probably continues in subsequent seasons.

However, new research adds more detail to several of the Fed’s ongoing discussions by combining into one economic model two important relationships; one between the unemployment rate and the inflation rate, known as the Phillips Curve, and the other between the vacancy rate and the unemployment rate, known as the Beveridge Curve.

For example, the paper suggests that when labor markets are depressed, policymakers may continue to treat supply shocks as the weak effects of inflation and fiscal policy. It takes a combination of supply problems and tight labor markets, they conclude, to produce the kind of permanent inflation the US has just seen.

It also adds a level of caution to the debate that has been going on at the Fed for years about what constitutes a high level of employment consistent with the central bank’s 2% inflation target – Congress it has held the Fed accountable for both plans — and what risks policymakers may need to take with the labor market to keep inflation low and stable.

The answer, the study suggests, is that it depends more on labor demand and supply, which Benigno and Eggertsson capture by focusing less on the unemployment rate itself and more on the average number of job openings. to the number of people looking for work. .

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When the number of job openings and the number of unemployed people looking for work are close to equilibrium, managing an inflationary epidemic involves a sharp rise in unemployment, as happened in the 1970s when The US was experiencing high inflation and unemployment at the same time.

When the labor market is tight, on the other hand, with the demand for workers high in terms of their number, “the cost of reducing inflation in terms of increased employment is relatively low,” the researchers said. they decide to.

The job opening metric has been key in recent discussions of the US central bank, the focus of policymakers and Fed Chairman Jerome Powell especially when it rose above the 2- to-1 during the reopening from the COVID-19 pandemic, with firms creating two jobs for every existing organization.

DANGERS OF RUNNING ‘HOT’

An analysis by Fed Governor Christopher Waller and labor economist Andrew Figura in 2022 suggested that bringing that ratio closer to equilibrium could lower inflation without the unemployment rate rising sharply, if at all, against it. and estimates by some top economists that the unemployment rate is up to 10. % would be needed to prevent the worst jump in US inflation in 40 years.

Their findings have been confirmed in practice, with the ratio now down to 1.2, the rate chosen by the Fed to drop to 2.5% from a peak of more than 7% in June 2022, and the rate of demand of employment until recently was less than 4%.

However, even the current ratio is above the one-to-one ratio that researchers say appears to mark a break – at least roughly – between market conditions. of workers who produce inflation and those who do not. Since World War I, they found, bursts of inflation have caused job opportunities to rise more than the number of unemployed and jobseekers.

After years of low inflation and declining employment in the decade before the pandemic, Fed officials felt they could steer the economy “hot,” in favor of workers, with an opportunity less inflation. New research suggests that there are risks with this approach.

Researchers also warn that if the unemployment rate continues to slide, the economy is at a point where unemployment could rise rapidly, a fear that Waller himself recently raised.

At the current level, they project that the Fed can achieve its inflation target, with the number of jobs in balance with the number of unemployed people, with an unemployment rate of about 4.4% – still below the long-term average for the US but significantly. higher than the experience of almost two years ago.

Once the one-person limit is passed, “further reductions in inflation are likely to be costly,” they wrote, with an average unemployment rate of 0.8 — with fewer jobs than which people want – causing unemployment to increase. above 5%.

(Reporting by Howard Schneider; Editing by Paul Simao)