Source: Wall Street News
Looking at the current round of great inflation in the United States, in addition to the short-term impact caused by the tight supply chain, in the long run, the fall in the unemployment rate and the surge in wages brought about by the hot job market should not be underestimated.
So now the Fed is desperate to control inflation by cooling the job market.
There are basically two ways, either, companies can significantly slow down the pace of hiring, or let more labor enter the job market, which is clearly preferable.
But the current situation is just the opposite. Not only do companies urgently need workers to fill positions, but how many people can enter the job market is unknown. This has led to an intensifying “worker shortage” in the United States, which runs counter to the Fed’s vision.
The U.S. Labor Department reported on Friday that nonfarm payrolls added a seasonally adjusted 428,000 in April, essentially unchanged from March’s increase and better than market expectations of 380,000, suggesting the labor market is moving fast develop.
In addition, the Labor Department reported earlier this week that there were a record 1.9 job openings per unemployed worker as of March, suggesting that even a slowdown in demand will hardly weaken the labor market quickly.
While the Fed has tried to slow wage gains by raising interest rates to cut jobs, it will take time. So the more effective solution for now is to get more people back to work.
It is worth mentioning that the current unemployment rate is at an all-time low of 3.6%, slightly higher than the 50-year low of 3.5% in February 2020, but employment is 1.2 million less than the record high at the time. If population growth is taken into account, the gap is even wider.
Unemployment is so low, but businesses still can’t find people to work
According to the analysis of the “Wall Street Journal”, if you want to be included in the statistics of the unemployment rate as “unemployed”, workers must show that they are actively looking for work, but many people do not choose to do so.
So the labor force participation rate (the percentage of workers who have a job or are actively looking for work) is a better indicator than the unemployment rate.
The labor force participation rate fell by 0.2 percentage points to 62.2% in April. Although it has increased significantly from the worst of the epidemic, it was 63.4% in February 2020.
This happened because many bright spots expected to boost employment, such as the availability of a Covid-19 vaccine, easing fears about the virus and the end of unemployment benefits, didn’t have enough leverage.
According to the calculations of Soochow Securities analysts Li Siqi and Tao Chuan, the current gap between supply and demand in the U.S. labor market is around 5.6 million, and the reduction in labor force will lead to a continuous expansion of the gap between supply and demand in the labor market, and therefore the wage level will continue to rise in the future. It could make already high inflation worse.
Perhaps as the weather warms, tensions over the pandemic ease and many people’s savings from pandemic benefits begin to dwindle, more people will need to keep looking for work, something the Fed is currently pursuing.
Fed Chairman Jerome Powell said at a news conference on Wednesday that he and other committee members “generally expect that we will get a higher labor force participation rate.”
However, if this expectation does not materialize, then the Fed needs to rein in the labor market development as soon as possible. And to do that, the Fed would have to raise rates faster, while at the same time risking the economy slipping into a recession by “going too hard.”
That is to say, although Powell said that the May FOMC meeting did not consider raising interest rates by 75 basis points, if the fiery momentum of the job market is not suppressed, it is difficult to predict whether there will be votes in the follow-up meeting to raise interest rates again by 75 basis points. basis points or continue to raise the neutral rate.
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