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As labor conditions continue to moderate, what will it mean for inflation and the Fed?

March 21, 2024 / 2 min read

Labor demand continues to slow, reflecting a normalization from the extreme swings experienced during the height of the economic disruption caused by the pandemic.

Labor market trending toward better balance chart illustration

It wasn’t all that long ago that the term “V-shaped recovery” served as a vivid descriptor of the economy’s reopening following pandemic-era shutdowns. The chart above illustrates this well, specifically as it relates to labor demand and supply. A sharp cratering in demand for labor occurred amid wide uncertainty around in-person commerce, which subsequently rocketed back higher as the U.S. economy reopened.

Job openings reached an all-time high of 12 million in March 2022, contributing to the largest excess demand for labor in at least 25 years. The labor market has served as the centerpiece to an economy that’s continued to defy consensus expectations for a slowdown. Put another way, the persistence of more job openings than available workers validates the strength of the economy and business conviction in that strength.

The trend matters though; job openings have receded for nearly two years. And although they’re still above the peak in the prior expansion, a better balance between labor supply and demand is evident. Additionally, recent signs of stronger productivity gains have emerged. Combined, both developments could help to alleviate the inflationary impact of wage growth over time, as discussed in our associated piece.

What’s the bottom line? The Federal Reserve’s dual mandate of stable prices and full employment are often intertwined. Further normalization in labor market conditions is a welcome development that should help to allay inflation concerns, even if wage growth remains elevated for now.

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