What’s behind the tight labor markets?

As illustrated above, the United States is amid the most pronounced worker shortage in decades, with about 3% more total jobs (filled and available) than workers in the labor force. The result has been an intense competition for workers and a surge in wage growth last year, compounding the Fed’s inflation challenge. In the absence of significant productivity gains, the supply/demand imbalance for workers needs to be addressed to ease upward pressure on wages and bring inflation back to the Fed’s 2.0% target. A meaningful influx of workers into the labor force could help, but labor force participation has been virtually unchanged over the past year. Considering that, the Fed’s policy is focused on reducing hiring demand.

There has been some evidence that the Fed’s interest rate increases and balance sheet reduction have had an effect, but the effect on labor markets have been relatively limited thus far. Layoffs in tech and financial services have grabbed headlines, but are still limited in scope relative to the overall labor force, and haven’t yet moved the needle on macro conditions in the labor market. A meaningful increase in the jobless rate will require a widening and deepening of job cuts well beyond what has been announced.

Other signs of progress toward the Fed’s goals include slower wage growth and job creation, and a reduction in average hours worked. It’s been insufficient to convince the Fed that they’ve done enough though. That could change quickly if layoff announcements accelerate and unemployment begins to climb.

Bottom line? Despite some emerging signs of easing in employment conditions, the mismatch between the demand for labor and scarce supply of available workers will keep the Fed from deviating from its current path in the near term.