In response to low employment levels and high wage growth, the Federal Reserve Board mandated full employment and stable prices. However, these unemployment and wage trends are expected to continue into 2023. Understanding where these trends may lead helps determine what the Fed’s future policy on the labor market and wages might be.
The Current Labor Market
The limited number of available workers, increasing wages, and low unemployment are causing the tight labor market. These factors impact the staffing shortage many companies are experiencing.
Because low unemployment, significant wage growth, and inflation occurred together, the Fed raised interest rates.
- Higher interest rates mean consumers have decreased borrowing power.
- Decreased borrowing power means consumers spend less money.
- The less money consumers spend, the lower the demand for products and services.
- The less money consumers spend, the more inflation decreases.
- The lower the demand for products and services, the higher the unemployment rate.
- The higher the unemployment rate, the greater employers’ candidate pools.
- The higher the unemployment rate, the lower wages may be.
Leading Indicators of Employment
Economic indicators provide insight into the potential direction of the labor market. This impacts the Fed’s likely direction of monetary policy.
- Employment trends in manufacturing are key drivers of economic growth.
- A slowing economy and potential recession indicate the unemployment rate will increase.
- Manufacturing employment likely will be impacted before employment in other industries.
- Manufacturing companies typically reduce their staffing levels ahead of an economic recession.
- Initial claims for unemployment benefits are a leading indicator of unemployment.
Increasing layoffs in the technology industry and startups also are impacting the economy.
- During the recent sell-off, tech-related equities have been hit harder than most other stock market industries.
- As interest rates rise, capital dries up and company earnings trend lower.
- As company earnings lower, layoffs increase.
Small business activity indicates rising unemployment.
- The number of small businesses that are willing to expand is nearing decade lows.
- The number of small businesses that are planning to hire more employees is decreasing.
Leading Indicators of Wages
Wage growth appears to be slowing down.
- The number of job openings compared to unemployed persons is substantially changing.
- The quit rate has significantly decreased and should normalize in the coming months.
- The number of job openings less hires shows wage increases might be peaking.
- Small businesses lack the resources to expand operations due to increasing employee wages and input costs and decreasing consumer demand.
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