The job boom continues in America, fueling fears of persistent inflation
Iwon’t usually Be a reason for a flawless celebration. According to figures released on August 5, the unemployment rate in America in July fell to 3.5%, which is equivalent to the lowest level in half a century just before Covid-19. Moreover, with nearly 530,000 jobs created last month – more than double the expected number – the economy has now recovered from all the jobs lost during the pandemic. That limits the strongest recovery in US employment after a contraction in decades.
But in many parts of the economy, there are more concerns than celebration. An extremely tight job market presents a challenge for companies struggling to return to pre-pandemic employment levels. For investors and policymakers, it presents a conundrum, suggesting that the central bank may need to press ahead with more massive interest rate increases, despite other signs of slowing economic growth.
Since the Fed began tightening monetary policy earlier this year, economists have debated the scale of the trade-off between inflation and jobs. The Fed’s actions to tame rates inevitably lead to weaker growth, burdening the labor market with an extension. Jerome Powell, Federal Reserve Chairman, has long insisted that a tightening of the labor market could mean there is a way companies can reduce their demand for new workers without ending up in large numbers on benefits. In other words, the trade-off between inflation and jobs may be less sharp than in previous periods of monetary tightening.
One key clue in this debate is the level of employment opportunities. Job vacancies in June fell sharply to 10.7 million, the lowest level in nine months, although still high by historical standards. All other things being equal, a fall in job vacancies without a concomitant rise in unemployment would lend credence to the Fed’s view that the swap could be relatively moderate. The counterpoint is that the swap is just getting started, because the Federal Reserve still has some sporadic work to tame inflation. Consumer prices are expected to rise nearly 9% last month, just below a four-decade high.
To understand the debate, consider the non-accelerating rate of unemployment inflation, more commonly known by its acronym, nairobi, or simply the natural unemployment rate. It refers to the lowest level of unemployment that the economy can tolerate before wage inflation begins to accelerate. Concept nairobi It was once central to economic analysis and to the Fed’s thinking about rates. But it was not favored before the pandemic when unemployment fell below the assumed level nairobi threshold without any noticeable increase in inflation. In a strategic review published in 2020, the Fed noted that the concept no longer featured prominently in its policy decisions.
However, the sharp rise in inflation over the past year along with the sharp drop in the unemployment rate has resulted in the nairobi Once again in the spotlight. The fundamental problem with the natural rate of unemployment, and why some object to its use, is that it is unobservable. Instead, economists must derive estimates of where they are based on the relationship between unemployment and inflation over time. This is not necessarily accurate. But there is a good argument for doing so nairobi It shifted to a significantly higher level early in the pandemic.
In the middle of 2020, unemployment rose to nearly 15%. As Brandin Bock and Nicholas Petrosky-Nadeau of the Federal Reserve Bank of San Francisco note, such a jump in conventional frameworks would have justified a much larger slowdown in inflation than has already occurred. In other words, it appears that the natural rate of unemployment has shifted higher, limiting the opposite effect of inflation to a significant rise in unemployment. They appreciated it nairobi It may have reached 8% in 2020, before dropping to 6% at the end of 2021. The economy is now seeing the other side of a rally nairobiInflation rises with low unemployment.
Structural changes in the shape of the economy during a pandemic help explain why the natural rate of unemployment increases during a pandemic. From the boom in the delivery and warehouse business to the subsequent boom in the restaurant and travel business, employers have struggled to keep pace with rapidly evolving staffing needs. Complicating matters further is a change in what people expect from their jobs, exemplified by the shift to remote work. One of the companies’ responses, of course, has been to offer higher wages. Earnings per hour are up about 5% in nominal terms compared to the previous year.
The gap between the measured unemployment rate of 3.5% and the estimated natural rate of 6% indicates that wage pressure is likely to remain high in the coming months, leading to more stubborn inflation. Immediately after the latest jobs report, traders raised their expectations for monetary tightening. They now allocate roughly two out of three possibilities for the Fed to introduce its third consecutive rate increase of three-quarters of a point at its next meeting in September.
The pessimistic interpretation is that the Fed may have to keep raising interest rates until measured unemployment approaches nairobi level. Millions of people would lose their jobs if that were the case. The hoped-for explanation is that the gap may be filled not by high unemployment but by nairobi drop. At a news conference after the Fed’s latest rate hike in July, Powell outlined this more optimistic perspective: “Logically, if the pandemic and turmoil in the labor market cause the natural rate to rise, then with the labor market stabilizing down, in principle it should You see it moving down again.”
The upshot is that wages are just as important as unemployment in gauging the health of the American labor market now. It is impressive to see such strong job growth at this point in the economic cycle. But only if accompanied by moderation in salary pressures will panic give way to celebration. ■