How labor markets can get back to balance
The job market of the last couple of years has just felt different from the one that prevailed in the 2010s, with the unemployment rate staying low and workers feeling empowered.
- That much is clear from both data and anecdotes. The open questions are if it will last and what America's labor market equilibrium will look like in the remainder of the 2020s.
Why it matters: The state of the economy in the years ahead hinges on how a rebalancing occurs. Do more Americans join the labor force? Do employers figure out how to operate more productively, or do they outbid each other for workers by raising wages and benefits?
- Alternatively, a recession would likely do the job by lowering demand for workers.
State of play: In a crisp and clear speech late last week, Richmond Fed president Tom Barkin walked through the job market shifts during the pandemic that have been "discombobulating" employers.
- "Over time, employers had become comfortable with where their jobs rated versus those offered by others," Barkin said.
- "Think of it as a job hierarchy," he continued. "They knew the level of investment in wages, benefits and working conditions they needed to make to hire and retain workers in what was a relatively stable marketplace."
- "But the pandemic era seems to have reshuffled that hierarchy considerably, making the jobs market less predictable and leaving a number of employers scrambling," he noted.
What's next: In response, employers are investing to improve the supply of qualified workers, such as through expanding training programs and working with community colleges.
- And the strong job market, coupled with those efforts, appears to be pulling people into the workforce, which has expanded by 3.2 million people over the last year.
- Meanwhile, companies are finding ways to operate with fewer workers. That can be as simple as hotels cutting back on cleaning services, Barkin notes, and over time will likely involve better exploiting artificial intelligence to make workers more productive.
- The third approach is for employers to "fight their way up the job hierarchy by adjusting wages, benefits and the work environment," as Barkin puts it, with higher wages or better working conditions.
Between the lines: The first two possibilities are good news all around — they consist of improvements on the supply side of the economy that equate to higher incomes and lower inflation.
- The last possibility — employer bidding wars that don't involve higher productivity or labor supply — is inflationary.
The bottom line: In reports on the labor market this week and beyond, look for evidence of which of these stories is dominant. That will help you tell whether inflationary pressure is abating and the Fed's work is done.