The clock is ticking on deciphering the job market slowdown
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Job growth slowed down substantially this summer. What we don't know for sure is why.
- That "why" is crucial for policymakers who must decide what to do next.
The big picture: If the jobs slowdown is due to less labor supply, thanks in part to restrictionist immigration policy, then it's nothing to worry about. If it is because employers are more reluctant to hire, then it's an early warning that the economy needs monetary stimulus.
- In other words, we could be in the early stages of a labor market downturn, which could justify the kinds of aggressive interest rate cutting the Trump administration seeks.
- Or we could just be seeing the inverse of the situation faced in 2023 and the first half of 2024, when high immigration rates unduly flattered the payrolls numbers, masking a deterioration in the health of the labor market. That would imply no rate cutting is needed.
State of play: Reliable numbers on immigration flows are hard to come by in real time, particularly for migrants with ambiguous legal status.
- If a large number of immigrants are being deported, self-deporting, or staying away from their workplaces for fear of immigration raids, it would translate into fewer workers on employers' payrolls.
- That, combined with the extra-large baby boom generation hitting retirement age, is exerting a downward drag on the rates of job creation consistent with a healthy job market.
Between the lines: Normally, the 35,000 average monthly job growth from May through July would be a four-alarm labor market fire.
- To the degree it's driven by those mechanical effects of immigration and demographics, it's not worthy of a policy response.
The intrigue: The inverse situation in the Biden administration shows the policy predicament. From April 2023 to July 2024, the unemployment rate rose a whopping 0.8 percentage point — one of many signs the labor market softened significantly.
- But the economy added an average of 177,000 jobs a month in that same span.
- At first glance, the combination of a rising unemployment rate and strong jobs growth simply does not compute.
- It is explained by a surge of immigrants seeking refugee and other statuses.
What they're saying: "We learned in '23 and '24 that if there are big immigration changes going, aggregate numbers like total GDP growth and total job creation can be very misleading short-run indicators of where we are in the business cycle," Chicago Fed president Austan Goolsbee told reporters last week.
- "I want us to not over-index on monthly payroll employment when we're in an environment where we don't know what the breakeven is because we don't know what the immigration flows are."
Of note: The official topic of this year's Jackson Hole Economic Policy Symposium, which starts Thursday, is "Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy."
- So these questions of how immigration policy and demographic changes are affecting labor market indicators are likely to be front and center, even though the topic was set long ago.
